Financial Independence Day

Written By: Terrance J. O'Brien
April 30, 2009

What Does It Mean? How Can You Achieve It?  

In the United States, Independence Day, commonly known as the Fourth of July is a federal holiday. It commemorates the adoption of the Declaration of Independence on July 4th 1776, declaring independence from the Kingdom of Great Britain.  

Financial Independence Day is also celebrated on different days and in different years for each individual and family.  

It is a simple concept. You wake up one morning, and you decide to go to work, based solely on the love for the job. You have enough money tucked away so that your personal income needs are satisfied without receiving a paycheck from a job.  

Current Conditions on Financial Independence 

The numbers are scary on how few people in the United States are financially independent. According to a study conducted by ING, one of the largest financial institutions, over 90% of baby boomers in the U.S. will not retire financially independent. This means that 90% of retirees will be dependent upon the government, family, or continued employment to survive.  

  How Do You Achieve Financial Independence?  

Thousand of articles and hundreds of books have been written over the years on creating wealth.  

Many financial advisors and planners claim they have the right education, tools, and advice to help you become financially independent. 

What if you have been following their advice for some time and it hasn’t achieved the results you wanted? What should you do? 

It gets very confusing. Who do you trust? Have you been sold products based on the highest profits for the firm? 

Where do you go to get concise, documented and accurate information that you can rely on to make decisions?  

Follow the Crowd Thinking 

Albert Einstein is reported to have said “the definition of insanity is doing the same thing over and over and expecting different results.” 

Traditional “following the crowd thinking” on creating wealth is usually centered on four key concepts. 

• Find better products with better rates of return.
• Reduce current lifestyle so you can save more.
• Maximize contributions to Qualified Retirement Plans.
• Pay-off the mortgage debt on your home as soon as possible.

If you are following these concepts you may be delaying your Financial Independence Day. 

Uncommon Thinking 

General George Patton Jr. was quoted as saying “if everyone is thinking alike, someone is not thinking.” Moving towards your Financial Independence Day requires uncommon thinking. Following the crowd may not give you the results you desire. You will want to move in another direction. 

The First Step – Focus on Personal Wealth Transfers not Rates of Return 

Personal Wealth Transfers are a major problem for most of us, and are usually overlooked by advisors.  

 This is money you may be transferring out of your wealth account unnecessarily and without knowledge.   This can be a huge obstacle for creating wealth and obtaining financial independence. 

Three areas where Personal Wealth Transfers occur:

• Personal Protection (Insurance & Lack of or Poorly Structured Legal Documents)
• Expenses
• Taxes 

Six things you need to know about Personal Wealth Transfers:

• They are hidden. You have to dig to find them.
• They are a liability. The liability can be a current or potential liability.
• They can be a huge obstacle to creating wealth and obtaining your financial independence.
• They hinder improving personal cash flow.
• Most advisors do not know they exist and do not deal with them.
• They can be corrected.

  Personal Wealth Transfers & Lost Opportunity Costs 

Personal Wealth Transfers are always accompanied with Lost Opportunity Cost. Lost Opportunity Cost is an important term and may not be one that is familiar.  

Basically it represents the interest you could have earned on a given amount, had you been able to avoid losing it or transferring it away. A dollar paid in taxes or expenses unnecessarily not only costs you that dollar but it also costs you what the dollar could have earned had you not given it away.

An example – Let’s assume you were able to find $1,000 in tax savings on your income tax because you understated your expenses.  Let’s also assume you were able to do this each year for the next 25 years.  The savings would be $1,000 x 25 years or $25,000. 

But, that is only part of the story.  If you were able to save the money at invest it in a tax favored account at 5% the actual savings would be $25,000 + $25,113 in interest earned or $50,113 over the 25 year period. The opportunity cost is 50% of the total savings.

  Summary 

 Financial Independence Day is achievable for all us.  It only requires an open mind and uncommon thinking.  Focusing on finding better financial products with better rates of return doesn’t work and is not the answer to financial independence. The first step and most important step is finding  the hidden Personal Wealth Transfers and taking action to correct them. 

We will be discussing more details on Financial Independence Day in upcoming articles.

 
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