Financial independence can mean different things to everyone. A 2013 survey from Capital One 360 found that 44 percent of American adults feel that financial independence means not having any debt, 26 percent said it means having an emergency savings fund, and 10 percent link financial independence with being able to retire early.
I define financial independence as the time in life when my assets produce enough income to cover a comfortable lifestyle. At that point, working a day job will be optional.
But what about the rest of America? How would you define financial independence? If freedom from debt is what you’re seeking, here are five areas that could be holding you back.
1. Not having clear, financial goals
If you’re not planning for financial independence, chances are you won’t reach it. The future is full of unknowns, but having an idea of when you’d like to achieve financial freedom should be your first step.
Do you want to retire before you turn 65? Do you want to travel the world with your spouse once you reach early retirement? Both goals will require a significant amount of cash stashed away, so it’s important to start saving ASAP to make those dreams come true. (See also: 15 Secrets of People Who Retire Early)
2. Not saving enough
It’s important to identify how much you’re currently saving, and how much you need to save in order to retire when you want to, or reach another major financial goal. Using a calculator like Networthify can help you play with various money-saving scenarios and make realistic projections about retirement.
Another way to make saving money easier is to automate it. Setting up an automatic weekly or monthly transfer from your checking account into your savings account will take the extra task off your already full plate. Even if it’s as little as $5 a week, it’s enough to start building that nest egg. (See also: 5 MicroSaving Tools to Help You Start Saving Now)
3. Not paying off consumer debt
If you’re carrying a credit card balance each month, financing cars, or just paying the minimum on your student loans, compound interest is working against you. Creating an aggressive plan to pay off debt quickly should be a number one priority for anyone who is serious about achieving financial independence. Otherwise, your money is working for your creditors, not you.
If you prefer to tackle credit card debt first, there are several debt management methods you can try, including the Debt Snowball Method and the Debt Avalanche Method. The Debt Snowball Method has you paying off the card with the smallest balance first, working your way up to the card with the largest balance. The Debt Avalanche Method is similar, but here you would pay more than the monthly minimum on the card with the highest interest rate first, working towards paying off the card with the lowest interest rate. Both are highly effective methods, and choosing one really just depends on your preference.
4. Giving into lifestyle creep
A high income does not automatically make you wealthy. As you move up in your career, the temptation to upgrade your lifestyle to match your income will be ever-present. After all, you work hard, so why not reward yourself with the latest gadgets and toys?
However, if you continue to spend and live modestly, you can put more money away for travel or retirement with every pay raise you earn. Financial freedom will be just around the corner if you resist that temptation to upgrade your home, car, and electronics to match your income bracket. (See also: 9 Ways to Reverse Lifestyle Creep)
5. Being driven by FOMO
Fear Of Missing Out, aka FOMO, is the modern version of keeping up with the Joneses. Except now you have access to the Joneses’ social media platforms, and they go on all kinds of fun adventures. Social media is a great tool for keeping in touch, but it can also make you want to spend all your money on lavish vacations, clothes, spa treatments, and other extravagent things. Resist that urge. And block the Joneses on social media if needed. (See also: Are You Letting FOMO Ruin Your Finances?)
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This article is from Toni Husbands of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:
5 Money Moves to Make Before You Turn 40
The 10 Commandments of Reaching Financial Freedom
16 Small Steps You Can Take Now to Improve Your Finances
The Pros and Cons of Paying Off Your Debt Early
How a Credit Card Can Actually Help You Get Out of Debt
Think two seasoned certified financial planners would have an easy time buying a house? Tony and Barbara Matheson would beg to differ.
In fall 2019, these empty nesters found themselves itching to downsize from their large rental in the uaexpensive San Francisco Bay Area. Hoping to buy a reasonably priced house within walking distance of restaurants and other amenities, they set their sights on Sacramento, CA. Armed with a healthy income, solid credit history, and a deep knowledge of personal financesâplus they’d owned property beforeâthey figured they would sail through the home-buying process.
