financial independence en-US Do You Know Your Retirement "Number"? <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/do-you-know-your-retirement-number" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="cash" title="cash" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Have you ever seen the TV commercials with people strolling through town or the neighborhood carrying their retirement number? The numbers vary from person to person, but the general range seems to be between $1 million and $2 million. The implied message: &quot;Shame on you if you don't know your 'number'!&quot; (And of course, &quot;Contact us so we can help you figure it out.&quot;) (See also: <a target="_blank" href="">Financial Independence Is More Than Just a Number</a>)</p> <p>I like the ads because they focus our attention on a measurable retirement goal. But <a target="_blank" href="">what exactly is the goal</a>, and what role does this &quot;number&quot; play?</p> <h2>Assets? What Assets?</h2> <p>The number in the ads might represent total assets (the combined value of your house, savings and retirement accounts, and other things of value). Or perhaps it refers to only your investable assets (just the savings and retirement accounts, not the house). Still another possibility is that it represents your net worth (your total assets minus your total liabilities, or debts). Hmmm.</p> <h2>High Net Worth Is No Guarantee of Financial Independence</h2> <p>If I were to guess, I'd say it represents your net worth. But here's the problem &mdash; net worth is a measure of your wealth. That's an important measure, but your ultimate goal is really financial independence, and that's measured by monthly income, or cash flow. Let's look at an example to illustrate.</p> <p>Assume your household has a net worth of $1 million. Congratulations, you're a millionaire! Surely that's enough to retire on, right? Maybe&hellip;or maybe not. It depends on the composition of your net worth.</p> <p>If, for example you have $2 million in assets but $1 million in liabilities (mortgage, auto, education, and other debt), your net worth is still $1 million. But the cost of carrying so much debt might be, say, $6,000 per month. Despite being a millionaire, can you afford to give up your job and still cover a negative monthly cash flow of $6,000? And we haven't even addressed your other monthly cash flow needs to cover food, clothing, transportation, energy, health care, and other living expenses.</p> <h2>Cash Flow Is King</h2> <p>This example is a little extreme, but it illustrates a very real point: Your ultimate goal &mdash; your retirement &quot;number&quot; &mdash; should be measured not by wealth <a target="_blank" href="">but by cash flow</a>. Yes, your wealth contributes to your cash flow, but it's a means towards the end and not the end itself. And as illustrated by the example, there is bad wealth (which generates negative cash flow) as well as good wealth (which creates positive monthly cash flow).</p> <p>Let's try another example, one that moves us in a more favorable direction. Your household has $1 million in assets and no liabilities. Great &mdash; no negative cash flow from loans. But your house is valued at $600,000 and your total retirement savings is $400,000. If you invest the $400,000 in an account that generates 6% annual interest, that's $24,000 per year or $2,000 per month in positive cash flow. Ah, but the house. While it's mortgage-free, the insurance and property taxes create a regular stream of negative cash flow. And then there are still those nasty cash outlays for living expenses.</p> <p>OK, you've made some progress but haven't yet reached the promised land of financial independence. So let's give it one more try.</p> <p>You have no debts, $500,000 in retirement savings, a primary residence valued at $250,000, and a two-family property also worth $250,000 that generates net positive cash flow of $1,200 per month. Now let's see where you land. Positive cash flow from retirement savings (at 6% return) = $30,000/year or $2,500/month. And if you apply $700 of the $1,200 monthly cash flow from your rental property to pay taxes and insurance on your primary residence, you net a positive $500/month from that &quot;good&quot; rental property asset.</p> <p>So now you've managed to clear $3,000/month even after the monthly carrying cost of your real estate. If that's enough to cover your monthly living expenses, then you're on your way to financial independence. Add in social security and other supplemental sources of monthly income and you might even have a cushion to cover occasional lump sum purchases and unexpected expenses. Nice going!</p> <p>As with <a target="_blank" href="">any good plan</a>, a retirement plan starts with a clearly defined goal. After all, without one, how do you measure your progress or success? Unfortunately, this part of the retirement planning process is often lacking. Yes, accumulating wealth plays an important role, but it's a supporting role, and it's not the ultimate goal. The ultimate goal is financial independence, and that's measured by a different &quot;number&quot; &mdash; monthly cash flow.