The Ultimate Guide to Financial Independence
How good wealth management can help you achieve financial security
Most people who write about financial independence assume you want to retire early. They believe that financial independence simply means never having to work again.
But financial independence is more than that.
Everyone worries about money, even those who never have to work again.
Don’t believe me?
According to the AICPA, the #1 concern retirees have is money. In fact, 42% worry they will outlive their savings.
Even the very rich worry about money, topping out as the #1 concern of ultra-high-net-worth people. According to the Spectrum Group, 20% of people with $5-25 million of assets still worry about running out of money in retirement.
Money alone doesn’t solve everything.
If it did, retirees and the wealthy would never worry about money. Yet, we still think of financial independence as being rich… that having enough money to out-do our neighbors will give us a sense of financial security.
In this ultimate guide, will seek to debunk these misconceptions. We’ll cover four major topics to get there:
- What is financial independence?
- Can you achieve financial independence?
- Why is it important?
- How can you achieve it?
By the end of this guide, you should have a good sense of what financial independence truly means, and how YOU can achieve it too.
As a side-note: This article is primarily written for women who want to be financially independent. However, the insights and information in this extensive ultimate guide can help anyone become more financially independent.
Part 1: What is financial independence?
Hint: It’s more than just having enough money.
I’d like you to pause for a moment and think about your savings and investments. If you feel even a hint of anxiety, you’re not alone. Even for those who earn comfortably, finances are still one of the biggest concerns Americans have.
In fact, 64% of all women and 59% of men feel discomfort about their savings level.
But these worries are misplaced. The vast majority of people will never go bankrupt in retirement. Only 2.8% of Americans 65+ go bankrupt, according to the Consumer Bankruptcy Report. But does that make the other 97.2% financially independent?
The actual meaning of financial independence
Some might also call this “financial freedom” or “financial security.” No matter your definition, there are, in fact, two different dimensions to financial independence
I. Physical/Rational Financial Independence:
Having reasonable control over your financial well-being
In other words, being reasonably non-dependent on others. What do I mean by reasonable?
Here are two examples.
Annuities give you reasonable control
Imagine you have just retired. As a precaution, you buy an inflation-indexed annuity for $3 million that will pay you $150,000 every year for the rest of your life. Most people would say you are financially independent. The guaranteed life income means you never have to work again.
But are you actually independent?
Keep in mind, you are still dependent on the annuity company paying out its arrears. Annuities are not protected by the FDIC, SIPC, or any other federal agency. This means bankruptcy or financial crisis at the annuity company could mean a decrease or even a total disappearance of your policy.
I would actually consider this reasonable. Most annuity companies are insured on the private market, so the risk of total loss is actually quite low.
Career income can give you reasonable control too
Now imagine you were a successful writer, like Jennifer Egan or Donna Tartt, respective winners of the 2011 and 2014 Pulitzer Prizes. Both of these women earn royalties for their works. But would you call them financially independent? Unlike JK Rowling (the first and only author to ever join the $1 billion net worth club) both Egan and Tartt may have to continue to write to earn a living.
So would you still consider this as financial independence? Both writers famously enjoy writing (although Tartt is also famous for how long she takes to write books). And presumably, they would both keep writing even if they didn’t need the money.
In a sense, this is also financial independence.
That’s because both women have reasonable control over their financial well-being. Unlike someone who’s forced to go to a job that they can be easily fired from, these two women have mastered their craft and enjoy their work.
If this isn’t financial independence, I don’t know what is.
II. Emotional Financial Independence
Feeling reasonable control over your financial well-being
Most financial gurus miss this point. For financial independence, not only do you have to be non-dependent on others. You have to feel that way too.
Retirement income can give emotional financial independence
Back to our first example with the lifetime annuity. For many, having a lifetime $150,000/year guaranteed income would be a joy. A chance to never have to worry about money again.
But others may worry whether $150,000 is enough. What if both you and your spouse both need nursing home care? Or if you need a larger house? These people haven’t reached financial independence yet.
