April 25th is International Financial Independence Awareness Day — a time to think about ways to achieve financial independence, determine goals to help you get there, and build a path to maintaining it. Why April 25? 4% is the magic percentage that you can withdraw from your investments annually to fund your retirement and increase this amount to cover inflation. Another way to calculate this same concept is to multiply the annual amount you need to live by 25. April 25 is the 4th month, on the 25th day, or 4/25!
So, what is financial independence? Financial independence is the ability to generate enough income from the assets you own to cover your living expenses. Our goal is for people to achieve financial independence prior to retirement. This gives them the ability to work because they really enjoy their career, not because the bills need to be paid by the end of the month.
Ensure financial independence by following these steps:
1. Set Your Goals
Goals are different for everyone. Do you want to start a family? Do you want to buy a house? Do you want to travel? Do you want to go back to school? Before you can accomplish your financial goals, you need to outline your personal goals for the near future and for retirement.
2. Audit Your Budget
Do you have enough to accomplish your personal and financial goals? Start diving into your finances by making sure you know where your income comes from, including the frequency and timing. Then, create a budget. It doesn't have to be difficult! Pay your future self first by saving for emergencies and retirement and then, once all your bills are paid, spend the rest however you’d like.
3. Cut Unnecessary Expenses
As you're thinking about your goals, you may find a gap between where you are and where you want to be. There’s no better time to cut unnecessary expenses such as TV or monthly makeup subscriptions, gym memberships, fast food runs, etc.
4. Create a Baby Emergency Fund
Scary things will happen and you may need to dip into an emergency fund to navigate those challenging moments . But it's important to never dip into your savings! You’ll never get ahead if you're constantly using your savings to put out fires (hopefully not a literal fire!). Start your baby emergency fund with at least 1 month worth of expenses.
5. Tackle Your Debt
If you have any high-interest debt (hello, credit cards), let’s get this stress out of your life. No matter your age, chip away at high-interest debt a little at a time as fast as you can. All the money you’re spending in interest to a bank can be better used saved or invested.
6. Pay Yourself FIRST!
Time is the most expensive thing in life to waste, even when it comes to your finances. The earlier you start to save, the more you will save. And, if you work for an employee that does a 401k match, invest at least the matched amount into your 401k. That is FREE money you’re not taking advantage of otherwise. FREE MONEY. If you don’t work for a company with a 401k, be sure to open an IRA.
7. Biggie Emergency Fund
You’ve cut unnecessary expenses, saved a little for a rainy day, and are saving/investing for your future self to enjoy, but now it’s time to save for a flood. Again, hoping not a literal flood, but you should at least have an emergency fund to cover 6-12 months of expenses, depending on the type of assets you own and your risk tolerance. This might be a terribly slow process, but creating this emergency fund gives you the peace of mind that you'll be ready for any surprise: a recession, losing your job, a medical emergency, etc.
8. Let's Get You Financially Independent
If you accomplish all of the above and still have funds available, you're not done yet! Now's the time to invest more. At this stage, you’re already getting your company’s 401k match (if they have one), but let’s now max it out! As of 2023, you can contribute $22,500 to your 401k. The catch-up contribution rises to $7,500 if you are over age 50 for a total of $30,000! And when the time comes that you still have money to invest after you’ve maxed out your 401k, it’s time to connect with your local fiduciary advisor. Based on your income and goals, there are several strategies available to help you secure financial independence.
After reaching financial independence, you are no longer relying on a paycheck to cover your needs. An entirely new set of financial goals and opportunities usually opens up and plans tend to change. Celebrate Financial Independence Awareness Day by thinking about your personal financial situation. If you have questions about your goals, seek the help of a fiduciary—someone who places your best interest ahead of their own. Financial independence is achievable and important. Give us a call and schedule a time to come in to review your personal plan!
