Financial Freedom and Your Capability to Achieve It
Knowledge is wisdom and as you get older you are able to learn from your experiences. You’re building knowledge and capability as you grow in your career. Maybe you have bought a home, savings and investing for the future and think you are doing all of the right things. But are you gaining the ability to achieve your own goals?
Having the true amount of financial capability is closely tied to financial freedom or independence; however, you define that. For a lot of people, it relates to flexibility and choices you make for your family and yourself.
Wanting to Retire early, working only because you want to, balancing the use of your money now working while saving, helping your children with paying for college or other gift, or being there to support your aging parents are all achievable goals. But to get there on your own timeline requires some planning and intentionality.
Let’a face it, it is somewhat human nature to put off taking action for another day. The consequence of this is it may make achieving Financial Freedom harder. It is like taking a road trip without a map. You may eventually get there, but it can take a lot of time, stress and effort to get there.
Every April, I find it interesting to see how people are scrambling to complete their tax return right up to the deadline. What are some of the consequences of this? Maybe they did not complete it correctly or did not take all of the deductions they are entitled to?
This is where you can increase your capability through having a plan and goals that will allow you to achieve Financial Freedom. Have you ever heard these quotes/sayings:
“Setting Goals is the first step in turning the invisible into the visible” – Tony Robbins
“A Goal without a plan is just a Wish”- Antoine de Saint-Exupery
“When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the Action Step”- Confucius
“A budget is telling your money where to go instead of wondering where it went.”—Dave Ramsey
It can include an advanced level of budgeting, reviewing employee benefits to make sure you maximizing them, planning for retirement, investing beyond a retirement plan, and strategically thinking about taxes so you can pay as little as possible over your entire lifetime.
Financial Freedom – Factor Lifestyle Creep Into Your Budget
Budgeting is a basic pillar of financial capability and key to successfully achieving your goals and achieving Financial Freedom. Unfortunately for many people, it starts and ends with paying your bills each month and having an automatically contributing to a retirement plan. The challenge is, what happens to the rest of your paycheck? If your approach is “whatever is leftover,” even if you are putting it in savings or investing it, you may be leaving yourself underinvested.
Underinvested may mean you are leaving your money in a savings account paying very little. If you look holistically at your investments and add in this cash into your allocation you can be sure your overall expected return from your wealth to be much lower. Expected Return directly relates to your goals. If you don’t achieve the expected return or average return needed to fund a specific goal you will come up short and won’t achieve what you want. The word to think about intentional as you want to have a plan for every dollar.
You will often hear Dave Ramsey talk about how up to 80% of people in the United States live paycheck to paycheck. Perhaps this the impact of how much we are marketed, but another reason more many who are making more money is the impact of lifestyle creep. For many people, lifestyle creep now is a serious threat to future financial and lifestyle flexibility/Financial Freedom. As income increases, it’s easier to think you can afford a more indulgent lifestyle.
What are some ways to head off lifestyle creep? There are a lot of sensible things you can do, but the best way is to change your mindset.
There’s an 80-20 rule for money Dave Ramsey teaches which says managing your finances is 80 percent behavior and 20 percent knowledge. This 80-20 rule also applies to constructing a healthy life. Personal wellness is 80 percent behavior and 20 percent knowledge.
- Set clear long-term goals and put a dollar amount on them. Every Dollas should have a name to them. Then track your progress. These are big things like a second home purchase, education savings, etc.
- Review your emergency fund every year – increase it along with salary increases
- Move some spending from short-term rewards to long-term rewards. It’s easier to say no to extra dinner out if the reward is a big purchase or a big trip
Financial Freedom – Are You Maximizing Your Benefits?
To get to Financial Freedom saving the maximum into a 401(k) each year is the easiest way to lower your taxes while you are working and take advantage of compounding to build generational wealth. As a guideline as part of the Dave Ramsey 7 Baby Step Process we list Baby Step 4 as Save 15% for Retirement. If are still working on earlier Baby Steps a consideration can be given to save enough to meet the company match. Ex. 3% Match will give you 100% return on 3% you save.
What else can you do?
Health Savings Accounts (HSAs) are offered by companies that also offer a high-deductible health insurance plan. HSAs allow you to contribute money before taxes, it grows tax-free, and when you take it out to spend on qualified expenses, no taxes are due. While you can use funds in these triple-tax-advantaged accounts anytime, allowing them to grow while you are working and using them as a source of funds for increased healthcare spending in retirement can make sense.
Does your firm offer disability insurance or life insurance? These are often offered at competitive rates, and enrollment may be simple. Protecting your income is a big part of growing wealth, and life insurance can provide for your family if you aren’t able to.
Flexible Spending Accounts/Transit Accounts – these accounts let you put aside before-tax dollars in an account for specific types of expenses. It can add up to hundreds or thousands of dollars a year in savings.
Financial Freedom – Are You Investing Outside Your Retirement Account? What About Company Stock?
If you are saving at least 15% for Financial Freedom in Retirement and have maxed out Retirement Contribution you may be able to save in a Taxable Brokerage account. Investing through a taxable brokerage account means putting more money to work for a longer period of time, and it can give you the opportunity to expand your asset allocation and calibrate your risk profile. It can also help you control your taxable income in retirement.
Setting up an account that works with your tax-advantaged retirement assets is key. Think of your asset allocation across your entire portfolio. Do you have company stock? That can increase your risk since your income and your investments are exposed to the same company’s fortunes. It may also mean that you are overexposed to a particular asset class.
Determining a plan for company stock purchases and sales and making sure it is tied to your goals should be a priority.
Financial Freedom – Do You Have a Strategic Tax Plan?
You have more control over your taxes than you think, and it’s a source of hidden income for many people. Keeping more of what you make is the goal, and thinking a few years in advance makes a difference. If you’re still working:
- Are you maximizing tax-advantaged retirement savings?
- Are you taking advantage of tax breaks on education savings?
- If you or a spouse is self-employed, are you optimizing tax deductions and credits?
- Are you being thoughtful about the timing of asset sales?
- If you are out of work for any reason, are you taking advantage of lower income to convert to Roth accounts?
- Are you paying careful attention to tax brackets?
- Are you timing your Roth conversion to hit the sweet spot before taking social security?
- Are you planning to maximize social security for you and your spouse?
Financial Freedom – The Bottom Line
Financial capability is about having a plan for ensuring you are building long-term wealth that will help you achieve your goals. Be different than everyone else. Don’t be the person who puts off planning their taxes and reacts to getting it done. Be intentional in your planning and you will live like no one else in the future.
Find an accountability partner to make sure you are doing what you said you would do. This may be a good Financial Planner or Financial Coach or perhaps you find a new way to hold yourself accountable. I was watching GMA-Good Morning American this morning and found it interesting people are posting to Social Media to hold themselves accountable.
Whatever the method you choose the sooner you take the next step the better it will be for you in the long run. Check out this post from Good Morning American: https://www.goodmorningamerica.com/living/story/tiktoker-cash-stuffing-method-pay-off-debt-launch-98167231
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