Career can also give emotional financial independence
In the same sense, imagine you were a Pulitzer Prize-winning author. But you HATE writing. You might be financially independent in a practical sense. If you ever run low on money, you could just force yourself to write another book. So is that true financial independence?
Clearly…no. There are plenty of people who work in relatively secure jobs, but can’t stand going to work. These are people who would retire as soon as possible just to get away.
But if you love your work and have reasonable control over getting compensated, that’s considered financial independence too.
Bringing the Physical and Emotional Together
It turns out that financial independence is actually a combination of two different things. You need to have both physical and emotional sides to become financially independent.
- Physical: having your finances be non-dependent on outside factors
- Emotional: having your finances feel non-dependent on outside factors
And only when you have both of these factors working together, will you actually feel financially independent.
Part 2: Can you achieve financial independence?
Becoming financially independent is easier than you think.
I want to give you a challenge. For a moment, I want you to truly believe you can achieve financial independence. Spend a couple of moments imagining you have both physical and emotional financial security.
Did you feel a sudden surge of confidence? That’s the joy of knowing you can achieve financial independence.
It’s important to have a sense of confidence. Too many people throw up their hands and say “I’ll never have enough money… how can I possibly become independent”. These thoughts can be defeatist and self-fulfilling.
In this next section, I’ll help you remove that sense of self-doubt. Because you need to BELIEVE you can achieve financial independence to actually start down that road.
Everyone achieves financial independence at some point. It’s called retirement.
Countless articles and books talk about financial independence like it’s the holy grail. These books tend to focus on retiring early after working hard and saving it all. Or they talk about earning passive income.
Yet, more people than you know are actually financially independent. The most prominent of these people? Retirees.
According to the Social Security Administration, 43.72 million Americans receive Social Security every month. That’s close to 15% of the total US population.
But you don’t have to be retired to be financially independent. As described in part one of this ultimate side, being financially independent simply means being not-dependent on outside factors.
It’s easy to become financially independent through investing
One of the most straightforward ways to becoming financially independent is as an investor. Here is where good wealth management can make a huge difference.
Imagine you had $500,000 to invest. Many people would put that in long-term savings and earn 2.0-2.5% on a certificate of deposit or money market account. After deducting 1.5% for inflation, you’re left with about 0.5-1.0% in actual earnings. On a $500,000 investment, that comes out to $2,500-$5,000 per year.
That’s not bad, but can we do better?
Investing smarter can help you earn much more
Imagine now that you used that $500,000 to invest in a multifamily house. You might put $400,000 down on a $1.70 million house and mortgage the remainder. The remaining $100,000 could be taken as a reserve.
(Don’t worry if your eyes are glazing over, we’ll go over this part quickly)
I’ll use a real-life example of 2806 W Cary St, Richmond VA
With some calculation, it turns out 2806 W Cary ST would cost $6,206/month in mortgage fees, $1,150 in taxes, $1,250 in expenses. All while earning $11,500/month from the building’s 12 units and keeping up with inflation.
That comes to $2,894 income per month, or $34,728/year! (far better than the $2,500 – $5,000 from a CD)
I’m not trying to sell you on some get-rich-quick real estate scheme. I purposely chose a conservative property in the heart of Richmond with pretty average cap rates and a 100% occupancy rate. There are properties out there that can earn you $65,000++ per year if you’re willing to take more risk.
My point is simply that as a SMART investor, you can become financially independent far faster than you realize. Don’t believe me? I’ll give you a challenge: call me today and let’s talk about it.
It’s also easy to become financially independent from your spouse
This is especially true for stay-at-home parents.
One of the truths about marriage in the United States? Half of them end in divorce. (If you’re feeling cheery, always remember … the other half end in death!)
This actually causes a huge amount of anxiety among stay-at-home moms and dads alike. (For the purpose of this article, I will write “mom” just for brevity’s sake)
According to AARP, 44% of women delay or entirely avoid divorce because of financial concerns.
Can you be financially independent of your significant other and still be married?
The answer is yes. It’s actually very healthy or married couples to be co-dependent and operate as a single unit, but know that each can live their lives independently.
