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Financial Independence

July 03, 2023

Financial Independence

"What you get by achieving your goals is not as important as what you become by achieving your goals." - Henry David Thoreau

On July 4, 1776, the path of our collective identity, culture, and destiny as a sovereign nation, by establishing our own independence, was forever changed. This is perhaps the most important idea for all Americans to this day.

When are you going to declare your own independence, financially? How will that change your identity, aspirations, and confidence for the rest of your life? Let's define what I mean by financial independence. This is the status of having enough income or wealth sufficient to pay one's living expenses for the rest of one's life without having to be employed or dependent on others.

You can call this concept retirement or a work-optional lifestyle. Whether you're hanging up your work boots for good or working because you want to instead of needing to, this achievement should be a major goal in your financial plan. Further, this goal is achieved not by accident, but by choice through careful planning - especially for those who get there early in life.

Let's run through a quick exercise to help you visualize what this looks like for. It's important to begin with the end in mind and these questions will help you understand how much you need to be financially independent:

  1. How much are you spending on a monthly basis?
  2. Are you living within or beyond your means? Will the amount you are spending now be sufficient in the long term?
  3. Are there major expenses coming up? (Care for parents, kids’ college, wedding, surgery, etc.)
  4. Do you expect some expenses to go away when you stop working? (FICA taxes, saving for retirement, reduced vehicle expenses, etc.)

The exercise may look like this:

  1. We usually spend $15,000/mo. as a household and it's sufficient.
  2. We bought a dock at the lake with a balloon payment of $100,000 due in 4 years. (+$2,500 per month needed)
  3. We will be living within our means, with fewer car expenses, work clothes, and meals. (-4,000 per month needed)

The result: Need roughly $13,500 needed per month now and $11,000 per month in 4 years.

Whether your number is $5,000 or $50,000 per month, you now have an idea of the needed cash flow. Next is understanding how to get there. For most Americans, saving/investing is the surest way to reach financial independence. While business ownership is hard and unpredictable, it does pave the path for many. Far fewer receive a sizable enough inheritance to cover all expenses. And almost incomprehensibly small are those who receive a huge windfall like the lottery.

The art and science of financial planning build the path from now until the indefinite future considering inflation, investment returns, and many other variables such as pensions, rental income, and longevity. These are all the things your financial advisor will take into consideration. Thankfully, we are your easy button, so you don't have to try and consider the innumerable options. Something a spreadsheet is a poor substitute for.

Do you still want to chart your course for financial independence? Let's look at the most common paths.

While not the fastest/biggest path to financial independence, saving is the surest. Live within your means, save/invest a portion of your income, and compound interest will multiply your effort. This works if you give it enough time. The average American retires due to health and is near the age of 62. If you want to save your way there, start early, maintain discipline, and finish on your terms with anticipation instead of anxiety.

If saving isn't for you and you want to take on a lot more risk, building a business is another great route that holds a special place in my heart being a business owner myself. The American Economy is built on the blood, sweat, and tears of entrepreneurs. While the benefits may be substantial, success as a business owner is much less common than you'd think! Even those who think themselves successful - 80% that go to market are unable to sell. For most business owners, while there may be the opportunity to monetize your business in a meaningful way, guess what? Saving some of that cash flow over your business lifecycle is still your surest path to financial independence…

FYI there are ways to drive up business value and make sure you can monetize all that hard work. I'm a Certified Exit Planning Advisor and am happy to discuss options. But that's a discussion for another time.

Inheritance is an extremely distant third on the path to financial independence. Very few people leave an inheritance big enough for the next generation to live off. Sometimes it is enough to move the needle from almost, to fully, independent. Something to consider in your plan. This shouldn't replace either of the above methods.

Finally, while fun to dream about, winning the lottery is nearly impossible to do and impossible to plan on. Funny thing about winning the lottery - most wealthy people and virtually no entrepreneurs ever play the lottery. This is because the odds are much more in your favor when betting on yourself and your ability to save than ever cashing in on the lottery big or small. It's better to stick to what works.

There are many paths to financial independence with none as consistent and achievable as saving your way there. It's also important to remember the best rewards are often the journey and not the destination. However, in the case of financial independence, that destination is just the beginning of a whole new journey with great, new opportunities ahead. Especially if that goal is achieved early in life. 

The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Information is based on sources
believed to be reliable; however, their accuracy or completeness cannot be guaranteed.