Seven Real-Life Ways To Achieve Financial Peace
How to stop worrying about money and start enjoying life
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
How do you achieve financial peace? It’s a question that confounds more people than you think.
A recent study by Merrill Lynch and Age Wave found that, when it comes to money, an overwhelming majority of Americans (88% of people) said they would rather have enough to achieve financial peace of mind. Only 12% of people said they would like to accumulate as much wealth as possible.
Yet, the majority of people find it difficult (if not impossible) to achieve financial peace of mind. According to a study by Personal Capital, finances remain the #1 greatest worry even among affluent people.
Why is it so hard to achieve financial peace?
American culture discourages people from talking openly about personal finances. Few people know what their co-workers earn, and even fewer people ask parents or close family members about their loved one’s financial status. That’s because US culture has made these topics taboo, leaving many people feeling like they have to worry about finances alone.
Why we need to talk about financial peace
Achieving financial peace becomes far simpler once we start sharing our thoughts on it. It takes some personal bravery to get the conversation started. But it’s worth it.
A study by Harvard and Stanford researchers found that reducing stress increased lifespans of participants by 10-38%, adding decades to a happier life.
So in this article, we’ll walk through the seven real-life ways you can achieve financial peace.
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What is financial peace?
Before we get started, we should consider: what does financial peace of mind mean?
It’s the ability to live life without worrying about money.
And it’s certainly possible to achieve. We live in one of the wealthiest countries in the world. While healthcare might be expensive and social security quite low relative to other OECD countries, only 4 in 1,000 retired Americans ever file for bankruptcy.
But why doesn’t that feel comforting?
That’s because merely staving off bankruptcy isn’t enough to bring financial peace of mind. Humans are hardwired to want to thrive. And so here are the seven ACTUAL ways to achieving financial peace.
1. Being able to live comfortably within your means
Balancing cash flow is the #1 that helps people attain financial peace of mind.
Imagine two people who each earn $100. One spends $95, while the other uses $101 ($1 extra from credit cards.) It’s only a $6 difference in spending. But who’s happier?
Create a basic budget to follow.
Living comfortably within your means involves creating a budget. And even affluent and wealthy families can benefit from this exercise. To keep things simple, I suggest using the “50-15-5 Rule”:
- Essentials (50% of net income). Includes rent, utilities, groceries, tuition, work clothing, work-related transportation, and everything else that is deemed “essential” to cost-of-living.
- Long-term savings (15% of net income). Includes 401(k), IRA and brokerage accounts
- Short/medium-term savings (5% of net income). Includes bank accounts, CDs, low-risk funds, and money market accounts.
Families can spend the remaining 30% on “fun” (i.e., discretionary) expenses, such as travel and entertainment.
The “50-15-5 Rule” is compelling for its simplicity. While each family might decide to change the ratios (paying for private tuition, for instance), having a general cost concept will always help.
2. Having the financial resources to live as you choose
Also known as achieving financial freedom. Living as you want involves two keep steps:
1. Identify how MUCH money you need to live as you choose
2. Identify how to EARN the money to live as you choose
Work hard, retire early
Many people want to live life in the fast lane. These people work incredibly hard during the first half of their life, often as lawyers, investment bankers, or other high-paying careers with extended hours. By the time they reach age 50, they tend to burn out and retire by age 55-60.
For these people, the ability to live as they choose involves an early retirement. And this means saving up a lot of money early in life. Typically, savings rates approach 50% of gross income. Having children gets deferred until later in life.
Work for the fulfillment, retire later
On the other hand, many individuals want to work more sustainably for an extended period. These people tend to either own their businesses or have personally motivating careers. Many even identify their jobs as their “calling.”
With better work-life balance, these people tend to work well into their 70’s. They tend to need fewer financial resources saved away, and typically save around 20% of their salary (though they usually still have substantial nest eggs to protect themselves financially.)
3. Being able to handle significant unexpected expenses
According to the Federal Reserve, 6 in 10 Americans have less than three months of liquid savings available for emergencies.
Why doesn’t that feel great? Consider this: the average length of unemployment is 20.5 weeks or around five months.
If possible, I recommend people keep between 3 to 6 months of liquid savings on hand. Liquid savings can include cash, credit cards, liquid savings, and unused HELOC lines of credit.
Having the following will help you handle major unexpected expenses.
- Adequate cash flow. Having positive cash flow every month gives you greater flexibility. For instance, if you don’t have enough money on hand for a significant expense, you can take out a personal loan and use your positive cash flow to repay the principal over time.
- Credit cards. By maintaining a good credit score, you’ll have access to low-rate credit cards. Debts can also get rolled into 0% APR cards for 12-18 months to make repayment easier. ~~
- Insurance. Having adequate life, health and disability insurance can help you pay for unexpected medical and other life expenses. If your health insurance has a high deductible, make sure you have that dollar amount handy too.