</p> <p><em>Do you have a retirement planning goal? What &quot;number&quot; do you use?</em></p> <a href="" class="sharethis-link" title="Do You Know Your Retirement &quot;Number&quot;?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Keith Whelan</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Retirement cash flow financial independence retirement goal Fri, 12 Jul 2013 10:24:33 +0000 Keith Whelan 980370 at Happy (Financial) Independence Day <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/happy-financial-independence-day" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="woman waving flag" title="woman waving flag" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>Today, let&rsquo;s take a vow to be financially independent.</p> <p>I&rsquo;m posting this on the Fourth of July &mdash; Independence Day here in the United States &mdash; but this works any day. Whether you need to work to become financially independent or just want to maintain the independence you&rsquo;ve already gained, today, let's set some goals. (See also: <a href="">How to&nbsp;Save Without Goals</a>)</p> <p>Here are mine:</p> <ul> <li>To never financially rely on my parents, my friends, or most certainly, a credit card. <br /> &nbsp;</li> <li>To be able to make the truly important decisions in life &mdash; about things like family, where I live, and the work I do &mdash; based on my desires, not the sorry state of my finances. <br /> &nbsp;</li> <li>To not be in debt. <br /> &nbsp;</li> <li>To be able to use money as a tool to create wonderful experiences &mdash; but know that it's far from the only tool necessary. <br /> &nbsp;</li> <li>To not worry about what would happen to me if I'm faced with a financial emergency.</li> </ul> <p>Some of these goals I&rsquo;ve achieved. Some of them I'm still working at (curse you, student loans).</p> <p>Of course, in order to actually achieve big-picture goals, you'll need to make smaller, more manageable goals.</p> <p>But...for many of us, today is a holiday &mdash; a time for that all-important relaxation (especially if you're one of those people who has been passing around this recent <a href="">New York&nbsp;Times op ed about being busy</a>). Take the rest of the day off, if you can.</p> <p>When you come back tomorrow, you can better define and break down your goals with the help of these articles:</p> <p><strong>Defining Your Goals</strong></p> <ul> <li><a href="">Defining What Financial Success Means to You </a></li> <li><a href="">Financial Independence Is More Than&nbsp;Just a Number</a></li> <li><a href="">Feeling Stuck? 100 Ways to Change Your Life</a></li> <li><a href="">Goal Setting, Defined and Deconstructed</a></li> <li><a href="">Deciding What You Want Out of Retirement</a></li> <li><a href="">How Much Money Will You Need to Retire?</a></li> </ul> <p><strong>Taking Action</strong></p> <ul> <li><a href="">5 Steps to Financial Independence</a></li> <li><a href="">Start Fighting Debt &mdash; Today</a></li> <li><a href="">25 Frugal Changes You Can Make Today</a></li> <li><a href="">37 Savings Changes You Can Make Today</a></li> <li><a href="">The First Step to Budgeting</a></li> <li><a href="">8 Tips for Improving or Starting a Budget</a></li> </ul> <p>Don't see an article for the action you want to take listed here? Just search our site using the field in the top right.</p> <p>Happy Independence Day, everyone &mdash; national, financial, or whatever else you might be celebrating.</p> <a href="" class="sharethis-link" title="Happy (Financial) Independence Day" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Meg Favreau</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Personal Finance financial goals financial independence Independence Day Wed, 04 Jul 2012 10:36:09 +0000 Meg Favreau 938632 at 5 Financial Steps to Take After Graduating From College <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-financial-steps-to-take-after-graduating-from-college" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="Graduates" title="Graduates" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Graduating from college can be awesome, exciting, and a huge relief. But when it comes to the current job market and student debt, however, graduating from college can also feel pretty darn daunting.</p> <p>But don&rsquo;t worry! With a little bit of planning, you can be in control of your finances post-graduation &mdash; and set yourself up nicely for the years to come. Here are five steps you should take to conquer your finances.</p> <h3>1. Create a Budget</h3> <p>If you don&rsquo;t already have one, I strongly recommend that you create a budget. Sure, you can probably get by without one &mdash; but that&rsquo;s also how you end up at the end of the month with no money in your account, wondering where it all went.