The 3 Keys To Financial Independence

The 3 Keys To Financial Independence

Jason Demland

April 1, 2022

Wouldn’t it be wonderful if instead working because you had to you could work because you want to? It’d be nice to wake up in the morning motivated to serve and join in your community, rather than wake up slightly agitated that you’re off for another day serving someone else’s goals and desires. I know almost everyone that works has felt this way and more and more people are aggressively putting into action a plan to realize financial independence. Even though the old adage “Do something you love and you’ll never work a day in your life” is attractive, it really seems unattainable to many of us. It’s not as simple as just quitting the job you hate and starting to do some stuff you like. We’ve all got competing desires and have to do our best to make rational decisions in order to fulfill our responsibilities and passions. So how do we work towards financial independence?

Setting Expectations

Most of us don’t have the expectation of driving luxury cars or living in mansions. Though that’d certainly be nice I guess. When I once told my daughter I considered our family to be rich (because we have never gone hungry and have refrigeration, indoor plumbing, healthy friends and family, etc.) she looked at me with confusion and said “If we’re so rich then where is our butler? Where is our mansion?” I had to laugh! At some level I still think that way too. Everyone has different definitions of success and those definitions manifest themselves differently in everyone’s lives. Some folks will never be happy with what they have and always need just a little more and others are perfectly content working the job they have as long as they can with relatively little disposable income.

I’m writing this to the person who believes in working hard, giving generously, and providing for their family. This is for the person who still dreams of pursuing their passions with the aforementioned goals. We all have to make tradeoffs to get what we want. Sometimes we regret those tradeoffs, but usually we’re still pursuing what we love. Take George Bailey in It’s A Wonderful Life for an example (I often do). He gave up his personal dreams of glory and exchanged them for responsibility and duty, but in the end he would have been a fool to go back and change anything if he could have. He was still pursuing priorities he valued (family, friends, integrity, community, etc.) and was all the richer for it.

I was in rock bands in high school and immediately after. I ignored college scholarships in order to chase my dream of playing music professionally with my friends. I also wanted to have a wife and family someday. When the band started to fizzle and the grind got me down I pursued the passion of having a family. I wanted to provide for my wife and family so I had to pursue work. I was passionate about my family farm and tried to make a go of making that my job, but ultimately failed at that. I tried several other jobs and the best way to pay our massive debt load was to take promotions in retail. I hated those retail jobs, but I loved my family, so I did it and by God’s grace He led me to a career in financial planning that provides for my family. As a side-bonus I actually love my job now.

My wife is a photographer and consummate free-spirit. She was the barista of the year for Biggby Coffee and she loves talking to people. If you know her you know she is extremely quick to get into deep conversations and is an open-book. She loves meeting people and talking to people. She is also passionate about homeschooling our kids and taking care of our home. She has made tradeoffs too!

We have to balance what is important to us. There is another old adage that goes something like “we can have anything we want, but we can’t have everything we want”. This means we have to prioritize. So when I talk about “financial independence” it can mean various things to different people. The definition I’m going to go with is all about getting to the point where you have the freedom to stop working at a job you don’t like so you can pursue projects you are more passionate about; all while fulfilling your duty to your family and neighbor.

After setting your expectations for what financial independence looks like there are only 2 factors that play into when/if you can be financially independent.

Managing Expenses

I have often told clients that I can tell them precisely when they can retire if they can tell me exactly how much money they’ll spend and when they’ll die. We can definitely control one of those variables, but it’s not going to be exact so when I talk about managing expenses, it’s actually just a secret code for budgeting. The people I know that are closest to financial independence or have actually already achieved it have this one trait in common. They control expenses. They usually do this by having a written budget and sticking to it. It’s a hard habit to start, but once you do you’ll be thankful for it.

The more detail you have about your current expenses, the more comfortable you are with how much you can spend in different categories in life, the more competent you are with disciplining yourself results in improved efficiency and will increase your confidence in your ability to become financially independent. The more accurately you can project your future expenses, the easier it is to back-in to how much money you need to have before you leave the job that you dislike. The most common and important expenses to get under control are: debt, healthcare, daily living (food, rent, etc.), and taxes.

If fear is the mind-killer then debt is the independence-killer.

