Today is a celebration of the United States of America’s proclamation of freedom from the British Empire over 235 years ago. We are self-governed, and our declaration specifically states you are free to pursue life, liberty, and happiness. As nice as all of that sounds, you do not get to declare true freedom until you can claim financial independence. Until you have saved and invested enough money that you can do whatever you like while living off of the interest or withdrawals of your nest egg, you aren’t really free. You still have to go to work, pay your bills, and earn an income to pay for your lifestyle.
Financial freedom doesn’t necessarily mean you have millions in the bank and you spend your days on the golf course. The key from the above phrase is getting to a point where you can do whatever you like. Perhaps that looks like a healthy nest egg that affords you a basic lifestyle, quitting the corporate grind, and starting your own company. Perhaps you decide to work at a non-profit or pursue art. But you can’t do any of those things without the financial stability in place to take that kind of risk.
Planning for Financial Freedom
It seems like an incredible task: how could you ever save hundreds of thousands of dollars, or millions? How would you like to put back $300,000 in principal for your financial freedom? It sounds like a lot until you realize that is just $10,000 per year for 30 years. That would fund two Roth IRAs or most of an employer-sponsored 401k plan. Keep the big picture in mind, but break everything down into manageable steps. Some of those steps include:
not carrying a significant debt load
saving a significant amount of money (your base contributions or principal)
generating growth on that financial base
You are digging a financial hole if you carry a $10,000 credit card balance at 20% while investing $10,000 that year and generating a 6% return. Props to you for wanting to put back money for retirement, but the debt will always hold you back. Get on a debt elimination plan first before taking significant steps toward retirement.
Once you’ve paid off your debt you should have some extra cash every month in your budget. That money used to go toward your minimum payments and debt elimination. A great way to avoid blowing that extra cash is to set it up as the base for your retirement savings. Every situation is different, and you can’t really go overboard on saving, so you may want to consider saving even more on a monthly basis.
Calculate what you need to be saving and what return you need to achieve in order to reach financial freedom. Knowing how realistic your growth calculations are will show you if you are really saving enough money or not. The stock market doesn’t come with a guaranteed annual return, but historically it has returned in the high single digit to low double digits. You won’t see 20, 10, or even 5 years of straight healthy growth. There will be ups and downs. But over the long run your portfolio should generate decent returns. I personally plan for 7% growth in hopes that my average is higher – closer to historical returns – but I won’t fall short if my average growth is lower.
There is no time like the present. You want your portfolio to have the longest period of time to enjoy compound growth. 30 years of compounding is a lot better than 10, so start saving immediately. The longer your portfolio can grow on its own, the less money you have to contribute to your retirement plans. The longer you wait to start, the more you have to chip in every year. There is no reason not to get started today – you can open up a retirement account at a brokerage right now.
Photo by Chad Davis via Flickr