Robert Stammers, CFA
The time in and around Independence Day is when people in America reflect on the freedoms that we are entitled to in this country. We celebrate the freedoms that we share due to the actions of individuals that came before us, many that made the ultimate sacrifice to secure those inalienable rights defined in Mr. Jefferson’s declaration of life, liberty, and the pursuit of happiness. As we bring memories of cookouts and fireworks with us back as we return from the holiday weekend, it is important to keep also the sense of gratitude for the opportunities offered by these freedoms we have been celebrating.
Financial Choices
On top of these guaranteed, foundational freedoms, there are others that instead require significant personal discipline and effort to attain. One of the more important and more difficult to achieve of these is Financial Freedom.
Financial Freedom implies the ability to meet all financial obligations throughout life, independently, confidently and securely. Often referred to as Financial Independence, those who achieve it have an abundance of financial choices, the financial ability to reach life goals, and the ability to weather many of the unexpected expenses or reductions in income that would otherwise devastate a savings and investing plan.
Since goals, fears and financial situations can vary wildly between individuals, so does the attainment of financial independence. Only individuals can determine when they feel confident and secure about their personal finances and their ability to pursue and finance their dreams without fear of the unknown.
Anything as valuable as financial security is going to take some sacrifice in terms of time and energy.to achieve. It is also going to take time in learning the personal finance skills and practicing them over time in order to optimize the amount that can be invested over time. Learning to live on a stable budget and sacrificing some discretionary income to save an appropriate amount will also be necessary. The key is to save the amount necessary to achieve the goal before spending and then to live on what is left over.
For those that are unsure, an accredited financial service professional can help you determine the amount that needs to be saved and invested over time in order for you to reach financial independence. Financial freedom is about having choices and the financial means to take advantage of those choices. Even though it does not ensure contentment, it does allow us to enjoy other guaranteed and obtained rights, which includes seeking happiness and peace of mind.
Reframing Retirement
So why should achieving financial freedom be an important life goal? Irrespective of the fact that people should aspire to feeling secure about their financial futures, I think it can provide a purpose and motivation for saving and investing activities. I find that many investors don’t have a specific purpose for their investing plan. Even if they do, it is for a goal that may not reflect their true aspirations.
For example, retirement is a common reason for why people purport to save and invest over the long-term. However, retirement in the traditional sense - the cessation of employment somewhere between the ages of 65-70 and living off accumulated assets for the remaining 30+ years – doesn’t fit with the reality of how many people actually spend their golden years. Many want the choice to be semiretired, or to start a business, or to pursue a different career than the one that was built over the previous 30 years.
Financial independence also does not have a time limit. For young people, retirement seems too abstract and too far way to be a serious motivator for long term saving and investing. Reframing the goal as financial independence could provide additional impetus for young people to save and invest for the future. Even pre-retirees need to rethink retirement, since financial obligations, the need for income, and having to make financial decisions do not end at age 65. Someone who is committed to achieving financial freedom might be able to do it and maintain it long before retirement age.
Managing Lifetime Wealth
Instead of the singular goal of “retirement,” financial independence should be thought of as a lifetime pursuit. This idea of “Managing Lifetime Wealth” has been resonating with investors and investment professionals to the point that the Future of Finance Initiative at CFA Institute now uses it instead of “Retirement” to label related projects and content. Although obligations, requirements, and risks may continue to evolve and change as you do, the importance of good financial management remains constant.
Financial independence is also something you can achieve while as you actively work to ensure it by saving and investing for the future. As you reflect on your July 4th celebrations, think about what it would take for you to be financially free now and in the future and set your own financial declaration of independence.