For some couples, this means having separate savings and spending accounts for each. This form of budgeting gives each spouse the freedom to spend how they want. For example, if your husband wants a new TV for his den, let him have it. But he has to pay for it out of his own account!
Other couples find having 100% combined accounts more important. This means having a financial plan that outlines contingencies if a couple decides to separate, or if something happens to one of the spouses.
Contingency for divorce
Having a memorandum of understanding (MOU) or premarital agreement between spouses can go a very long way in helping people feel financially independent. Even though a judge will ensure assets are split equitably during a divorce, having an agreement set up beforehand can help. As a financial advisor and wealth manager, I find too many women stay in unhealthy relationships because they feel financially dependent on their spouse.
Contingency for the death of a spouse
I like to joke that the other half of marriages end in death. But a surprising number of couples fail to prepare adequately. Simply having the correct life and disability insurance policies can go a long way in helping people stay financially independent, even if something were to happen to their spouse.
Additionally, couples should have clearly written wills and healthcare directives. This reduces uncertainty in case anything happens to a spouse, or if your partner becomes unable to voice his or her wishes.
It’s also easy to become financially independent from your work
More precisely… independent of work you DISLIKE.
According to AARP, a whopping 32% of people aged 65-75 are expected to work by 2022. Some do it to increase future Social Security payouts. The majority, however, simply enjoy their work too much to quit.
Amy Kaiser, who became director of the St. Louis Symphony Chorus at age 70, said: “The thought of retiring at 70 is unthinkable, and I’m having a ball.”
These people are actually financially independent, yet choose to work for personal fulfillment reasons. According to the CDC, people who work past 65 are about three times more likely to report being in good health than those who stop working.
This means you can actually still be working and be financially independent. Because once your work becomes play, even losing your job doesn’t mean losing your financial independence. You would find another job just like it and continue on your way.
Part 2 Conclusion: Get rid of negative thoughts
It’s easier than you think to become financially independent. In fact, you might already have enough money, but don’t have it invested correctly yet. Or perhaps you feel unnecessarily dependent on your spouse, and simply having a separate savings account will give you peace-of-mind.
Whatever negative feelings you have about your finances, make sure you get rid of them fast. And if you want help in doing this, we’re always here to help too.
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Part 3: Why is financial independence important?
It seems obvious, doesn’t it? Financial independence sounds like something wonderful. It’s like an advertisement you see in the back of a magazine or a mantra that self-improvement gurus tout.
But why exactly is financial independence important? There are five key reasons why.
And it’s important you understand them well. Because once you understand why financial independence is so important, the motivation to reach that point becomes second nature. Read on and learn why.
1. You no longer feel trapped by other people
Especially true for recently single women or people going through separations
There is a stark difference between feeling codependent versus dependent on someone else.
- Codependence: you and your codependent partner (often a spouse) can lean on each other for support.
- Dependence: you can feel trapped by your spouse.
You want to avoid becoming dependent on someone
The number of people who stay in bad relationships is staggering: 55% of divorcing women cited abuse or drugs as a top-3 reason for divorce, yet almost half of women delay or don’t divorce because of financial dependency reasons, according to AARP. Becoming financially independent helps solve this.
2. It allows you to enjoy your life
People find money stressful. In fact, 65% of Americans report losing sleep over money.
But imagine for a moment, a world where money was plentiful. That anything you reasonably want was paid for by a benevolent fairy godmother. You could still spend your own money on lavish things, but any reasonable purchase would be guaranteed.
I want you to actually imagine that scene in your mind’s eye.
Wouldn’t you enjoy life so much more? The knowledge that a lavish $10,000-$50,000 around-the-world vacation will never cut into basic necessities like housing, healthcare, food, and entertainment. You would enjoy that vacation so much more.
3. You don’t need a job for the sake of a paycheck
According to Gallup, Americans aren’t generally fans of their work… In fact, 85% of people feel disengaged with their work.
But why do we keep working at jobs we dislike?
