When you’re financially savvy and on your way to a secure retirement, you may believe you already know the steps to achieve financial independence.
But when you’re 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 both are significant milestones in life and personal finance.
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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 (FI), 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 FI is sometimes debated. But there’s 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’re 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 FI
Consider these ten ideas to help you build your financial house. Leading you down the path to financial independence and a secure retirement.
1. 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.
- Remember to include the cost of years of long-term care or some plan for assistance as you age. You definitely want a financial plan to support a very long life!
2. 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.
Consider starting a hobby or side-hustle while you’re working that you can turn into a side business in retirement.
It can help fill a void when you’re no longer employed and can add to your retirement income sources. Bonus when it allows for more passive income.
3. 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.
Also, pay attention to your credit history and track your credit score.
4. Increasing Household Income.
Understand what your take-home pay is each month.
In what ways can you 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?
Consider implementing some passive or nearly passive income sources – dividend investing, renting out a room in your home, writing a book, selling items you no longer use, etc. – to boost your incoming cash flow as well.
5. 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.
6. 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.
You can use a simple spreadsheet or invest in a great service like Tiller or YNAB. Both provide a great community to learn and interact with on top of offering a great tool.
7. Growing Savings.
Put money into an emergency fund (ideally 3 to 6 months of living expenses) and create sinking funds to avoid going into debt for unexpected problems such as a job loss or severe illness and routine bills.
Consider keeping your sinking funds in high-interest savings account and your emergency fund in a money market bank account to benefit from a higher return and compound interest.
8. 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.
Look for the best rate of return for the risk you’re willing to bear.
And pay attention to investing fees. Managed Mutual funds are often more costly (which doesn’t necessarily make them better) than Index funds or ETFs (exchange-traded funds) through Vanguard, Fidelity, or other brokerages.
- Check out our Worthy Bonds Review, of a product providing a fixed 5% interest rate to investors while helping small businesses.
- Beginning investors start here
9. Improving Net Worth.
Monitor the growth of your net worth.
Continue building streams of income, mainly passive income, that’ll help you generate enough personal income to pay for your living expenses for the rest of your life without having to work.
10. Use Tax-Advantaged Accounts.
Be mindful of your income and tax brackets. Utilize pre-tax and/or after-tax accounts to save money on taxable income.
Both types of tax-advantaged accounts have different retirement savings options, like employer-sponsored defined contribution plans or individual retirement arrangements IRA’s.
As your income grows or slows, you may desire utilizing different accounts to keep your tax rate in check.
11. Guarding Against Inflation.
Don’t make the mistake of forgetting about inflation rates in your calculations. Inflation can eat up a lot of your savings and total returns through the years.
12. Downsize / Reduce Cost of Living.
Your home is often your biggest expense, and one trap many of us fall into is keeping up with the Joneses.
To help speed up your journey to FI, consider downsizing your home or moving to a lower cost of living area and getting a handle on spending or so-called retail therapy.
Many in the financial independence community have done so successfully, without compromising significantly on their standard of living.
Financial Independence from Parents
This stage of FI 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 saving for their future retirement plans.
For the benefit of everyone involved, parents and adult children have a responsibility to each other to focus on changes. And to develop a financial plan to make this step of FI a priority.
How Can Young Adults Become FI?
They could:
- 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
- Gamify their money management to make it more enjoyable
- Build a solid credit score
- Balance the need and cost for continued higher education against the potential for higher income and employee benefits. An advanced college degree – or even an undergraduate degree may or may not make good financial sense.
These options can help 20-somethings tackle current student loans or credit card 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 Parents Can 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 financial 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 not focused on them becoming financially secure.
When 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.
This will only lengthen the time needed to reach FI.
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 great financially independent points where you can take more control of your money, your time, and your life!
- Can I Save For Retirement While Helping My Kids & Parents?
- Flipping a Switch: A Guide for Life and Financial Transitions [Book Review]
By Women Who Money Co-Founders, Vicki Cook and Amy Blacklock
Vicki and Amy are authors of Estate Planning 101 – a Crash Course in Planning for the Unexpected -coming soon from Adams Media.
Updated Sept. 2020