Any debt you have (especially debt wrapped up in depreciating assets like a car, boat, or ATV and unsecured debt) is in direct competition with your independence. The less you owe others the more freedom you have. There’s a reason Proverbs 22:7 says “The borrower is slave to the lender.” Becoming completely debt free is a great idea before being financially independent but at the very least it should be a priority to remove all “bad” debt (e.g. vehicle loans, credit cards, student loans, personal loans, medical bills, and back taxes).

Mind your health, mind your wealth.

Healthcare is likely to be your largest expense in seeking financial independence. This is usually because many folks have health benefits through their primary job. If you leave the job you’ll have access to COBRA for a period of time, but it’s usually cost-prohibitive. Seek out alternative health plans through, different sharing ministries like MediShare or CHM, or contact a local health insurance agent to look at private options. Do this before you leave your job. I’ve talked to many people who think financial independence is a fantasy because of how expensive healthcare can be, but they’re often surprised that it can actually be affordable with just a little leg work. Whatever you do, you must have an idea of what your healthcare costs are going to be before making a huge life change.

Hope clouds observation.

Daily living expenses are the easiest to predict and track. You’re already spending money on these categories. Maybe you’re spending too much, maybe you’re not spending enough, I don’t know and I don’t care. I don’t want to judge you on this. We all value things differently. Some folks love eating at restaurants. Some people love driving a new car. Some people love traveling. The important part about your daily living expenses is that you track them so you can predict what they will be in the future. This is a data analysis, not what you “hope” you’ll be able to live on. If you have a higher standard of living, you’ll need more income to support independence than if you have a lower one. It’s all about those tradeoffs, but you have to track them. I recommend a budgeting software like YNAB (youneedabudget). It’s easy to budget and track and be on the same page with your spouse with that one particularly, but use whatever works for you.

The taxes must flow.

Taxes are a sneaky one. Income taxes are based on, you guessed it, income. Managing your income is in the next section but it’s important to have an idea of your current tax situation when planning for your phase of financial independence. Location of your taxable and non taxable assets for when you start living off of your investments and alternative income streams is extremely important. You don’t want to have a great plan for financial independence ruined because you forgot to include taxes! Reducing your amount of taxes paid while preparing for financial independence is a huge benefit and usually requires some professional help. There are lots of ways to do this, find a great CPA or tax preparer to team up with a CFP® Professional who specializes in tax strategy (hey! that’s me!)

The basic premise is this: the greater reduction in expenses you can make now – the more you can save. You want to make sure you’ve got all your ducks in a row before you say “I DECLARE FINANCIAL INDEPENDENCE”.

Managing Income

The more income you have the better – but it all is relative to your expenses. How much income do you need is the first question and that should be answered by doing a comprehensive audit of your expenses. What comes next is actually making the leap to independence and then managing your income from there.

Diversify your income streams

Having multiple income streams funding your independence reduces risk and therefore increases confidence in your plan working. Some common streams of income for people of traditional retirement age (59.5 and up) are social security, pensions, and retirement accounts (e.g. 401(k), IRA, Roth IRA). Some other common income streams are part-time jobs, self-employment, taxable investment accounts, and real estate. Plan out where you can realistically expect income from when you’ve shut off your primary job and calculate how much and for how long you can realistically expect that income to last (hey! I can help with that!).

The mind commands the body and it obeys. The mind orders itself and meets resistance. Location of assets matters.

The location of your assets plays an important role in this as well – it will help to manage the tax expense associated with realizing income from these accounts. Increasing your primary income and cultivating savings habits will help to ensure you’ll have adequate income for when you leave your primary job. It takes some planning to have the right type of account funded for living financially independent lives. Many folks overlook the value of using a non-tax qualified account (such as an individual or joint brokerage account) when saving money for financial independence. The tax deferral benefit of retirement accounts like Roth IRAs, 401(k), and 403(b)s are great, but are of little benefit when there’s a fat tax penalty on any withdraws you make at age 49 and that’s when you’re going to be needing to use them. In this regard an ounce of prevention is worth a pound of cure, so make sure you’ve planned your income sources well for tax purposes. Look for professional help (hey! me again!)

Do it.

You have my permission to take a chance. “It is impossible to live in the past, difficult to live in the present and a waste to live in the future”. The great thing about jumping into financial independence is that you probably have enough skills, experience, and talent to find another job if you need to. Don’t let fear of failure stomp on your pursuit of your passions. Remember, fear is the mind killer.

Random quotes in this article are poorly quoted from Frank Herbert’s Dune, which I highly recommend reading for enjoyment.

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