Often, it’s for a paycheck. According to the Pew Research Center, the majority of people working in private companies work “just for a living“. While jobs help put food on the table, that’s still a lot of time to spend doing something you’d rather not.
Financial independence means working only the jobs you want
Now imagine having the financial freedom to do the work you actually want to do. Being able to apply yourself to the best of your abilities. And making a difference in your work.
Wouldn’t you rather have that?
Once you achieve financial independence, it becomes much easier to do the work you find meaningful. And what if you don’t want to do work?
4. It allows you to volunteer and make a difference
There’s one thing in life that money cannot buy: the number of hours in a day.
Even the wealthiest person in the world still has just 24 hours in a day. Financial independence means you get to spend those hours doing the things you want. That’s why so many retirees start gardening, traveling and volunteering.
And what’s the one thing retirees do a lot of? Volunteering.
According to the Retirement Project by the Urban Institute, 67% of working Americans over the age of 75 volunteer. That’s because volunteering gives people the ability to give back to their communities.
In fact, volunteering has been proven to have the following benefits:
- Improved physical health
- Better social connections
- Stronger sense of purpose
- Boosts self-esteem
- Teaches new skills
5. You know you and your loved ones will be provided for
Once you become financially independent, you can help loved ones do the same.
But how much should you give your loved ones? Nobel laureates Daniel Kahneman and Angus Deaton suggest “the happiness benefits of increased income diminishes around $75,000, in part because increases beyond that point likely don’t exert as large an impact on people’s ability to live comfortably.”
I would argue that giving less can benefit your children too. You should certainly provide for education and living expenses. But $7,000 for a kid’s birthday party?
Instead, there’s something far more valuable you can spend on your loved ones: your time.
Children whose parents are involved in their lives have better long-term outcomes.
- They feel more supported
- They score higher on achievement tests
- They are more likely to go to college
- They have a better sense of community and connectedness
- They have more confidence in life
That means it’s actually quite easy to help provide for your loved ones. The joy you can get from making sure they have a loving and comfortable life.
Part 4. How to achieve financial independence
In this section, we cover how YOU can get there too.
It sounds too good to be true, doesn’t it? “You can be financially independent too!”
There’s a lot of misinformation out there. Feel-good gurus and financial product salesmen tout “get-rich-quick” schemes. Everyone wants you to think you can become independent as long as you pay them…
But there ARE steps you can take to reach financial independence. I know they work because I’ve personally helped countless people walk through these steps.
1. Calculate how much income you need to be financially independent
First, you should understand what it would actually take for you to be (and feel) financially independent. This is different for different people.
Ask yourself these four questions
I: Where will you live?
Where you live has an enormous impact on your spending habits. The average retiree needs $120,000/year to retire in Washington DC, for example. The same person could live abroad in a low-cost country like Vietnam or Costa Rica for just $12,000-$25,000 according to a study conducted by International Living.
I’m not suggesting you have to move to gain financial independence. You simply need to make an honest assessment of your wants and needs. Some people would love moving to warmer climates. Others would find it boring, or simply far from home.
II: How much will you spend?
This second question is somewhat dependent on where you will live. But not always.
People living in the same neighborhood can have very different lifestyles. Some are content with living a basic life. Others like spending more on entertainment or travel. Yet others like to spend to impress.
“We spend money that we do not have, on things we do not need, to impress people who do not care.” – Will Smith
Whichever group you belong to, be honest with yourself. Have a solid understanding of how much you need to comfortably cover your living expenses. If you enjoy spending, make sure you write that down. Some people can live on $40,000 per year. Others need $400,000.
Remember, it’s your life. Choose how much you actually need. (Though be aware, the lower your cost-of-living, the easier it is to become financially independent)
III: How much reserves will you need?
You need to study your family’s medical history and understand your risk factors. Inherited diseases such as Alzheimer’s and dementia can cost upwards of $100,000 per year for nursing home care.
Other long-term diseases such as HIV, diabetes and their complications can cost anywhere from $85,000 to $350,000 over the course of a lifetime to manage.