</p> <p>To make it easy on yourself, consider using one of the many free budgeting tools available online. These tools can securely pull in information from your various bank accounts and loans, allowing you to easily create budgets, track your spending, and set financial goals all in one place. If you haven&rsquo;t supported yourself in the past, it might be surprising how quickly your new paycheck gets spent &mdash; especially since, according to a <a href="">USA Today article</a>, &ldquo;most young people don&rsquo;t realize they&rsquo;re actually taking home about $75 of their paycheck once taxes, Social Security and 401(k) contributions are factored in.&rdquo; A budget helps you ensure you have all the money for the necessities &mdash; and helps you set-aside cash for some fun stuff, too.</p> <h3>2. Understand and Reexamine Your Insurance Policies</h3> <p>While you were still a student, your insurance &mdash; including health, car, life, and renter&rsquo;s insurance &mdash; may have been covered by your parents or your school. But after graduating, it&rsquo;s likely that you&rsquo;ll be responsible for these policies &ndash; and the costs can, quite honestly, be a little startling.</p> <p>The first step in your research should be to find out from your parents or school what levels of coverage you had. Then, armed with that information, you can begin researching new policies for each of the following types of insurance.</p> <p><strong>Health Insurance</strong></p> <p>Hopefully you&rsquo;ll be able to find a job with health coverage. The unfortunate fact, though, is that this is becoming less and less likely. If you were on your parents&rsquo; policy while in college, you may be able to stay on it for a few more years. Have a conversation with them about it, and if you&rsquo;re able to, offer to pay any associated fees for your care.&nbsp;Doing this will likely be cheaper than getting your own policy.</p> <p>If you do not have the option of employer- or parent-based coverage, do consider getting at least a basic insurance plan. Medical debt from an emergency can cost thousands and thousands of dollars; a basic policy helps protect you from going into wild, crushing debt.&nbsp;You can start your search online or with a health insurance agent. Before you do so, round up all of your medical records (these are good to have around anyway); applying for insurance as an individual requires that you answer several questions about your medical history so the insurance company can determine your risk level and decide what to charge you. Other factors that can adjust your rate include age and habits.</p> <p><strong>Car Insurance</strong></p> <p>The cost of car insurance can vary drastically depending on where you live, the type of car you drive, and factors including your age, your driving record, and even your grades in school. When applying for a policy on your own, speak with a customer service representative &mdash; they can often tell you about discounts that aren&rsquo;t always available through their website.</p> <p><strong>Renter&rsquo;s Insurance</strong></p> <p>If you&rsquo;re renting your first house or apartment, strongly consider getting renter&rsquo;s insurance. Policies are inexpensive, depending on your level of coverage, and they&rsquo;ll help replace your stuff in the advent of something terrible happening, like a burglary or fire. Depending on the policy, you might even be covered if your stuff is stolen somewhere else, like out of your car or while you&rsquo;re traveling.</p> <p><strong>Life Insurance</strong></p> <p>There is a very good chance that you don&rsquo;t currently have a life insurance policy. Typically associated with older folks and people with families, life insurance pays out a sum to your family or loved ones upon your death. Here&rsquo;s what the Illinois Department of Insurance has to say about college students and life insurance:</p> <p>If you are a young college student with no dependents, life insurance is not as important as it will be when you get older and are married and/or have children. For most college students, the only reason to buy life insurance is to cover funeral expenses and debts, if there are any. Your parents may already have a life insurance policy on you that will cover these expenses. If not, you should be able to purchase a term life insurance policy for a small premium.</p> <p>If you are married, and/or have children or elderly parents who are dependent on you, the need for life insurance is much greater. Still, you should be able to purchase a term life insurance policy that will provide benefits to pay your debts and provide your dependents with some financial security.</p> <p>That said, even if you do not currently have family members who are dependent on you, it can be a good idea to shop for a life insurance policy now. The primary reason is simple frugality &mdash; the younger and healthier you are when you sign up for a policy, <a href="">the cheaper your rate will be</a> &mdash; and you&rsquo;re able to lock those rates in. (See also: <a href="">Life Insurance Calculator: How Much Insurance Do I Need?