10 Tips to Achieving Financial Freedom: Part 2
In our previous blog, 10 Tips to Achieving Financial Freedom: Part 1, we discussed the importance of budgeting and saving, as well as strategies to do both seamlessly. In this blog, we will continue the discussion on how to free ourselves from the financial shackles that often hold us back from achieving the goals we set for ourselves. Once again, financial freedom is subjective. However, in this context I refer to financial freedom as the ability to live comfortably throughout all the unknown phases of life to occur with no financial concerns. So, let’s get started with our last 5 tips to do so.
1.Investing
First on our list, is investing. Investing is the process of setting aside money now with the expectation that that money will work for you and produce more money that you will redeem in the future. Now while that definition may seem quite simple, investing can be quite complicated. Especially when you consider the many avenues one can take for investing: stocks, bonds, options, index funds, mutual funds, exchange traded funds, certificates of deposits, real estate, personally managed portfolios, brokerage managed portfolios, employer retirement funds, cryptocurrencies, and the list goes on. I’ll go into detail with a lot of these types of investing in later blogs, but for now I’ll just explain the importance of investing and provide a brief list of things you should consider before investing.
To put it simply, investing is important because inflation is real. According to Illustrative Mathematics, 1lb of bread cost on average $0.75 in 1990, $1.99 in 2000, and $2.99 in 2010. This means that if you retired in 2010 you were spending an average of 299% more on 1lb of bread, in comparison to what you were spending 20 years prior. Now from a retirement perspective, you can’t afford to retire with only your social security check from the government and expect to survive/live a comfortable life in America. However, if you had been strategical investing all that time, you would have been combating inflation and increasing your chances at being able to afford the life you used to live pre-retirement. Now imagine how much money you could have at normal retirement age (age 65) if you started investing at age 25? I mean if you invested $2,000 today, contributed $300 at the end of each month, and earned an average annual rate of return of 8%, you would have over $1 million dollars in 40 years. Don’t believe me, check it out!
Now that we, hopefully, understand the importance of investing let me go over some high-level things to consider before jumping into this big pot of potential money:
Consider your risk tolerance.
Where there is uncertainty there is risk, and where the higher the risk taken the higher the reward. However, as an investor you must be honest about the risk you are willing to expose yourself to in order to achieve that reward. For example, if you plan to retire at age 65 and your 25 years old, you may be more inclined to invest in risky assets because you have 40 years to reap the benefits of that investment or course correct. However, if you plan to retire at age 65 and are 50 years old, it may be in your best interest to invest conservatively to ensure that you have the minimum you need to retire in 15 years.
Consider what type of investor you wish to be.
There are 2 different types of investors: passive vs active. Passive investors usually invest for the long haul. They prefer to buy and hold their investments until they are ready to cash out for retirement. These sorts of investors are happy with making the same amount of return on their investment as the overall market. On the other hand, active investors aim to beat the market return by being very hands on. These investors usually leverage technical analyses to determine when to enter and exit a trade.
Diversify your portfolio.
It’s never a good thing to put all your eggs in one basket, so diversification is the art of doing just the opposite. To diversify means to spread your money across different investments to reduce your exposure to risk. There are many ways one can diversify your portfolio. You can buy exchange funds or mutual funds. You can dabble in different types of assets, such as stocks, bonds, cryptocurrency, real estate, etc. You can invest in different types of stocks: technology, energy, healthcare, entertainment, etc. If you sprinkle your money around your portfolio, you’re in good shape to reduce your exposure to market risk.
2. Individual Retirement Accounts (IRAs)
Another investment strategy that we recommend, is investing in an IRA. IRAs allow you to save for retirement in a tax-advantaged way. IRAs are typically managed investment accounts that you must sign up for individually. Many brokerages such as TD Ameritrade, Fidelity, Charles Schwab, etc. have them, so it shouldn’t be hard to find one. However, when you are ready to sign up for one, you’ll have to decide if you’d like to contribute your money to a traditional IRA or a Roth IRA. With traditional IRAs you contribute funds that have not yet been taxed but will be taxed upon withdrawal at retirement. With Roth IRAs you contribute funds that have already been taxed and will not be taxed upon withdrawal at retirement. A good rule of thumb here is if you think you will be in a higher tax bracket upon retirement, than you are now, then contribute to a Roth IRA. Otherwise, contribute to a traditional IRA.
Another thing to consider when investing in an IRA, is that the government restricts how much may be invested to these accounts. For example, if you are under the age of 50 you may contribute a maximum of $6,000 to a traditional or Roth IRA; otherwise, you may contribute a maximum of $7,000. See irs.gov for more details.
Now, since this a retirement fund, withdrawal of funds before retirement will result in paying a 10% penalty. However, what most people don’t know is that first-time home buyers may withdraw a maximum of $10,000 from their IRA for purchase, build, or rebuild of their home, without penalty. Obviously, this means that you have $10,000 in your IRA for retirement; however, you don’t have to start from scratch to save up for a home either.