If you’re unsure at this point, I suggest putting $400,000 for yourself as a reserve and move on. Don’t get stuck trying to figure out exactly how much reserves you’ll need.
IV: How much will you need for taking care of others?
Will you be responsible for taking care of others? This could be an aging parent, children, or any friends or family who needs support.
According to Fidelity, the average child takes $250,000 to raise to age 18. private schools and colleges will add to that amount. Were the wealthy, a child could take upwards of $350,000 to raise, in part from having to buy a larger residence.
Medical costs for aging parents should also be taken into account.
Finally, if there are causes and foundations you would like to donate to, make sure you have those covered as well.
Bring the 4 parts together
Once you have these four figures, you should add up your annual expenses. For example, you might decide the following:
- Location: Live in the Washington DC area
- Living expenses: Need $85,000 per year in living expenses
- Reserve fund: Need $500,000 over a lifetime for emergency expenses
- Spending on others: Spend $300,000 taking care of children and aging parents
Now it’s your turn:
- Location: I want to live in _________________
- Living Expenses: I will need $_________ per year
- Reserve fund: I will need $_________ over my lifetime
- Spending on others: I want to give $_________ over my lifetime
2. Calculate the assets or income you need to reach financial independence
Next, you should take those figures from part 1 and put them into a financial calculator.
If you’re not comfortable with financial calculations, here is where a wealth manager or financial advisor can help you greatly. You can contact us for support, or find a local wealth manager near you.
Because once you know your expenses, it’s just a matter of calculation.
How to calculate how much you need
There are many methods out there, but personally, I use a combination of financial planning software and Excel.
Excel: Great for exact calculations
Excel can give you a precise answer. Simply create an “amount needed” and “discount factor” columns. The discount factor is simply an amount to convert tomorrow’s dollars back into today’s.
If you look at line 13, for instance, you only need $60,115 today to have $105,687 in 11 years thanks to compound interest. Once you’re finished, sum up column D, and that would give you the precise amount you need TODAY to reach your required income.
Financial planning software: great for calculating uncertainty
While Excel is good for exact calculations, what if things don’t go to plan? What if you need more than $85,000? Or what happens if stock market returns are low? There’s always uncertainty in life too.
Here’s where advanced financial planning software can help. These systems use what’s known as Monte Carlo simulation, running scenarios over and over again to see possible outcomes. Unlike Excel calculations, Monte Carlo simulations assume that adverse things can happen to your portfolio too.
Experienced financial planners and wealth managers should have these types of software available. You can access the more basic packages too through robo-advisors such as Betterment
And if you have a question, feel free to reach out to us for a free consultation and I’ll help you figure out how much you’ll need to be financially independent.
For the purposes of this article, I’ll just give you a summary of the example above.
Assuming you’re 45 today and will live to age 95, a financial calculator shows that with 2% inflation and 5% discount rate (i.e. the returns you can achieve with savings), you will need either:
- A lump-sum of $3 million today,
- A guaranteed income of $115,000/year
3. Make a plan to earn (and manage) the assets you need
Here is where your journey to financial independence can truly begin. Now that you know how much you actually need to be financially independent, you need to organize your wealth to match those requirements.
If you already have the assets but need help managing them:
A surprising number of people in their 40s and 50s already have the assets they need to cover their lifelong basic needs for life, but don’t realize it.
In fact, YOU might be one of those too
In this case, there are four key elements to generating the income you need for financial independence.
- Investment portfolio: stocks, bonds, and any investment security. These are securities that can be liquidated over time for cash.
- Business: any personal business that you own, including freelancing work. Businesses produce income over time or can be sold for a lump sum as needed.
- Real estate: investment properties that produce rental income. Like a business, real estate produces income over time and can be sold when needed.
- Fixed Income / Annuities: investments that provide fixed payments.
If you’re still working towards earning your assets:
If you’re younger and are still working towards financial independence, you should have a good sense of how you plan on achieving that goal.