</a>)</p> <p>Another major reason for purchasing life insurance is the aforementioned debt. If you have any debts at the time of your death, life insurance can cover or help cover them &mdash; instead of passing them on to your already grieving loved ones.</p> <h3>3. Start Saving Immediately</h3> <p>I&rsquo;ll admit, this Wall Street Journal article on <a href="">why you need to start saving now</a> is kind of depressing &mdash; &ldquo;two-thirds of students will graduate with debt that averages $25,250 in student loans and more than $4,000 in credit-card debt.&rdquo; But the same article also points out something very important &mdash; that compound interest is a powerful thing, and the earlier you start saving, the most you can take advantage of it: &ldquo;If you save $10 a day at age 25, you&rsquo;ll have more than $1 million by age 65, assuming an 8% annual rate of return. If you start at age 35, you&rsquo;ll have $445,000. At age 45, you&rsquo;ll only have $180,000.&rdquo;</p> <p>If you have a job that provides a 401(k) retirement plan, take advantage of it. Not only will you not miss the money (since it&rsquo;s automatically deducted from your pay before the check before it hits your hands), but most employers offer matching contributions after you&rsquo;ve been with the company for a certain amount of time. At that point, if you don&rsquo;t contribute to your 401(k), you are turning down free money.</p> <p>Don&rsquo;t worry if you don&rsquo;t have a 401(k) plan, though, there are still several great saving options &mdash; like Roth IRAs.</p> <h3>4. Talk to Your Parents About Their Finances</h3> <p>It&rsquo;s not always a fun chat, but this is a good time to have a discussion with your parents to help better understand their financial situation and your role in the family's financial future. Questions you might want to discuss include: Are they ready for retirement? Do they expect you to support them in their retirement? If you borrowed money from them for college, can you pay them back?</p> <p>One thing that you should be sure to discuss with your parents, even though it can be uncomfortable, is expectations &ndash; yours and theirs &ndash; if they get sick or need long-term care.</p> <p>If they don&rsquo;t already have one, encourage your parents to create a living will &mdash; this document determines who will make medical decisions for them if they are unfit, and it also outlines things such as whether or not they want to be kept on life support.</p> <p>It can also be helpful to discuss long-term care for your parents. Earlier this year, USA Today reported how <a href="">caring for elderly parents catches many unprepared</a>. Sudden strokes, heart attacks, and other illnesses and accidents &mdash; while we don&rsquo;t like to think about them &mdash; can have consequences beyond just health. Whether it requires a stay in a nursing home, hiring an at-home caretaker, or taking time off from your job to care for your parents, long-term care can be monstrously expensive &mdash; according to the USA Today article, &ldquo;The median cost of a year in a private room at a nursing home in 2011 was $77,745&hellip;And only those who have spent most of their assets can qualify for Medicaid to pay for the nursing home.&rdquo;</p> <p>Long-term care insurance, however, can help cover the costs of services for this kind of day-to-day care. And once you buy it, long-term care insurance is locked in &mdash; the policy can&rsquo;t be canceled by the insurance company, no matter what happens health-wise.</p> <h3>5. Have Fun</h3> <p>I know that sounds like one of those stupid suggestions that everyone ends articles like this with. But I am very, very serious about having fun. While this is possibly one of the most financially tender times in your life, it&rsquo;s also a time when you probably have a lot of freedom and flexibility. Plan and make room in your budget for things like travel, culture, or even just trying new foods with friends. Remember, money can buy happiness &mdash; if what you&rsquo;re buying is an experience. With a little bit of planning and balance, you can experience life <em>and</em> save for your future.</p> <p><strong>Are you a current college student with concerns about entering the working world? Or do you have advice for college graduates? Leave your thoughts in the comments. </strong></p> <p><i>This article was made possible by the support and inspiration of&nbsp;<a href="" target="_blank">Genworth Financial</a>, a S&amp;P 500 insurance&nbsp;company with more than $100 billion in assets</i><em>. Check out Genworth's website for more information on their <a href="">life insurance</a>&nbsp;and <a href="">long-term care insurance</a>&nbsp;products.