Six months and three lost bidding wars later, they realized that Sacramento’s real estate market was far more cutthroat than they’d imagined.
In March, the Mathesons finally purchased a three-bedroom, one-bathroom 1926 Tudor on a tree-lined street. With the closing papers signed, they figured they were home-freeâbut COVID-19 was about to throw another curveball into the picture.
Here Tony shares their story,Â and his hard-won lessons for aspiring first-time home buyers and others who want to learn what buying real estate is really like today.
Location: Sacramento, CA House specs: 1,225 square feet, 3 bedrooms, 3 bathrooms List price: $550,000 Price paid: $580,000
Why did you decide to move?
Weâd been living in the Bay Area and were looking to downsize since both of our kids had moved out. We wanted to be near downtown Sacramento, close to restaurants, bars, museums, and coffee shops.
I’d think home buying would be a breeze for two finance pros. How did it go?
I was really surprised by how tough the market was. After five months touring homes, we made an offer on our first house. This house went into a bidding war; we had to raise our bid five times before tapping out.
Next, we fell in love with a second home. This time, we offered the sellers $30,000 over the asking price. The sellers had so many other bids, they never even bothered to counter our offer.
We found a third home, and once again bid over the asking price. But after five tries, we lost out again. It was heartbreaking.
How awful! Why do you think these homes sold to other buyers?
We came prepared with what most consider strong financials for making an offer on a single-family home: great credit scores, a significant down payment, pre-approval for a mortgage. We offered good earnest money and 15-day escrow, didn’t include an appraisal contingency, and probably had a few other bonuses to the seller that I’ve forgotten. So we were doing everything “right.”
What we were finding is that we were up against some other buyers who were making all-cash offers, sometimes $50,000 above the asking price. How does anyone compete with that?
So how did you finally get an offer accepted?
We were extremely fortunate that we had a great real estate agent who was able to find a home that hadn’t been listed yet. We could negotiate one on one with the seller without having to compete against multiple offers.
The sellers had planned to invest $30,000 to $40,000 on home improvements before putting it on the market. We offered to buy the house as is, without the improvements. After going back and forth a few times, the sellers took our offer. Â
What did you like about this house?
We knew within 5 seconds of walking into the house that this was the one. It was the perfect neighborhood. We were close to everything, within walking distance to plenty of bars and restaurants. The outdoor area is gorgeous. Beautiful trees surround our house, and the house is the perfect size for us.
So once your offer was accepted, what happened next?
The sellers werenât prepared to move immediately. They needed time to prepare. So we rented the house back to the sellers for a month after closing. We closed on Valentine’s Day, but we didnât move in until mid-March.
Little did we know what was about to happen.
March is when the coronavirus really hit. What was it like moving during that time?
It was difficult and terrifying in the beginning. We moved in ourselves without hiring movers. Then, after we moved in, it was quite an adjustment. Simple things like calling an electrician or completing other minor home projects were enormously difficult.
Did you make any renovations to your home?
We put $10,000 to $12,000 into the house so far. The major issue after moving in was electricityâit needed to be completely reconfigured. For example, the second bedroom, which became my office, only had two plugs. Between my monitors for work, computers, Peloton, cellphones, and other devices, I needed 12 plugs. We also wanted to put in a tankless water heater for more space, and install a security system. Â
How did quarantine affect these repairs?
It was horrible. We couldnât get anyone to come out to do any work for at least three months. For the first month, no one was booking. Then, when we could finally get through, the businesses were overwhelmed with requests.
What was it like when you finally settled in?
It was exhilarating, exciting, and weird. Exhilarating because we got the house we wanted. Exciting because we were beginning a new phase in our lives. And weird because we moved in at the beginning of the pandemic. We wanted to have a housewarming party, but of course, we couldn’t.
What is your advice for aspiring home buyers?
Even if your finances are completely buttoned up, be prepared that buying a house may be a difficult and even painful process.
Emotionally it does get hard. As much as you try not to get attached to a house during the negotiation process, you can’t help it. And there is a competitive drive that kicks in when you are in a bidding war with others. It’s draining.
