This month we celebrate the 4th of July, which commemorates our country’s Independence Day.
How much thought have you given to achieving financial independence lately?
Financial Independence means that you’ll have enough money to live on without relying on your employer, your family, or the government! Sometimes referred to as FIRE (Financial Independence, Retire Early), becoming financially independent involves taking total control of your finances today so you can enjoy life on your own terms in the future.
Finding an exact number to gauge your level of financial independence can be tricky since everyone’s lifestyles and goals are different. A general rule of practice recommends having a total savings amount that is 25X your annual spending. If you live on $40,000 per year, then you’d need $1,000,000 to be considered financially independent.
What do financially independent individuals have in common? They live by these 3 effective and proven principles.
Live Within Your Means
Living within your means isn’t just a principle for low-income earners to follow. Many billionaires, including Warren Buffett, Mark Zuckerberg, and Bill Gates, tout this lifestyle even though they have amassed great wealth. To keep it simple, the way to save money is not to spend it!
The first step on your journey towards Financial Independence is to develop a budget or spending plan. You can use cash buckets, excel spreadsheets, or software like Mint, to analyze your income and expenses.
Budgeting software is helpful because it breaks down your spending into categories, highlighting where the bulk of your income is allocated each month. From this analysis you can find ways to cut back on frivolous expenses, such as excessively eating out, to save more aggressively.
As you continue, consider avoiding unnecessary, overpriced discretionary items like brand new vehicles or luxury vacations. A new car or truck can depreciate more than 10% during the first month of use! Even though the average monthly car payment is $391 (which may not seem like much), it can make a big difference on your total savings amount when that amount is compounded over the long-term.
Consider driving a Certified Pre-Owned vehicle or postponing a few lavish vacations as you work to accelerate your savings rate. For more on calculating your suitable savings rate you can read here.
Create Multiple Flows of Income
The average millionaire has approximately 7 streams of income, while the average household relies solely on their job and maybe a 401(k) savings plan. When we say “Create Multiple Flows of Income” this means:
1. Active Income
This is earned by having a job or by providing a service. You are active with your time to earn a paycheck.
2. Investment Income
Your portfolio will generate dividends, interest, and capital gains from your investments (stocks, bonds, mutual funds, CDs, ETFs).
3. Passive Income
You can generate passive income with rental payments on real estate investments, royalties on creative content or other businesses.
The internet today makes it possible to earn passive income with affiliate marketing, ads on websites or social media, and by selling content such as online courses. Get creative and hone your skills to tap income from multiple sources!
Please Note: Be careful with #3 and the buzz words that come with it. Some internet “courses” or “affiliate programs” advertise that you can earn passive income, but are nothing more than false get rich quick schemes. Do not trust enticing guarantees such as making $10,000 per month in 60 days. These are generally money pits and can end up detracting from your savings goals.
One of the best ways to start building multiple flows of income is to work towards a high-income skill that matches with a high-paying job to apply that ability.
The definition of a starving artist is real! You can be the most talented artist in the world, but with a career as an art teacher you might not be compensated monetarily for your talents. Identify your skillset with what the current market is willing to pay you.
Some examples of high-income skills include website development, lead generation, sales, copywriting, skilled trades (HVAC, carpentry, plumbing, electrical engineer), and types of financial analysis. You can also demand high incomes with expertise in areas like accounting, legal services, and healthcare. The most important part is to MASTER YOUR OWN TRADE and understand your industry inside and out.
Then, Invest. Invest. Invest! Once you have a high-paying job or skill, live within your means and invest for the long-term. A higher salary will enable you to invest in diversified mutual funds, ETFs, stocks, bonds and real estate. These investments will be the building blocks on your path to Financial Independence, but each one carries its own risks and rewards. Work alongside your board Certified Financial Planner to help identify and mitigate risk.
Understand Your Taxes
“It’s not how much money you make, but how much money you keep, how hard it works for you, and for how many generations.” – Robert Kiyosaki
Understanding the fundamentals of income taxes can help you keep more of your hard-earned dollars from the IRS. One of the most popular ways to do this is to use tax-advantaged investment accounts, such as Roth IRAs, to save for your future.
With a Roth IRA, you contribute after-tax money to invest while your earnings will grow tax-free. Roth IRAs also offer more flexibility on withdrawals than traditional IRAs and 401(k) plans. More information about Roth IRAs can be found here.
What Do Tax Refunds Actually Mean?
Tax refunds might seem great when you receive thousands of dollars back, but what a high refund really indicates is that you overpaid in taxes each month. This money could have been used to build your savings or investments, but it was loaned to the government interest-free.
You might enjoy getting a large refund, but an ideal situation is to either have a small refund or break-even. You can adjust your allowances each year to ensure that you do not over or underpay month to month.
The more allowances that you select, the less money will be withheld from your paycheck. Consult this IRS guide on allowances and Form W-4 for more details. Own your own business? Ask your accountant to generate a Proforma Tax Return and make estimated tax payments using Form 1040-ES. A Proforma Tax Return is completed on a “what if” basis, using projected income and expenses to see the tax ramifications of a hypothetical scenario.
The 4th of July is a time to celebrate our nation’s independence and spend time with loved ones. You should also consider the power of Financial Independence. Being financially independent can prevent you from worrying about the job market, the future of Social Security, or how the stock market is impacting your account value daily.
Achieving Financial Independence is different for everyone, but taking actions today such as living within your means, investing for the long-term, and creating multiple flows of income can help you reach financial freedom!
There will be many roadblocks, ups and downs on your journey, and we do not expect you to accomplish this alone. At Aventine Financial Group we provide professional client-centered financial planning and investment advisory expertise to help our clients achieve Financial Independence and long-term prosperity.
Frank J. Fiumecaldo, CFP
Founder & President