5.5 MIN READ
What does Financial independence mean to you Regardless of your stage of life, phase, age or desire, you have the opportunity to take small and large steps towards financial independence.
On the occasion of Independence Day we wanted to give you a little foretaste of our newest module of the FPFoCo Academy. Our latest edition is called “Planning for Financial Independence” and you can now access the entire course. Just go to the academy and log in! There you will learn how to:
- Define your own goal for financial independence (in this sneak peek).
- Forecast your future financial data.
- Earn more. Spend less (in this preview).
- Follow your personal savings hierarchy.
- Monitor, optimize and review continuously.
These steps can help you achieve financial independence. However, to get to this stage, you need to do the hard work of giving yourself this opportunity.
Define your own financial independence
FPFoCo’s customer experience includes aggressive savings strategies. For example, you have likely seen, or will see, that we recommend a savings plan that usually includes this savings hierarchy:
- Have an emergency fund ready.
- Use your employer-financed pension accounts.
- See your health savings account as a long-term savings account.
- Open and fund IRAs or Roth IRAs.
- Use tax incentives wherever and whenever you can.
With these savings strategies, you will add more money to your net financial worth over time than you would spend elsewhere. In this way, you can achieve financial independence according to a schedule that makes sense for you.
You may have heard of people who are part of the Financial Independence, Retire Early, or FIRE movement who intend to retire at a young age. A fitting self-proclaimed word to describe the financial bloggers who promote the FIRE movement: extreme. These people welcome extreme savings and budgeting. For example, many people within this movement declare that they are saving 70% or more of their income.
These saving habits are not the reasons this personal financial lifestyle is a movement. It goes back to why these people save money in the first place.
Examples from the FI community
Many people in financial independence or FI communities are relatable and are profiled in short videos Fire Starters Series from MarketWatch. Here is a couple’s example of what FI means to them, their habits of everyday spending, and how they try to inspire others to make better money decisions.
The types of FI
Many people within the FIRE community speak of FI as their personal target for the second part of the acronym RE (early retirement). A common question in this community is: “How many years have you been away from FI?”
There are many different calculators on the internet that will help you understand the basic principles of finding your FI number. And within the FI community there are many different types of individuals with different styles of FI
Some of these identities are self-proclaimed, and some of them are tagged. However, when you are contemplating pursuing your own financial independence, how do you envision your personal style when it comes to FI? See which label makes sense for you. This can help you understand what type of journey you might be taking when in FI. follow
This is how you define your own financial independence
Many of our clients identify with the Pro FI definition, as many of them enjoy their careers and enjoy working after their financial independence. However, it is worth knowing the mental benefits of knowing that you have the savings to consider your job “optional”.
A recipe for financial independence starts with some self-exploration. To begin planning your ideal life, start with these four categories of how you envision your financial independence.
How would you like to spend your financial independence? Do you do “optional work”, do you work part-time to supplement your financial life, or do you enjoy the “good life”? Would you like to pursue expensive hobbies like sailing or more frugal hobbies like gardening at home? How would you like to spend your life energy?
Which places suit your ideal lifestyle? Would you like to live there full-time or part-time, or do you plan several visits from time to time? Where would you like to spend your financial independence? Will you be living in a country house, suburb or city apartment? The cost of living in your primary residence is a crucial factor when planning your future self-employment.
3) SPENDING NEEDS
Given your desired lifestyle, how much money do you expect to have to spend annually?
4) INCOME NEEDS
Voila! Now that you’ve identified your spending needs, you now have a number that will help you calculate your projected nest egg that fits your unique definition of financial independence. Now the math nerds at Financial Planning Fort Collins can get to work!
Identify and define
As with almost anything else, you may need to grunt a bit at the beginning as you experience the learning curve. Then hopefully later on you will have multiple sources of income on autopilot to meet your income needs.
Below is a general list of potential sources of income for you to explore. We encourage you to dive into an area and set some SMART goals to get you on the road to more income. This can open new doors for your career, protect the financial health of your household, and make your income life less shaky.
▶ ︎ SECURITIES AND BUSINESS
- Monetize your hobbies
- Contract work with other companies
- Build a side business
▶ ︎ SHARE AND GIG-ECONOMY
- Drive for ride hailing programs
- Offer short-term rentals of your home or property
- Getting chores done and running errands
- Work in other app-based gig marketplaces
▶ ︎ INVEST
- Rental properties
- Dividends and interest
- Angels invest
▶ ︎ PASSIVE INCOME
- Web-based content (photography, books, websites, e-courses, etc.)
- Copyrights, patents and usage rights
- Many other options
Ask your friends and family or search the internet for new, creative, and sometimes weird ways to make money. Make sure you use your best judgment and explore the possibilities.
There is a lot of money out there and you need to find creative ways to make some cash at times.
Save more, spend less
A big component of creating a plan for financial independence is comparing your projected annual expenses with the annual distributions of your savings.
Projected Annual Spend may not be the hottest phrase in the financial world. However, this is the second most important aspect in the pursuit of financial independence.
- The first is building and having the savings available when you retire.
The good news is that you can control this part of the “spend less” process with your daily, weekly, and ongoing habits. Here’s a great way to actively prepare for your retirement by cutting your expenses today. This will help you connect the dots between your future self and your present self.
We have a whole module (Budgeting Styles & Strategies) devoted to budgeting habits that I recommend you revisit. In the meantime, here are some general tips for forecasting your future expenses.
1) TRACK WHERE YOU ARE NOW.
Take forensic bookkeeping if you haven’t already analyzed your spending habits. It is easier to forecast your future spending when you can imagine how you are currently spending. You can schedule another cash flow meeting with our team and / or use a budgeting app to monitor your spending habits.
2) WHERE CAN YOU PUT THE BELT ON?
Once you know your current spending, you can determine where to cut your spending.
When you understand the difference between your “wants” and your “needs”, you can prioritize how, where, and when to manage your spending. Saundra Davis, a finance coach, has a great phrase that she repeats many times:
Be aware of your expenses. What makes you happy, fulfilled and satisfied? Identify these and then try your best to spend your money on what energizes your life – and then cut down on everything else.
3) MONITOR, TWEAK AND REVIEW
You can prepare yourself to spend less money in your future self-employment and to continue your education during your wealth-building years. That constant habit of monitoring, tweaking, and reviewing your spending is likely to pay off – or, I mean, save cents – as you prepare for financial independence.
And you will have these money management skills by the time you move into your life with “optional work”.
Now that’s a liberating feeling!
About the author
Dan Andrews is CERTIFIED FINANCIAL PLANNER ™ and Director of Estate and Financial Planning at Financial Planning Fort Collins. Dan has been helping clients since 2012 and has made a goal of making the financial planning process less daunting. Although he also has an extensive knowledge of estate planning, Dan enjoys financial planning with a professional, yet carefree approach.
Did you know that XYPN consultants offer virtual services? You can work with clients in any state! View Dan’s Find a Advisor profile.