</em></p> <p><a href=""><img src="" width="605" height="454" alt="" /></a></p> <a href="" class="sharethis-link" title="5 Financial Steps to Take After Graduating From College" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Meg Favreau</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Budgeting Insurance Lifestyle financial independence life insurance long term care insurance recent graduates Fri, 22 Jun 2012 10:36:12 +0000 Meg Favreau 935292 at Financial Independence Is More Than Just a Number <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/financial-independence-is-more-than-just-a-number" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="numbers" title="numbers" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>When do you think you've made it to the land of financial freedom?</p> <p>Financial independence was a goal of mine when I started in 2007. Back then, I thought of the goal as a number. &quot;When I have a million dollars in the bank, I'd be all set...&quot; (See also: <a href="" title="5 Steps Toward Financial Independence">5 Steps Toward Financial Independence</a>)</p> <p>Then I started writing, thinking, and talking about money matters on a daily basis, and that number changed. Sometimes, all the glamorous advertisements and a few impulse purchases would prompt me to increase this number. Other times, I would be reminded that material happiness is just temporary relief and I would lower the number.</p> <p>It slowly occurred to me that financial independence isn't merely hitting a number, but being in the right state of mind. Some people can't retire until they have $12 million in retirement funds, while others can live on $300,000. The difference has nothing to do with the ability to <a href="">find coupons</a>, but it has everything to do with their expectations.</p> <p>The funny thing is that I probably know more happy people who don't have oodles of money than satisfied, wealthy people. This may sound counter-intuitive, but the more money people have, the more money they seem to need. Of course, the money is not for survival purposes; they want more because they compare. Wealthy people are <a href="" title="Biggest Money Saving Tip: Move Far Away from the Joneses">exposed to more luxury</a>, and they subsequently want more. They see ultra expensive <em>stuff</em>, and they want everything.</p> <p>Every company is out there trying to get more sales. No matter how much money you have, you won't have enough to buy everything out there. If you keep chasing, you will always need to run. You cannot win.</p> <h2>What Is Financial Independence</h2> <p>It is very easy to look at our assets and see if we can meet a certain retirement number that a financial article would cite, but honestly, who cares what someone else's number is?</p> <p>If you have $1 million in retirement funds right now, have your house paid off and have expenses of less than $1,000 a month, why does it matter that someone else thinks they need $3 million to retire?</p> <p>On the other hand, if your expenses are $20,000 a month and you have $3 million, of course you can't retire yet. You need way more than what you have. And you know what? I bet the other guy with $1 million is happier than you, too.</p> <h2>It's All Based on You</h2> <p>Financial independence is not needing to base your living decisions on financial constraints. You can achieve freedom with more money or less spending. Which road you decide to take is entirely up to you.</p> <p>Just realize that once you reach a certain level of income, keeping your spending in check is a much easier way to keep up.</p> <a href="" class="sharethis-link" title="Financial Independence Is More Than Just a Number" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">David Ning</a> and published on <a href="">Wise Bread</a>. Read more <a href="">Retirement articles from Wise Bread</a>.</div></div> Lifestyle Personal Development Retirement behavior financial freedom financial independence income money philosophy Tue, 21 Sep 2010 13:00:11 +0000 David Ning 242657 at 5 Steps Toward Financial Independence <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-steps-toward-financial-independence" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="Independence" title="Independence" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Whether you&rsquo;re a brand new grad or regrouping after a layoff or other financial difficulties, you may find that it&rsquo;s more difficult than you&rsquo;d imagined to wean yourself from any monetary help you&rsquo;ve been getting. Though most of the process is straightforward, it&rsquo;s always good to remember what it takes to achieve financial independence.</p> <h2>1. Get a Job</h2> <p>While finding a job in your niche or industry is great, any job is better than none at all. With job markets still sluggish, getting your foot in the door anywhere will help you towards your financial goals. Once you&rsquo;re in, it doesn&rsquo;t mean you have to stay. Getting a job that will hold you over, though, may mean the difference between making it on your own and moving back in with the folds.