This week, our country will celebrate one of its most important values: independence. It’s a concept that means something a little different to everyone.
Similarly, financial independence is something worth fighting for and celebrating. However, if you ask 100 Americans what their definition of financial independence is, you very well could receive 100 different answers.
Not sure how to work toward financial independence? We can help.
Does financial independence mean that you’re not solely working to live? Does it mean that you don’t have to work at all? Does it mean you are free from debt? Does it mean retiring by a certain age? Rich Ramassini, Certified Financial Planner, senior vice president and director of sales strategy and performance at PNC Investments, encourages individuals to figure out their own definition.
“Your rationale doesn’t necessarily need to be as specific as purchasing a certain item by a particular date, but you should know what motivates you,” said Ramassini. “What are your goals? Your values? Your interests?”
For instance, there are people who are part of a movement to achieve a goal they call FIRE: financial independence, retire early. This group has even come up with a mathematical definition for financial independence. According to FIRE devotees, once your net worth is 25 times your annual expenses, you’ve achieved financial independence.
To many, that can seem like an unreasonable, unattainable goal – and that’s the point of defining financial independence for yourself. You need to define and work toward your own version of financial independence.
Once you’ve honed in on your personal definition, you can start strategizing. Regardless of what your version of financial independence looks like, it will require one very important thing: discipline.
“Your savings habits must be rooted in discipline and aggressive enough that you can self-fund your goals and financial obligations. That’s where spending becomes so important,” Ramassini added.
Be intentional in how you spend money and be honest with yourself so you can ultimately spend less than what you make, a concept known as positive cash flow.
“You cannot achieve financial independence unless you have financial stability, and that comes from positive cash flow,” added Ramassini.
The next step in achieving financial independence is to set reasonable lifestyle expectations.
“Because you want your savings to grow at a faster rate than your spending, you should aim to live a modest lifestyle,” said Ramassini. “Once again, that concept is specific to each person and family.”
For some, it could require cutting back on eating at restaurants and taking public transportation more frequently, while for others it could mean downsizing your home or swapping an expensive car for a more cost-friendly one.”
If part of your financial independence means not working, you must be able to meet your financial obligations using a combination of your savings and investments.
Lastly, account for your emotions in this process.
“For example, if you want to retire early solely because you hate your job, that’s not going to be a sustainable goal,” Ramassini said. “You have to know what you are going to do with your time when you retire. What fuels many people is a higher calling than working 9-to-5 each day. They want to pursue other passions.”
Achieving financial independence will not come easily to most people. There might be some bumps in the road along the way that could tempt you to give up.
“A big component of success is determining why the outcome is important to you,” said Ramassini. “That often requires you to do some soul searching and tap into your emotions to continue to motivate yourself, especially during hard times or periods of temptation.”
At the end of the day, financial independence gives you the freedom to make choices that are not entirely dependent on money. That idea alone deserves a fireworks display and celebrations with family and friends!
PNC can help you on the path to financial independence »
“Think about your monthly expenses in terms of what is essential versus what is discretionary. It’s easier to save more by cutting back on discretionary expenses first,” said Ramassini.
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