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During the month of July when we celebrate American independence, it’s a fitting time to look at your progress toward financial independence. Of course, your particular definition of financial independence is important in determining whether you’re on track or not.
Achieving and sustaining financial independence is a central objective of personal financial planning. However, if you ask 10 people to define what financial independence means, you’ll likely get 10 different answers. Your definition won’t be the same as others. For many people, financial independence equates to a time where working is optional, but not required. In other words, you have “enough” financial resources to continue your lifestyle including increasing living expenses.
It’s crucial to settle on a clear definition of what financial independence means to you. That way, you’ll have a destination that you can aim for and assess progress along the way.
We’ve all heard the phrase, “freedom isn’t free”, and that applies to your financial life as well. You can’t achieve and sustain financial independence without diligent effort, sacrifice, and saving. Nothing is more important in determining financial independence readiness than how much you save from your earnings.
Good investments and great returns can’t fill the gap if you don’t save enough. In over 40 years of working with individual clients, I can count on two hands the number of clients I’ve seen that were saving enough. Ironically, almost everyone thinks they’re saving enough to fund their financial future. That’s one of the values of financial planning; it keeps you connected to reality.
Financial planning is focused primarily on progress toward your long-term goals. Investment markets are noisy and making decisions based on short-term conditions often leads to regret. Yet that’s exactly what many investors do.
The drivers of financial independence are sufficient saving, investments with broad global diversification, and staying invested during all types of market conditions. These three components are codependent. If you don’t save enough, global diversification and good behavior won’t help. If you do save enough but have a concentrated portfolio and emotion driven behavior, that won’t work either. Finally, if your decision making is poor, even a well-diversified portfolio derived from adequate saving won’t lead you to financial independence.
Our forefathers had to fight numerous battles to secure our independence. You too will face many challenges in your quest for financial independence. However, securing and sustaining financial independence is a worthy objective. The alternative, a constantly declining lifestyle or even running out of money altogether is unthinkable.