Still, in the end,Â knowing that you’ve overcome challenges along the way just makes you more appreciative of the reward at the end. We have a place to call home amidst all this craziness. It’s all worth it.
The post Why 2 Finance Experts Still Struggled To Buy This House appeared first on Real Estate News & Insights | realtor.comÂ®.
A key financial decision people struggle to make is how to allocate savings for multiple financial goals. Do you save for several goals at the same time or fund them one-by-one in a series of steps? Basically, there are two ways to approach financial goal-setting:
Concurrently: Saving for two or more financial goals at the same time.
Sequentially: Saving for one financial goal at a time in a series of steps.
Each method has its pros and cons. Here’s how to decide which method is best for you.
You can focus intensely on one goal at a time and feel a sense of completion when each goal is achieved. It’s also simpler to set up and manage single-goal savings than plans for multiple goals. You only need to set up and manage one account.
Compound interest is not retroactive. If it takes up to a decade to get around to long-term savings goals (e.g., funding a retirement savings plan), that’s time that interest is not earned.
Compound interest is not delayed on savings for goals that come later in life. The earlier money is set aside, the longer it can grow. Based on the Rule of 72, you can double a sum of money in nine years with an 8 percent average return. The earliest years of savings toward long-term goals are the most powerful ones.
Funding multiple financial goals is more complex than single-tasking. Income needs to be earmarked separately for each goal and often placed in different accounts. In addition, it will probably take longer to complete any one goal because savings is being placed in multiple locations.
Working with Wise Bread to recruit respondents, I conducted a study of financial goal-setting decisions with four colleagues that was recently published in the Journal of Personal Finance. The target audience was young adults with 69 percent of the sample under age 45. Four key financial decisions were explored: financial goals, homeownership, retirement planning, and student loans.
Results indicated that many respondents were sequencing financial priorities, instead of funding them simultaneously, and delaying homeownership and retirement savings. Three-word phrases like “once I have…,", “after I [action],” and “as soon as…,” were noted frequently, indicating a hesitancy to fund certain financial goals until achieving others.
The top three financial goals reported by 1,538 respondents were saving for something, buying something, and reducing debt. About a third (32 percent) of the sample had outstanding student loan balances at the time of data collection and student loan debt had a major impact on respondents’ financial decisions. About three-quarters of the sample said loan debt affected both housing choices and retirement savings.
Based on the findings from the study mentioned above, here are five ways to make better financial decisions.
1. Consider concurrent financial planning
Rethink the practice of completing financial goals one at a time. Concurrent goal-setting will maximize the awesome power of compound interest and prevent the frequently-reported survey result of having the completion date for one goal determine the start date to save for others.
2. Increase positive financial actions
Do more of anything positive that you’re already doing to better your personal finances. For example, if you’re saving 3 percent of your income in a SEP-IRA (if self-employed) or 401(k) or 403(b) employer retirement savings plan, decide to increase savings to 4 percent or 5 percent.
3. Decrease negative financial habits
Decide to stop (or at least reduce) costly actions that are counterproductive to building financial security. Everyone has their own culprits. Key criteria for consideration are potential cost savings, health impacts, and personal enjoyment.
4. Save something for retirement
Almost 40 percent of the respondents were saving nothing for retirement, which is sobering. The actions that people take (or do not take) today affect their future selves. Any savings is better than no savings and even modest amounts like $100 a month add up over time.
5. Run some financial calculations
Use an online calculator to set financial goals and make plans to achieve them. Planning increases people’s sense of control over their finances and motivation to save. Useful tools are available from FINRA and Practical Money Skills.
What’s the best way to save money for financial goals? It depends. In the end, the most important thing is that you’re taking positive action. Weigh the pros and cons of concurrent and sequential goal-setting strategies and personal preferences, and follow a regular savings strategy that works for you. Every small step matters!
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This article is from Barbara OâNeill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:
How to Manage Your Money â No Budgeting Required