Michael FitzPatrick: What Does Independence Mean to You This Fourth of July? Part 2

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In Part 1 of this series, I posed the challenge of reconsidering what the words “independence” and “freedom” mean to you and focused on the concept of time freedom.

In the second part of this series, I want to address the idea of financial independence and what it truly means. According to Wikipedia, financial independence is defined as “the state of having sufficient personal wealth to live, without having to work actively for basic necessities.”

This quote has two distinct components that make it unique:

  1. The first half of the quote says “…having sufficient personal wealth to live.” The word I want to emphasize here is sufficient. What might seem sufficient to someone in Ghana, Africa, might be different than a family in Manhattan, NY. It’s all relative, but for YOU, what does sufficient mean? How much monthly income would cover your current lifestyle?
  2. The second half of the quote says “without having to work actively for basic necessities.” Wouldn’t it be nice to work because you want to, not because you have to? To have total financial independence means that you have the opportunity to choose to work if you’d like, but that it may not be required in order to have your basic needs and expenses covered.

There is a very simple formula that could help you move towards financial independence. This is not the be-all and end-all formula, but rather a condensed version to give you something to think about.

  1. Create a budget: It is imperative that you know what your projected expenses are in order to live the lifestyle that you desire; you should be able to project this a year in advance.
  2. Actual vs. goals for six months (from your budget): Now it’s time to inspect what you expect. Get a copy of your bank statement or credit card bills from the previous month and, once a month over a cup of coffee, sit down and plug in your numbers. It’s simple, but it works!
  3. Reduce Expenses: You now have one of the most important items necessary to make good decisions – DATA! Go over your expenses; figure out what expenses you can reduce or eliminate; and start asking yourself if the expense is a “nice to have” or “have to have.”
  4. Increase Income: This is where things get fun! Now you control your money vs. your money controlling you. So, create a dream inventory consisting of those things that you’d like to have. In a perfect world, how much income would you need per month to live your desired lifestyle?

Here is a short story to illustrate the points above. The names have been changed for privacy.

John and Mary, 46 and 44 years old, are married with three kids. John works full-time and makes about $120,000 of net income each year ($10,000 per month). Mary is a full-time mom and stays home to raise the children. When you add everything up – mortgage, taxes, utilities, food, education, clothes, insurance, sports, camps, etc.— their expenses are usually right around $9,000-$10,000 per month. John feels like he is working as hard as possible as it is, but they realize that college is right around the corner. As a result, they are feeling stressed, anxious and overwhelmed.

That story doesn’t sound too attractive, does it? Unfortunately, that is how 90 percent of people live right now. So, for this family, it is critical that they follow the formula above as soon as possible to start determining what sacrifices need to be made in order to change their current financial situation.

For John and Mary, figuring out how they could increase income is going to be a major focal point. In Part 3 of this three part series, I will discuss the options that John and Mary have to move towards becoming financially independent.

In closing, I want to leave you with a quote about money from one of my favorite people:

Money is something I understand only vaguely, and think about it only when I don’t have enough to finance my current enthusiasm, whatever it may be. All I know about money is that I have to have it to do things. I don’t want to bank my dividends, I’d rather keep my money working. I regard it as a moral obligation to pay back borrowed money. When I make a profit, I don’t squander it or hide it away; I immediately plow it back into a fresh project. I have little respect for money as such; I regard it merely as a medium for financing new ideas.  I neither wish nor intend to amass a personal fortune. Money — or rather the lack of it to carry out my ideas — may worry me, but it does not excite me.  Ideas excite me!  – Walt Disney

How much additional income, per month, could significantly change your life? How would things be different if you had more income coming in? Anything could be possible; it’s up to you to seize the opportunity.