By Joel Dansby* on Nov 21, 2020
If given the choice, most people would choose financial freedom over financial servitude. Who doesn’t want to be financially independent, having your money work for you, as opposed to you working for your money? The problem for many is that, that kind of choice is an abstract exercise of futility as they struggle to navigate the waters of daily living paycheque-to-paycheque, or in a clash of priorities where spending tends to win out over saving. The truth is that ultimate financial freedom is not about making one single choice, rather it is about making many choices on a daily basis that will make financial freedom a reality.
Clearly Defined Goals Leads to Smarter Choices
Setting long-term savings goals, while essential, is not always effective for people who have never before accumulated a meaningful sum of money. When looking into the future and seeing the need to save $50,000 for a down payment on a house, or $1 million for a secure retirement, people can sometimes become paralyzed by the sheer magnitude of the goal. Suddenly, the goal doesn’t seem realistic, which can deflate any motivation to start saving. But, when they take a moment to break those goals down to the smallest incremental steps for achieving them, not only do they appear much more attainable, but also it can unlock a number of small choices a person can make each day that will put them on a track to actually achieving their goal.
Take, for example, a 35 year old man earning $75,000 who suddenly realizes that his retirement time horizon is just a few of decades off, yet he has done nothing to accumulate any savings. Based on a round number calculation of what he will need to enjoy a modest life style in retirement, he determines that he will need to accumulate $1 million. Assuming he is able to achieve an average return of 7% over 30 years, his annual savings need is $12,000 or $1,000 a month. To someone who has spent most of life consuming, that amount may seem out of reach – until he breaks it down further: on a weekly basis he will need to save $230 which is $230 he is currently spending on something else; daily, that comes to about $32. The question becomes, is there something that is costing him $32 a day that he doesn’t really need?
The Freedom of Choice Leads to Savings
Where can a 35 year old man, earning $75,000, who has been spending his entire life, find $230? Possibly, through choices that he makes every day, include the choice to buy a pack of cigarettes or café latte each day ($25), to drive his car unnecessarily ($30), to eat a meal out ($50), to buy movie tickets or some other entertainment ($30), to buy expensive brands versus generic ($15), to buy a weekly case of beer or bottle of liquor ($30), buying a daily snack or soft drink ($3), watching premium cable ($10), the weekly impulse purchase of clothing or household goods ($25), to use a more expensive cell phone plan ($5), to add to debt by using credit cards ($10); that’s easily $230 worth of choices.
Granted, many of these are lifestyle choices, but those are usually the ones that add up the most. And, of course, you probably don’t smoke, but somewhere among your daily lifestyle choices there’s $7 or $8 that can be diverted to savings. The key is in understanding that these are not merely minor lifestyle choices; rather they are the choice between financial freedom, or financial servitude.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.