Declare Financial Independence in 3 Easy StepsWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
In their new book, “The Two-Income Trap,” Elizabeth Warren and Amelia Warren Tyagi discuss why middle-class mothers and fathers are going broke. According to their book, “more people will end up in bankruptcy this year than will suffer a heart attack, be diagnosed with cancer, or graduate from college.” Ringing in the New Year, many of us make resolutions. Make this year the year to resolve to be financially fit and declare 2011 the year of financial independence.
Independence is defined as “freedom from control or influence of another or others.” A recent retiree who visited our office described it quite well. Exampling that retirement was not just an event, but was a point in his life that he knew he was free to do what he wanted no matter how other people and occurrences beyond his control impacted his financial situation. The day he knew he was there was what he called his “Freedom Day.”
The first step is to identify an emergency or rainy day account and make sure there is enough money in this account. Nearly everyone has been affected by the recent recession that almost turned into a depression. Some lost their jobs, others had to help family members out, most saw their investment accounts decline in value, and still others had to drain down their emergency accounts. Gaining financial independence starts with building up a liquid account, such as a savings or money market account, to cover short term emergencies that will come up. An emergency could be a new furnace, a major car repair, or unexpected health care bills. Keeping about 6 months worth of income set aside in an emergency account can help fight off the majority of problems that can arise in the new year.
Build up this emergency account by moving money from the left pocket to the right pocket. This means pay yourself first. Complete a budget to find out where money is going on a monthly basis and then identify ways to change spending habits. It could be eliminating two nights dinning out and instead opting for a movie night or playing cards with a spouse or friends. Instead of signing up for the gym membership, try free alternatives such as group runs or biking in our local metroparks. Joining a group can not only be free or low cost, the group can be a great motivator. Contact the Chamber of Commerce to plan a year’s worth of fun activities that you didn’t even know existed. Our local community has a treasure trove of wonderful activities that are just waiting to explored. A few simple and easy changes could save several hundreds of dollars a month that can be put into building the emergency account up.
Next, eliminate all outstanding debts. When someone has a debt they are a slave to the lender, subject to their rules and changes with limited or no control. Principals of saving can become a habit and since it takes a few months to build up an emergency account, those habits can become a regular way of life. Once the emergency account is built up, redirect those savings dollars towards debt elimination. Financial Professional, Dave Ramsey suggests the “snowball effect.” That means putting all of the extra money towards the lowest balance debt first. Pay off debts, one debt at a time.
Increase the amount of money being saved for retirement. Time flies and what seems like a long way off will be here before you know it. Remember that financial independence means freedom from control or influence of another or others. At any point the company retirement plan could change, be it the pension, health expenses, etc. The same should be expected with government benefits such as Social Security for yourself or a survivor along with all government benefits. The single best way to address this is to save and invest on your own. Put away 20% of earnings in a retirement savings account. Save as much as possible once debts are eliminated and increase savings every time there is a pay raise.
Stop letting circumstances and others control your financial future. Don’t rely and expect others to take care of you in the future, take personal financial responsibility. It will take some time, it will take some effort, but won’t being able to reach your Freedom Day be worth it? Won’t it be a great feeling knowing that you now are in control? Declare this year, the year you gained financial independence. You can do it, you deserve victory.
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguysradio.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc nor its representatives provide tax advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537.