The miserable rich
and happy poor
“I believe that through knowledge and discipline, financial peace is possible for all of us.”
– Money expert Dave Ramsey
I was recently watching a finance video in which the host asked, “What would you do if you won the lottery?” People in the audience gave the typical answers: Quit my job, buy a new car, buy a new home. The question was based on the assumption that all that money brings happiness and no more worry.
However, the real answer may, in many cases, be “File for bankruptcy in a few years.” According to the National Endowment for Financial Education, 70% of lottery winners end up broke, and a third declare bankruptcy.
In an interesting article about financial wellbeing, Rick Kahler, founder of the Kahler Financial Group, asks, “What is financial well-being?” and then defines it according to the Consumer Financial Protection Bureau as “a state of being, wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life.”
Personally, I think that is a bad definition.
A major problem with it is that you could have a very high net worth, yet be miserable. As soon as emotions come into the picture, someone with a low income who really enjoys life and funds it through debt could have greater “financial well-being” than someone with a large income.
We even have a concept like this in Pirkei Avot (Ethics of the Fathers) 2:8: “The more possessions, the more worry.”
That’s why I much prefer the term “financial independence.”
People tend to define financial independence in a multitude of ways.
According to Wikipedia, “Financial independence is having sufficient personal wealth to live indefinitely without having to work actively for basic necessities. In the case of many individuals whose financial circumstances fit this description, their assets generate income that is greater than their expenses. Under such circumstances, a person is financially independent.”
No talk of enjoying life or other subjective terms. You are financially independent if your income is more than your expenses, and you don’t need to fret over basic necessities.
While many individuals believe that you need to be rich in order to be financially independent – meaning a job with a salary of $250,000 and savings of millions of dollars – in reality, to fit the definition, you just need to be able to cover your expenses with passive income.
It’s not all about your assets; your expenses play a huge part in the equation as well. If you scale down your lifestyle, you can achieve independence on much more modest sums than you ever dreamed possible.
Below are three tips that can help get you on the path to financial independence.
Set goals
People need to set goals in order to achieve sought-after milestones. If you want to lose weight effectively, you must set a goal of how much you want to lose. If you just tell yourself that you want to lose weight, without expressing how much, you are priming yourself to achieve minimal weight loss (if any at all).
It’s important to set a realistic date for when you’d like to be financially independent.
As a guide for how much money you will need in the future, I like to tell clients that they need about 20 years’ worth of this year’s expenses to make it. For example, if you spend $30,000 a year, you will need $600,000.
Don’t get nervous. Keep in mind that any pension or social security income that you receive will lower the overall amount that you need to supplement. If you receive $20,000 a year in retirement income, then you will need another $10,000 as supplemental income, which means you would only need around $250,000 in savings to be independent.
Prioritize
You need to make saving and investing a priority. Make a habit of ‘paying yourself first’ every month. Whether you invest in real estate (and receive a monthly rent check) or in dividend-paying stocks, focus on a slow and steady approach to building wealth. While this may not be popular in an era of instant gratification, when it comes to building assets, slow and steady rules the day.
Don’t wait
Individuals often wait to begin investing because they think that their accounts are too small. They think that if they don’t have hundreds of thousands of dollars, there is no point investing.
I recently had a meeting with a group that wanted to learn the basics of personal finance. A few of them mentioned that they had some money saved in the bank, but it was not earning any interest. When I asked why they never invested the money, they said they figured that it was such a small amount that it wasn’t worth it.
With intelligent savings and measured investing, you can be well on your way to financial independence.
The information contained in this article reflects the opinion of the writer. He is author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing, and a licensed financial professional in the US and Israel. For more information, (02) 624-0995, www.aaronkatsman.com, email aaron@lighthousecapital.co.il