If you are financially savvy and on your way to a secure retirement, you may believe you already know the steps to work toward financial independence.
But if you are climbing out of debt, and just taking control of your money, financial security might seem entirely out of reach.
If you have kids, focusing on solving your own money problems may be complicated by your concern about their financial future too.
Financial independence means two different things at two different points in life. And they are both significant milestones.
You and your adult children may even be working toward the two stages of financial independence at the same time!
Here are explanations of both kinds of financial independence and actions to consider to make the path to “FI” attainable. No matter where you’re starting from.
Becoming Financially Independent from Work
When many hear of someone being financially independent, they may think the person inherited money, won the lottery, or received some other form of a cash windfall. But that’s often not the case.
In general, reaching financial independence means you have enough income to pay for your living expenses for the rest of your life without having to work.
This stage of financial independence is sometimes debated. But there is little argument it should be a future goal for everyone.
For some, financial independence or FI, may come as early as their late 20’s or 30’s. While others may never reach financial independence before retirement age or before they are forced to retire for other reasons.
Many people who attain FI continue to work to earn some money. But the idea is they don’t ever have to work again to pay their bills and afford the lifestyle they desire.
There are many ways to achieve financial independence. Each has its benefits and drawbacks.
The strategies you choose to use and the timeline you decide to follow is what makes the path to financial independence personal.
Just don’t forget it isn’t a race. Always consider what will make you happy along the way to reaching your financial goals!
Finding Your Way to Financial Independence
Consider these ten ideas to help you build your financial house. Leading you down the path to financial independence and a secure retirement.
- Life Outside of Work. Think about your future without work and discuss it with your partner, family, or friends.
- What do you want in life?
- What are your hopes and dreams?
- Do you know your necessary expenses in the future?
- Then, set goals. Make a conservative estimate of how much the future you desire will cost each year. And don’t forget to include the cost of years of long-term care or some plan for assistance as you age. You definitely want a plan to support a very long life!
- Work Being Optional? Don’t assume you’ll be able to work until traditional retirement age or longer. Even if you love your job or think that you’ll always work at least part-time, you may not have that option.
- Eliminating Debt. Determine how much debt you have and develop a plan to pay it off. It doesn’t all have to be paid off at once but paying off consumer debt, and any other high-interest debt needs to be a priority.
- Increasing Income. Understand what your take-home pay is each month. What are ways that you can increase your income? Are there opportunities for advancement at work? Would taking on a part-time job (even a temporary one) in addition to your “day job” help you meet the goals you’ve set?
- Tracking Expenses. Use a tool like Personal Capital or Tiller Money to track your expenses and see if there is anything you can do to reduce them. If you’ve never tracked your spending before, you might be surprised to know where you can save money each month.
- Budgeting. Set up a monthly spending plan and understand this will be a work in progress – especially early on. Then stick to your budget as tightly as you can.
- Growing Savings. Put money into an emergency fund (ideally 3 to 6 months of living expenses) to avoid going into debt for unexpected problems such as a job loss or severe illness. Consider keeping your emergency fund in a high-interest savings account too.
- Investing. Determine how much money you can put into investments – retirement accounts, real estate, or any type of investment meeting your needs – and consider your risk tolerance levels.
- Improving Net Worth. Monitor the growth of your net worth and continue to build streams of passive income that will help you generate enough income to pay for your living expenses for the rest of your life, without having to work.
- Guarding Against Inflation. Don’t make the mistake of forgetting about inflation in your calculations. It can eat up a lot of your savings through the years.
Financial Independence from Parents
This stage of financial independence is the first we all hope to achieve.
Adult children who no longer require any monetary support from their parents are at the first financially independent stage.
This doesn’t mean a parent can’t provide some financial aid if they choose. It merely means a child can meet their financial obligations without parental help.
With money concerns, including five-figure student loans, rising rents, and considerable consumer debt – many young adults face an uphill battle when trying to leave their parents ‘financial’ nest.
And parents may also be “sandwiched in” – helping their kids and providing support for aging parents while trying to save for retirement.
For the benefit of everyone involved, parents and adult children have a responsibility to each other to focus on changes. And to develop a plan to make this step of financial independence a priority.
How Can Young Adults Become FI?
- Learn how to track expenses and make (and stick to) a budget
- Make choices like sharing housing with friends
- Buy used cars or take public transportation
These options can help 20-somethings tackle current debt and avoid taking on more.
Over time, increased income from second jobs paired with making frugal choices like cooking at home, can provide the money adult children need to minimize and finally eliminate the need for parents’ financial support.
What Can Parents Do to Encourage Financial Independence?
Parents can start setting limits on the assistance they provide their children. And work closely with them to create a plan to end all financial support over a set period.
Parents need to realize they may actually be harming children by enabling their kids to make decisions that aren’t always focused on them becoming financially secure.
If a parent always steps in with a solution, their kids may not learn the importance of meeting their needs while putting off wants for the future. And this will only lengthen the time needed to reach financial independence.
Providing advice, emotional support, and helping adult children problem solve money troubles, shifts the financial relationship to adult conversations. Rather than a parent instructing their child on what to do.
Obtain Financial Independence
No matter which stage of financial independence you’re seeking, you’ll be less dependent on someone else in the long run!
Adult children will really be “on their own” when they no longer need money from their parents.
And when you have sufficient income to meet all of your needs and the lifestyle you want without having ever to work again, you’re no longer dependent on your employer.
Your financial house will be built, and your future financially secure.
Both are wonderful points where you can take more control of your money, your time, and your life!