3. Employer Sponsored Retirement Plans
Many employers offer retirement plans, such as 401(k)s or 403(b)s, but many employees don’t participate in them. Employees that agree to participate in a 401(k) or 403(b) have a percentage of their paycheck paid directly into an investment account. Most employers also match a percentage of their employees’ paycheck, as well. For example, if an employer offers 6% matching and you contribute 4% of your paycheck to the 401(k), then the employer will only match 4% of your paycheck. On the other hand, if you contribute 10% of your paycheck to the 401(k), then the employer will only match 6% of your paycheck, because their policy is to only match up to 6%. As you can see, those who don’t participate in their employer sponsored retirement plan are leaving “free” money on the table.
Like IRAs, you have a choice between a traditional or Roth 401(k) 403(b). Employee contributions into traditional 401(k)s or 403(b)s are based on pre-tax income and must be taxed based on the individual’s tax bracket at time of withdrawal. The Roth 401(k) or 403(b) are based on employee contributions that are made with after-tax income and doesn’t need to be taxed at time of withdrawal. There are also federal limits to the amount employees may contribute to their 401(k) or 403(b). The current 2022 limit is $20,500 per year for employees under the age of 50. See irs.gov for more details.
It is also important to note that since this is a retirement investment account withdrawals before the age of 59 ½ will face a penalty of 10%.
4. Health Savings Accounts (HSAs)
We all know that the cost of healthcare continues to rise all around the world. It is certainly to topic of discussion at every presidential debate in the United States of America. So, from the perspective of protecting yourself and achieving financial freedom, now and during retirement, it is only right that we touch on HSAs. An HSA is a savings account that accepts pre-taxed employee contributions and can be leveraged by people who have a high-deductible health insurance plan. Regular contributions are deducted from the employee’s paycheck and is put into this savings account to be used on qualified medical expenses not covered by the insureds medical, dental, or vision plan. Some employers may also contribute to the HSA, whether by lump sum contribution or by reward incentive programs.
Here are a few reasons why we love and recommend HSAs:
Use them to save for medical expenses, such as deductibles, copays, prescription drugs.
The account earns interest.
You can use the money in the HSA to invest in stocks.
Self-employed or unemployed individuals may also contribute to an HSA if they meet the eligibility requirements.
You can rollover your HSA balance every year (i.e., No use it or lose it policy).
You can take your HSA with you when you leave the company or roll it over into a new account.
The money you withdraw from an HSA isn’t taxed, so long as it is used for qualifying medical expenses.
After age 65 the money in your HSA can be used on medical and non-medical expenses, with no penalty. You can even use it to pay for your Medicare premiums.
Like the IRAs and 401(k)s, there are federal imitations to how much an employee can contribute annually to their HSA. The 2022 maximum contribution limit is for employees under the age of 55 is $3,650 (self only) and $7,000 (family). Check out this article for details.
Nonetheless, HSAs are a great way to save for an relieve some of the burden of future medical expenses.
5. Life Insurance
Our final tip for achieving financial freedom is to purchase life insurance. We understand that no one likes to talk about death, but the fact of the matter is it is inevitable, and it is expensive. Life insurance is a legally binding contract that guarantees the insurer pay a certain amount of money to predetermined beneficiaries upon the death of the insured. Upon signing that contract, you can determine how much you’d like your beneficiaries to be paid in the event of your death. As you determine that amount, you should keep in mind estimated funeral expenses, supporting your beneficiaries financially in your absence, and providing them with the financial means to reach new heights. And what we mine by that being a middle-class citizen, passing a way, and leaving your beneficiaries with a $500,000 or even $1 million dollars’ worth of a life insurance settlement. I mean this is a lot of money and that doesn’t even consider the other investment accounts/strategies we touched on above. This money can truly break your family from the shackles of financial freedom and give the next generation of your lineage a more than fair shot of survival.
Hopefully, after that explanation you agree with us that life insurance is important. The next question would then be what type of life insurance policy you should get. While we can’t answer that question for you, we can share a list of the different types of life insurance policies that you should consider. Below is a brief list of options, but a more detailed look into life insurance policies will be covered later.
Term life insurance policies pay a death benefit to the beneficiaries if the insured dies with a predefined certain number of years, commonly 10, 20, or 30.
Permanent life insurance policies pay a death benefit to the beneficiaries whenever the insured dies. This type of policy is usually more expensive than Term.
Life insurance policies usually require the insurer undergo a health assessment with a physician. Upon passing the health assessment and determining what type of policy you want, you will have to pick the amount of coverage you want (i.e., the death benefit to pay your beneficiaries). Now, of course there is no such thing as a free lunch, so life insurance isn’t cheap. However, the younger you are the healthier you are and the healthier you are the cheaper your policy will be. So, we suggest looking into life insurance sooner than later and sticking to a policy that you can afford.
So, there you have it folks! We’ve covered 10 tips to achieving financial freedom: Budgeting, Separate Accounts, Automatic Payments/Transfers, Emergency Funds, High Yield Savings Accounts, Investing, IRAs, Employer Sponsored Retirement Plans, HSAs, and Life Insurance. Imagine how much money you’ll be swimming in if you implement all 10 tips into your financial strategy? We hope you realized some common themes throughout, though. Start early! Stay disciplined! Enjoy Later!
Disclaimer: The information in this blog is based on my opinion and experience, it should not be considered professional financial investment advice. The ideas and strategies should not be used without assessing your own personal and financial situation, or without consulting a financial professional.