4. Not feeling overwhelmed by debt
In the US, almost 1/3 (29%) of Americans borrow from their retirement plans. 46% of respondents said they were using it to pay off debt. And only 26% said it was a good idea.
Liabilities can be a chief concern of both the rich and poor. That’s because, regardless of how much you earn, you can quickly end up paying more in interest than in the principal amount if you fail to make timely payments.
Studies found that having credit card debt over $1,000 is associated with nearly every risk indicator tested. Risk factors included overweight/obesity, binge drinking, substance abuse, and violence.
That’s why having proper debt management is essential to achieving financial peace. You want to make sure you’re paying down bad debts FAST while making sure you have enough money for necessary expenses.
Good debt (<5% interest rate)
Good debt generally involves mortgages, federal student loans, and unused HELOCs. People typically use good debt to buy assets (or education) with a positive return-on-investment.
For example, many families find that taking out a mortgage and buying a house can reduce long-term housing costs.
Bad debt (>8% interest rate)
Bad debt generally involves credit cards, private student loans, and cash advances. People often spend these sums without expectation of return.
When I come across people who feel overwhelmed by debt, that’s because they have “bad debts” that are both high-interest (and so the loan takes longer to pay down) and unproductive (i.e., the asset bought with the debt doesn’t produce profits).
5. Feeling confident you won’t outlive my money
According to the Social Security Administration, one-third of all retirees will live past age 90. While human longevity can be fantastic, it also comes at a time when private pension plans are becoming far less common. These days, only around 5% of corporate employees are eligible for a defined benefit plan.
That means nest eggs will have to last far longer.
To make sure you don’t outlive your money, I recommend several tactics.
- Have adequate savings. Typically, having a nest egg that’s 25 times your final salary will be sufficient for a 30-year retirement. ~~
- Buy an inflation-protected lifetime annuity. Annuities are financial instruments where you pay a lump sum today and receive monthly payouts for the rest of your life.
- Buy long-term care insurance. I typically recommend people take a partial amount of long-term care insurance that covers 30-50% of potential needs.
6. Knowing your family is provided for if something were to happen
One of humankind’s greatest worries stems from worrying about the well-being of family members. There are two key ways to protect your family if something were to happen to you.
Financial protection – life and disability insurance
- Life insurance. Life insurance pays out if anything were to happen to you. If you have a mortgage, I suggest you take out enough insurance to close out the mortgage too, in addition to covering all your dependent’s expenses.
- Disability insurance. Depending on your career, the amount of disability insurance you need can change. Those who work in physical-skill jobs (i.e., dentists, surgeons) might need additional protection too.
Legal protection – documents you need
Even among married couples, having the right documentation can still bring peace of mind. It can also help avoid lengthy arguments or probate matters between family members if one family member contests.
- Living Trust.
- Durable Power of Attorney
- Medical Directives
7. Having a well-defined financial plan
Studies have shown that “psychological certainty” plays a crucial role in guiding people’s thoughts and behaviors. The better a person’s confidence, the higher their persistence over time. That’s the reason why having a well-defined financial plan generally helps people become happier. A study by Northwestern Mutual found that the vast majority of retirees who had a highly disciplined financial plan (91%) said they were happy in retirement, versus just 63% of others.
Financial plans tend to cluster in five key areas:
- Retirement Planning: Knowing how much to save for retirement and NOT outlive your savings.
- Cash Flow Planning: Having financial resources for day-to-day expenses.
- Long Term Care Planning: The ability to fund medical care costs with certainty.
- Asset Management: Growing your assets to maximize the long-term value of your nest egg.
- Tax Planning: Navigating taxes and leaving enough behind for your loved ones and
Achieving financial peace often isn’t a straightforward path. That’s because the path you take depends on your situation, needs, and life situation. Yet, there are certain guidelines that everyone can follow to start down the way towards financial peace.
And it starts with a conversation.
Once we start addressing our financial concerns for the future, we tend to realize there are clear steps we can take that are entirely under our control. There will always be unknowns in the world: will the stock market crash, or how much will your family’s medical bills cost?
But even if we can’t predict, we can certainly prepare. And THAT’s the steps you can take towards reaching financial peace.
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Where to find more resources
If this seems like a lot of information, don’t worry. The great news is that help is available. That’s because here at Jurnex, we work with individuals and families just like you to make the most out of investing. I’ve helped invest client money for over a decade in the same old-fashioned way. And that’s to seek out great companies in great industries that can you can buy at a discount to their fair value. Sounds too simple to be true? Give me a call today, and I’ll show you that it’s still possible after all these years.
We are an independent registered investment advisor and asset manager. 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.
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