Planning Your Financial Independence Day

It’s July and Americans are getting ready to celebrate Independence Day on July 4th! It’s a day with fireworks, great food, and gathering your loved ones together to appreciate all the good things we have here in the US and pay homage to it. Despite the headlines, we still know that this is the land of opportunity and we feel lucky to be a part of it. And so we celebrate our country’s independence. But have you ever thought about celebrating your financial independence day?

Planning Your Financial Indpendence Day

Financial independence (or FI as it’s known) isn’t a dollar amount you accumulate but rather a date that you have or will set for your financial freedom. Most of us think of it as a retirement date, simply because it will take some time to reach the goals for your independence. For some people it can come early in life, just ask Bill Gates or Mark Zuckerberg. But for the rest of us, it’s a longer term goal and we get to it with good plans and habits. It’s what we want and look forward to, isn’t it? So let’s plan it right now: your financial independence day can come before retirement!

Here’s what you can do to get closer to that date:

Make a plan to pay off your home

For most of us, a mortgage is the biggest debt we will ever incur, so in order to be free you need to make that debt disappear. In most instance, we own a 30-year mortgage and it’s paid off with enormous interest even in today’s markets where the percentages are near or at record low rates. Your plan should include adding extra principal payments regularly to your mortgage payments and amazingly, you can cut your term from what was 30 years down to 27, 25, or even 20 years depending on how much you contribute to that goal. While you are working and earning your pay, it will be so much easier to pay off any loan. The last thing you want is to still be paying off a mortgage after you have stopped working!

Refinancing your loan, or your other large debts such as student loans or credit cards, is usually an option. Doing so when it can save you interest and reduce your payments can work well. I’ve done that myself and have reduced my monthly mortgage payment by $100/month, so now I contribute that savings toward my principal payments. Resist the temptation to withdraw any equity when you refinance because that will only increase what you owe and make your payment larger. The only time you should increase your required monthly payment is when you can afford to refinance with a shorter term, like going from a 30-year mortage to a 15-year term. Mortgage burning day can be your financial independence day!

Plan multiple sources of income before retirement

In addition to getting Social Security (as early as age 62, or later for larger payments), you could earn interest income, dividend and investment income, annuity income, rental property income, pension income, or even income from another job. Some say that working by choice rather than necessity is “real” financial independence. I tend to agree, so a new second career can be your statement about that.

Hone your frugal skills as you grow nearer to independence day

The plan and the truth is you can and will cut expenses in retirement. Things like clothes, cars, commuting expenses and the like can be reduced. If your plan is retirement on your “date” (like your 66th birthday), begin adjusting your lifestyle changes in your mid-50’s (or sooner) so that by the time you retire, you have already adjusted and are comfortable with your way of living. Sometimes, going from a full time job to complete retirement can cause a real shock if you haven’t been able to adjust your expenses and build your assets to draw upon. Doing that ahead of time will make it a lot easier.

Now wait, you may be asking what about all those things you plan to do in you financial independence, like travel and take up new hobbies? Being frugal doesn’t mean you can’t spend your money, it just means being careful when and how you spend it. Make sure you focus your spending on what’s really important to you, and be a smart consumer so you don’t spend more than you need to for what you want.

While you’re still working: save, save, and save!

Building your emergency fund and contributing to your IRA or 401k are ultra-important to reach your financial independence day. Save 20% of your income every month. Can’t do that? 15%, 10% or even 5% is still good to get that pile of money building up. Check that budget for ways to cut spending and funnel it into your saving and investing. It’s when you don’t do anything at all that you’re giving the kiss of death to your financial plan.

Have an investment plan to grow your money

A good investment plan doesn’t have to be complicated. Pick a successful and highly-recommended US Exchange stock fund, an international stock fund, and a US bond fund and hold on to them. Review them annually and make any adjustments to balance them into the right proportions you desire if that needs to be done. Use index funds if you prefer those and seek out a financial advisor if you need one.

 

Having your essential expenses, lifestyle expenses, healthcare and emergency expenses taken care of now will make your financial independence day arrive much earlier in life than that retirement day!

So what is your financial independence day plan?

Image courtesy of holohololand on freedigitalphotos.net (with changes)

12 Comments

  1. Great post – I’ve always felt my life is so crazy and up in the air, it’s impossible to set a real Financial Independence Day, but I do try to practice all of those habits so that when life slows down enough someday, I’ll be prepared to figure out my long term plan for independence.

  2. Alexandra @ Real Simple Finances

    Planning multiple sources of income is a big one — particularly passive sources of income! One of my FI goals is to have my income be from a source that I can manage while travelling instead of being physically tied down to one location.

  3. Jayson @ Monster Piggy Bank

    Having different sources of income guarantees earlier retirement. This is what I am doing so that I can either retire earlier or work further to have great retirement years! By the way, we’re having a blast during this 4th of July! Lots of food have been prepared. Hope you are enjoying as well Gary.

  4. We currently have to focus on saving for my husband’s $25,000 dental implants, so we’re not able to make much progress on the retirement or mortgage front. We have a pretty low mortgage and are paying about $130 (or a little under 25%) extra. But I’d love to pay more.

    Once this teeth thing is taken care of, I’m focusing my energies on opening and fully funding a SEP IRA to help make up for lost time. Unfortunately, no 401(k) since I’m a contract worker.

    Once that’s established (hopefully no later than 2017), we’ll be increasing mortgage payments to pay that sucker off.

    Once the house is paid off, we’ll look for a rental property. I know lots of people prefer to buy early, but I’m the only income earner. So juggling two mortgages just wouldn’t be good for my mental health.

    1. It looks like your plan is something that will work better for you and that’s important. No one way is a template. It’s tough when medical and dental issues arise (as I well know!), but they need to be the priority. As long as you are on a path that will lead you to your goal, I commend you.

  5. This post is excellent since we just celebrated the Independence Day holiday. Hopefully people also made this day their date to become Financially Independent.
    I myself am setting up goals to be financially independent by the end of the year and using July 4 as my kick off date, two dates that I can remember as my motivation to make it too full financial independence.

  6. Big hit in planning multiple sources of income. Once established I think everything will go smoothly from paying off the house mortgage, saving and growing the investment.Cutting of expenses is a good start and finding other means to earn. Great share, thanks for this!

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