I. Start saving to harness compound interest
The power of compound interest means that every dollar you save in your 20’s turns to seven dollars at retirement. (That’s in today’s dollars too!) And even if you’re in your 50’s, it’s never too late to accumulate wealth. Each dollar saved in your 50’s will still double in value by the time you retire.
II. Change your goals
You can also change your goals. Rather than live off $200,000/year in expenses, perhaps you can cut that to $100,000?
There are other ways to achieve financial independence too. Instead of funding your child’s entire education, perhaps get them involved as well. Low-interest federal student loans can often HELP college-bound kids get more out of their education. How? That’s because many kids take college for granted if it’s fully paid for. But once you ask your children to help contribute to private schools, education may suddenly become much more important to them. As much fun as goofing off in college can be, helping your child put their mind towards studying and achieving in life is one of the best lessons you can give them.
4. Take action on your plan.
At this stage, many people get confused about the next steps. They often say: “I have a financial plan… but now what?”
Once you have a good idea of what you need to accomplish, it’s time to put that plan into action.
I. Start putting your money to work for you
For those who are comfortable investing their own money, it’s important that you stay involved. Markets can change rapidly, and you need to keep up-to-date on how your investments are doing.
On the other hand, make sure you don’t over trade. People who over-trade tend to underperform the market because of poor timing and fees. According to Dalbar, a financial analysis group, equity investors who trade underperform the market by 2.89%.
Instead, what you are looking for are good long-term investments that can generate profits over the long run. As any good financial advisor will tell you, smart investing is a key to achieving financial independence.
II. Invest in a business or real estate to generate passive cash flow
Whether you have active income in a business or passive income from real estate, you still need to make sure you manage your money properly. For those who own investment properties, it’s important to maintain a high occupancy rate. Empty apartments act as an anchor on your returns.
And for those who manage their own business, whether a large company or freelancing, make sure you take care of your customers. They are the ones who pay the bills. Also, it’s never too early to prepare an exit strategy. You don’t have to sell your company immediately, but you should have a good idea on how you will do it
III. Create a budget you can follow
My favorite rule for budgeting is the 50-15-5 rule. It works this way:
- 50% of your income goes to essential spending
- 15% of your income goes to savings
- 5% of your income goes to an emergency fund
- The remaining 30% goes to “fun” spending
The numbers can change depending on your financial situation. But the most important thing is to separate your paycheck before you spend it. Savings should be automatically deducted from each paycheck.
Be sure you have a separate account for “fun” things. This will prevent you and your family from overspending on discretionary items that can block your path toward financial independence
IV. Get a good wealth manager
A good financial advisor works too.
Few people are born financial experts. It’s simply a skill that’s not taught in school. And there’s no shame in hiring someone to help.
The right wealth manager is worth their fees. Having the right professional help can mean the difference of hundreds of thousands of dollars in investments. It can also make the difference between living a life of stress, versus a living a happier life where you can concentrate on the moment. It’s about having a trusted advisor on your side to keep track of your wealth. Because at the end of the day, life needs to be worth enjoying too.
Virtually EVERYONE gains financial independence at one point in their lives. It’s called retirement
But with proper wealth management, many can live that way far earlier in life. They may still go to work, raise children and volunteer their free time. But the one thing they have in common? They aren’t financially forced to do anything.
Maybe you are already financially independent but just don’t know it yet.
And the funny thing about financial independence? Many people don’t realize when they’ve already made it. In fact, YOU might have already reached that point too.
The key is knowing HOW MUCH you need to achieve financial independence. Is it a $5 million estate? Or perhaps $100,000 of passive income per year?
Once you sit down and understand what you need, your path to financial independence becomes ten times clearer.
Where to find more resources
And if you need help, we at Jurnex provide free consultations for our prospective clients. We understand the importance of the personal touch, and we want to make sure we’re all a good fit. Any less would be child’s play.
At Jurnex Financial Advisors, we have the securities backing of Charles Schwab. Yet we retain our operational independence from any third party. This means you can have the confidence your money is safe with one of America’s best brokerages and still receive knowledge and advice from an independent firm focused on YOU.
Want to learn more?