</p> <h2>2. Know Your Expenses</h2> <p>It&rsquo;s easy to get overwhelmed with the different types of expenses you have, particularly if you aren&rsquo;t used to paying them yourself. While writing a check here and there will get the bills paid, you&rsquo;re more likely to achieve financial independence if you&rsquo;re intimately familiar with your expenses.</p> <p>Knowing approximately how much you pay each month in certain categories will also help you find any problems. If your electric bill suddenly skyrockets, you&rsquo;ll know you need to investigate to find the source of the extra charges.</p> <h2>3. Commit to Saving</h2> <p>Being financially independent doesn&rsquo;t only mean paying your own way now, but making preparations to do so in the future. Plan ahead as soon as you have some extra money, and it will go far towards ensuring your financial independence even if something bad happens, like you lose your job or face a large, unexpected bill.</p> <p>Put your savings away after your regular expenses are paid and before you buy anything else. This will help your savings grow and make sure that you stay committed to it in the long term.</p> <h2>4. Prioritize Essentials</h2> <p>Make sure you know how much money you&rsquo;ll need each month, and categorize your expenses. Determine which ones are necessary, which are high priority, and which ones you can eliminate if you need to. This will help you know what to pay first, as well as how much money you need to make to achieve your goals.</p> <p>Prioritizing your expenses also gives you a good idea of how much you need to make each month. If your expenses are high, consider lowering them by finding roommates or changing your lifestyle for a few months, until you can get more income.</p> <h2>5. Give Yourself a Deadline</h2> <p>Decide when it&rsquo;s realistic for you to achieve your financial goals and make that your deadline. Once you have that in mind, you&rsquo;ll know how long you have to find a job, find a place to live, and figure out your personal budget.</p> <p>Deadlines provide fantastic motivation. With one in place, you&rsquo;ll be more likely to follow through on your intentions and to do so in good time. Of course, your deadline isn&rsquo;t absolute. If something falls through or your situation changes, you can always move it back. But don&rsquo;t move it unnecessarily, because then it isn&rsquo;t a deadline at all.</p> <a href="" class="sharethis-link" title="5 Steps Toward Financial Independence" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Sarah Winfrey</a> and published on <a href="">Wise Bread</a>. Read more <a href="">Personal Finance articles from Wise Bread</a>.</div></div> Personal Finance financial independence Thu, 01 Jul 2010 12:00:05 +0000 Sarah Winfrey 159726 at Wage slave, debt slave <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/wage-slave-debt-slave" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="Signs showing the way out" title="Way Out a rama" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>This article has its roots in an article I wrote some time ago that used the terms wage slave and debt peonage--terms that some people objected to. Those making free choices aren't slaves, they said, even if their poor choices result in a hard life. There's some truth to that. But there's also some truth to the notion that our system makes it easy--almost automatic--for people to trap themselves.</p> <p>I've thought about it a lot since then, and found that the terms still resonate with me. It's true that the system makes people complicit in the process that traps them, but that fact doesn't make it okay. It seems to me that the system is designed, whether consciously or not, specifically to get people locked into it.</p> <p>(The article where I&nbsp;used the terms, by the way, was this one: <a href=""> Self-sufficiency, self-reliance, and freedom</a>.)</p> <h2>Student loans</h2> <p>It starts with student loans--available to any student, pretty much without regard to whether their course of study will give them the skills and certifications that will produce an income to support the debt load.</p> <p>Students with parents who are both generous and affluent can escape. (I largely did.) Students who are both unusually smart and unusually wise, or else are lucky enough to get very good, thoughtful advice, can escape. But most students come out of college with debts that lock them into the money economy. They have no choice but to earn enough money to pay off that debt--on top of the money they need to support themselves, of course. Even bankruptcy won't free them.</p> <p>Which isn't to say that student loans are evil. For many poor students who couldn't otherwise afford to get an education, they're a marvelous tool--something that can break generational poverty and let people aspire to some of the great things that can follow on from education.</p> <p>But for too many people, student loans are a default choice that they make--often before they've even graduated from high school--without even imagining that there are alternatives.