Many Meanings of Feeling Financially Free
Getting that feeling takes some doing. Only you know what will make you feel financially free.
Maybe it's knowing you'll never run out of money, or having enough to be considered unquestionably rich.
Or maybe it's being able to support yourself doing what you love, even if it's not profitable.
Whatever your fantasy, in honor of Independence Day, here's a quick five-step guide to help you in your quest for financial freedom.
First, figure out what your financial priorities are � and what they're not.
Clarifying your desire makes it easier to curb spending on what is non-essential to your goal.
In other words, exercise your right to flip the bird at Madison Avenue and all others who wish to seduce you into buying what you don't really want, even if you look good in it. Get real about what your dream costs
Next, estimate how much money you'll need to support your dream.
Say you want to quit your high-stress job and move to Vermont for a more laid-back life. First, figure out how much the new lifestyle you seek costs in your new state. Factor in housing, food, transportation, taxes, insurance, utilities, you name it. And compare that to your current costs.
Then figure out how you're going to generate that money. If you're not planning to work, estimate how much income your savings will throw off annually, what you'll need to withdraw every year and for how long.
If you're under 59-1/2, "You'll need to have a really good stash of money outside tax-deferred accounts," said certified financial planner Pat Jennerjohn. That's because you won't be able to draw down your IRA or 401(k) without penalty in most instances.
Nor should you. Your retirement assets will have to be preserved, especially since giving up your job means giving up not only income, but also the means to save for your old age.
If you're planning to work, but for half your current income, "that's a more manageable task," Jennerjohn said, so long as you ratchet down your lifestyle accordingly.
Live below your means, or double them. Next, realize that achieving a financial goal requires some sacrifice and think about what yours will be. Here's one idea: spend less than what you earn year after year. Beyond that, consider what else you'd be willing to do.
You may buy a less expensive home, stay in your starter home longer than planned, move to a lower-cost area or work a second job.
You also might supplement your income doing what you love. Certified financial planner Ginita Wall has clients who have repaired golf clubs, designed dry-flower arrangements, worked for a different national parks every summer, rented out their homes when they traveled, and worked at the racetrack.
Now figure out how to streamline your savings efforts.
You'll accumulate more than you thought possible sooner than you thought possible if you automate your savings. So earmark money from your paycheck to be direct deposited into your 401(k), your brokerage account, your IRA, or any other savings account.
Or, say your goal is to be free of credit card debt, and pay as little interest as possible.
Jennerjohn recommends a "power pay" strategy. Calculate how much money you can commit every month to paying down your debt. Say it's $500 and you've got five cards to pay off.
If the cards have a minimum of $50 each, earmark $200 ($50 x 4) to pay the minimums on four of the cards, and use the remaining $300 to pay down the highest rate card.
Once that balance is paid off, apply the $300 plus the $50 minimum you've been paying to the next highest rate card. When it's paid off, apply the $350 plus the $50 minimum you've been paying to the third highest rate card, and so on.
"You can cut the amount of time it takes to pay it off in half," Jennerjohn said.
The Fed may have begun to raise interest rates, but we're still in a low-rate environment. So try to minimize what you pay on your debts.
Rates on Stafford and PLUS education loans, for instance, are still at all-time lows, although they're likely to go up by July 2005. So if it makes sense for you to consolidate your loans, thereby locking in low rates, you could save thousands of dollars.
As you can if you get a low-rate credit card for any balances you're carrying. Just don't keep running up that balance.
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