With independence day this week, I wanted to talk about a bit about financial independence. There’s been a movement lately called FIRE (Financial Independence and Retire Early). While some are really big on this idea, I would beg to say that the most important thing you can do is find your purpose first and then add the finances as a means to get where you want to be.
As they say, life is a journey, and I’ve seen too many individuals scrimp, cut corners, and sometimes completely omit important facets of their life in order to obtain this dream FIRE destination, only to find that once they get there, they are empty and life has lost its meaning and purpose. Instead of pushing to get to the destination, slow down, and enjoy the actual journey while also preparing for the road ahead. This means you need to pause and ask yourself a few questions before jumping on the FIRE bandwagon.
What are my life goals?
This may sound odd coming from a financial expert. What do finances have to do with obtaining your life goals and dreams? A lot! Actually this is where all financial planning should really start. Financial planners that listen more to their clients’ goals, dreams, fears, and aspirations are better able to understand the financial means needed to help them live their ideal life. They are also able to set up the appropriate safeguards needed to protect the assets they have gathered.
A recent example came from a friend that I had a conversation with regarding a sum of money she had saved up but didn’t know what to do with it. She already maxes out her retirement plans, she lives a comfortable lifestyle and really doesn’t have any urgent or pressing issue. Before we discussed WHERE she should put the money, we instead talked about her future and what she envisioned. Instead of stating what she wanted exactly, she talked a lot about needing to make sure she was taken care of later in life. As a single professional female without children, she wanted to make sure that she had options later in life when she was no longer able to care for herself.
As a part of this discussion though, we talked about how not only should she be considering future benefits at retirement age, but she should also make sure she is covered in case of an accident that is disabling. According to the Social Security Administration, a 20-year-old has a 1 in 4 chance of becoming disabled before reaching retirement age. Many serious accidents or medical conditions can leave young people seriously injured and impaired long before retirement age. Even if not fully impaired, medical expenses, as a result of serious accidents, are quite costly. In fact, medical debt is cited as the top cause for bankruptcy filings (American Public Health Association, 2019, Medical Bankruptcy: Still Common Despite the Affordable Care Act). Additional supporting information if you find it necessary. In short, disability can eat away at current savings and limit future earning potential. In this case, it was important for my friend to also consider disability insurance as a part of her financial plan to help ease her fear of being alone.
What do I need to accomplish these life goals?
After you’ve realized what you want to accomplish with these life goals, the next step is to decide a timeline and what you’ll need to accomplish them. Money often is a factor in helping to accomplish some of these goals and the place to start is now. How much will be needed? Even small amounts of savings can make a big difference.
I remember a surprised Facebook friend looking at her 529 College Savings plans for her kids and being surprised at how much they had grown. Her secret? Setting aside small amounts toward this important goal every month. It didn’t have a large impact or effect on their monthly budget, but over time, small amounts of money can make a huge difference.
So back to the question of financial independence. Instead of defining it narrowly along the lines of the FIRE movement or no longer having to work for money, thinking of it instead as being able to take care of yourself and your family with your needs (notice I didn’t include all wants and wishes here). This idea of self-reliance is important as it serves as a launch point for being financially confident that you can meet your financial needs and obligations. As stated in one of the first books I ever read during my financial planning education:
“Financial independence encompasses a lot more than having a secure income. It is also independence from crippling financial beliefs, crippling debt, and a crippling inability to manage modern ‘conveniences’. Financial independence is anything that frees you from a dependence on money to handle your life” (see Your Money or Your Life by Vicki Robin & Joe Dominguez).
Life is about the journey. So this July 4th, while you are celebrating America’s independence, look around you. Whether you see bbq on the grill, your kids playing by the pool, or fireworks in the air, take a few minutes to think what these moments with friends and family mean to you. You’ll get to your financial destination soon enough. Enjoy your journey.