</p> <p>And that's just the beginning of it. The default path is to graduate from college and then get a job to pay off the student loan (and pay living expenses). The wise graduate might know that it'd be a good idea to get that loan paid off quickly, but that's still likely to take a decade. It's not practical to put your life on hold until then, so you proceed with all the ordinary aspects of living your life: getting married, having kids, buying a house--with the attendant mortgage.</p> <h2>Mortgages</h2> <p>Mortgages are no more evil than student loans. If you buy a house that's well within your means, a mortgage can be cheaper than renting.</p> <p>But just like a student loan, a mortgage traps you in the money economy--you have to earn enough money to make that mortgage payment (and your student loan, and all the other costs of supporting your family), or else you lose your house.</p> <p>I won't even talk about credit card debt.</p> <h2>The trap</h2> <p>This all works fine for most people, but it fails badly for some--for people who can't find work or lose their job or become disabled. It fails less badly for others--people whose degree prepared them for work that they enjoy, but that doesn't pay well enough to both support them and get them out of debt, or for people whose work pays well enough but that they don't enjoy.&nbsp; Overall, I'd say it fails to some extent for lots of people.</p> <p>There are all kinds of ways to support yourself besides working at a regular job. You can be self-employed, you can do freelance work, you can be a writer or an artist, you can grow your own food and make the things you need. Most of those ways won't support you at a middle-class standard of living, but they're an option. Except that they <strong>aren't</strong> an option to most people, because most people are in debt. And most people in debt can't cover their cash expenses any other way than by working at a regular job--those other options, although they can provide enough to eke out a meager existence, don't generate enough cash to do that and make the monthly payments.</p> <h2>The way out</h2> <p>In the end, debt and wages work together to trap the overwhelming majority of people.</p> <p>It's hardly an airtight trap. You can buy your way out if you earn good money: Keep your expenses low, pay off those debts, get enough savings that you don't need to borrow again, start making some investments.... That path to financial independence is well known to anyone who reads financial blogs.</p> <p>But it's a path that most high school students don't learn about. Most people only begin to understand when it's too late--after some young kid (i.e. them at age 17), guided by well-meaning but under-thoughtful parents, guidance counselors, and college admission advisors, have set them on the path to being locked into employment by wages and debt. Once you're there, it's a long hard slog to switch back to the path to financial independence.</p> <p>One thing I'm sad about is that so many people who have managed to find the path to freedom have so little sympathy for the people who went badly astray. Granted, those who have just begun to find their way will be in the midst of difficult striving, but it somehow seems to me that should give people <strong>more</strong> empathy with those who, following the default advice, headed down the path of debt. In fact, though, it seems to give them less.</p> <p>There's nothing wrong with debt and there's nothing wrong with wages. But I think the system we have now is pernicious. It makes sure that everyone starts out with a load of debt to trap them into working for wages at exactly the moment that they might otherwise be exploring other possibilities, and keeps them there until family obligations and a promising career make it hard to escape.</p> <p>It's not impossible to escape. Wise Bread is full of advice, both tactical and strategic, for finding the path out of the debt and wage trap. Better if you never get trapped in the first place, but who among us has such luck? Who among us was smart enough or lucky enough or well-advised enough as teenagers to find the path to financial independence early? Too few.</p> <p>&nbsp;</p> <a href="" class="sharethis-link" title="Wage slave, debt slave" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Philip Brewer</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Personal Finance Frugal Living Debt Management debt debt slave debt slavery financial independence freedom independence wage slave wage slavery wages Tue, 21 Jul 2009 20:00:07 +0000 Philip Brewer 3412 at What is keeping you from a life of financial independence? <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/what-is-keeping-you-from-a-life-of-financial-independence" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="" title="" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>My goal has always been to work for ten years and then have enough financial freedom to do whatever I want to do. Whenever I tell people this they seem to be rather incredulous and sometimes say things like, &quot;sure, you could try.