Fourth of July! We stand in the haze of firework smoke and barbecue grills enjoying our family, sweating in the heat. On this most nostalgic of holidays, we celebrate the independent spirit of what it means to be an American. More than a one-time political event in distant history, this is the freedom to stand on our own two feet and pursue our unique destiny.
This spirit of independence is something we try to foster in financial advice. Money can be a cruel master – whether it’s concerns of debt, legacy, taxes, retirement and many other worries. The tyranny of money needs no introduction. How can we find freedom from these concerns?
Independent wealth is a dream only some will reach. However, personal financial freedom – where we feel we have control and direction over our financial life – is a worthy and achievable goal for everyone. A life where we make purchases confidently, know our money is protected and growing, and have substantial hope about our kids’ (even grandkids’) start in life – this is the true independence of true wealth.
Today, let’s talk about reaching financial freedom through awareness of your own money mindset and a few practical actions you can take, no matter where you start financially.
How You Think About Money
It starts with mindset. Without a financially independent frame of mind, even independent wealth wouldn’t feel that way. There’s a reason the maxim “Know Thyself” is one of the oldest building blocks of philosophy. Money is a deeply emotional topic, and looking through the fog of feelings to where your motivations and fears come from is essential to personal financial freedom.
Do you recall your first money memory? For some of us, it was the first time we earned a quarter (or our parents let us hold one) and went to pay for a candy ourselves. For some of us, it was a constant concern in the house that we wouldn’t have enough to cover expenses. Whatever those early interactions were, they left an indelible mark on how you think about finances as an adult.
Money scripts are unconscious beliefs about finance that have roots in childhood and shape our financial habits as adults. Just as your innate understanding of morality and relationships are formed in these years, your money scripts take shape as well and affect you for the rest of your life.
Do you compulsively pay bills with little thought for interest rates or which is most pressing? Your parents may have hammered home the danger of having any outstanding debt, however small. Are you reluctant and miserable when facing a purchase, even when you know the money is readily available? This may have more to do with the time your mom and dad went bankrupt thirty years ago than it does with what’s currently in your account.
A heart-to-heart with those who know you best (and can be honest), as well as your advisor can help you find financial freedom through awareness of your emotions around money. The Klontz Money Behavior Inventory and other assessments are a good place to start and can give you some tangible conclusions about your own financial psychology.
How You Act with Money
The old motivational phrase rings true: It’s easier to act your way into a new way of thinking than think your way into a new way of acting. Although complete personal financial freedom may be years away, there are steps you can take now to change your mindset, your portfolio, and eventually your assets.
Automate Your Savings and Retirement Contributions
Know your own psychology well enough to trick yourself a little. If your contributions are automated, you circumvent the temptation to “borrow” here and there from the money you should be saving.
Max Out Your 401(k) or Other Retirement Plan
Apparently even Einstein found the process a little complex when he said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Contributing to your 401(k) in the wealth-building years long before it “feels” necessary will grow your money and thus your independence.
It’s the Pie, Not the Latte
Suze Orman’s “latte factor” is useful to a certain point. If you spend four bucks a day on coffee, it will drain your kettle pretty quickly. But looking at the whole pie of your finances – an aggregate perspective that tells you how big all the pieces are – can give even more insight.
Your advisor can walk you through this kind of pie graph exercise easily. If you find yourself spending a certain percent of your money on vacations every year to the same place, maybe you need to consider getting a home there. If you find yourself spending a big slice on car repair, it may be worth investing in a new vehicle. Standing outside of your finances for a moment so you can see them all in one place will give this perspective.
It’s common knowledge that taxes are one of the largest expenses you’ll have at the end of the day. Uncle Sam seems to be leaning on every corner with his hand out. Tax efficiency will save you those little expenses that add up to the big ones.
Solid tax efficiency software can help you get started, but for the larger numbers and longer periods of time, your advisor’s insight will be invaluable. Asset location, retirement contributions, charitable donations and other strategies can help keep your money protected.
Give Me Financial Liberty
Independent wealth may not be the reality in your bank account, but personal financial freedom – control and prerogative with your money – can be real in your life. Preoccupation and anxiety about financial matters takes up far too much energy, and always pays diminishing returns.
Becoming aware of yourself and your finances is the first step, developing healthy habits is the next. Your advisor can help you see through blind spots and make small concrete changes that will add up.
You’ll find yourself with more assets and less worry as time goes on, and you’ll live more in the moment – whether it’s enjoying a day’s hard work or a family barbecue. And that’s a liberty worth celebrating.