&quot; Even though I am quite young, I have met enough people to see what keeps them from quitting their jobs and living a life of financial independence. Here are a few of my observations over the years.</p> <p><strong>1. The places they live </strong>- I have met a handful of people who are tied down to their jobs because of their mortgages. There is also a couple I know that could retire right now if they just sold one of their houses and invested the proceeds in government bonds. However, many people toil on to feed their houses not realizing that they could live in so many other nice places. Oftentimes, the location of our homes is based on our jobs, and places with an abundance of jobs generally have higher costs of living. Once the need to live close to work is eliminated it is easy to find a cheaper place to live. Another observation I have is that people generally have bigger homes when they have kids, but once the kids are grown up and gone they do not downgrade their homes. Having two to three rooms that are never used is an extravagance in my opinion.</p> <p><strong>2. The societal norms</strong> - When you try to break away from the norms of society you will get naysayers. Unfortunately a lot of financial advice we get in America is based on this notion that we should retire at age 65 and collect Social Security. When I say that I want to retire when I am 35 I feel that some people think I am a lazy and crazy weirdo. Even though there is no law that says you can retire only if you are 65 I think a lot of people subconsciously believe that is the right and normal thing to do. There are laws that state you can collect certain government sponsored benefits at age 65, but that should not prevent you from living the life you want before arthritis sets in. I think many people are just a bit afraid to step out and be different.<br /><strong><br />3. Pure and simple greed -</strong> Some people I know just want more and more every single day. If their greed is never quenched then they will never be free from working. Here in the Silicon Valley there are many multi-millionaires or even billionaires who could retire in the blink of an eye, but quite a few of those I have met still work 12 to 16 hour days. I just do not understand that mindset because it seems that they do not have much time to enjoy all that money. It may be that they enjoy working, but I think a lot of people just cannot stop working because they feel the urge to accumulate more wealth.</p> <p><strong>4. Insufficient funds </strong>- Most people including myself fall into this category. Basically we still need a bit more in our nest eggs before we can comfortably live in our retirement. I think a small retirement fund is an issue that is by far the easiest to pinpoint. The problem is that many people I know do not try to do resolve the issue at all. If one wants to retire early, he or she needs to start saving early. It is a very simple concept, but many of my peers feel that retirement is so far away that they do not need to save. The truth is that we all could be financially free so much sooner if we start saving earlier.</p> <p><strong>5. Familial responsibilities</strong> - I do not have kids yet, but I know they are pretty expensive. I respect those who start and support a family, and it is a huge financial burden. Family is only a problem when people use it as an excuse to why they cannot succeed. I think a family that works together towards financial independence can achieve it. A real life example is <a href="">the cheapest family in America</a> . This is a family of seven that never had too much income, but still managed to save quite a bit of money. If more people treated their family as their strength rather than a burden I believe they can achieve their goals even faster. </p> <p>I could go on, but I think all of the rest of my observations have to do with people who are kind of stubborn and do not really want to change their lives. It is curious to me that some of them say that they want to retire early, or even right now, but take absolutely no action. I think what most of them need is to change their mindsets and believe that it is possible to achieve financial independence, and start doing something about it right now. So what about you? What is your one big obstacle before you are free of the daily grind? </p> <a href="" class="sharethis-link" title="What is keeping you from a life of financial independence?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="">Xin Lu</a> and published on <a href="">Wise Bread</a>. Read more <a href=""> articles from Wise Bread</a>.</div></div> Personal Finance Frugal Living Investment Lifestyle Real Estate and Housing Retirement budgeting financial independence life saving Thu, 21 Feb 2008 01:11:42 +0000 Xin Lu 1824 at