When you hear the words “financial independence,” you tend to think of that Powerball ticket that didn’t pan out the way you thought it would (that’s ok buddy, there’s always next week.) But the secret to making enough money to do what you want, not freak out about your kid’s college, and (potentially) not have to work until you die is fairly simple. You’re just not doing it.
Matt Becker is a financial planner who specializes working with new parents, the founder of Mom and Dad Money, and author of The New Family Financial Road Map. He says that the secret to saving a comfortable nest egg is no secret at all.
“The whole idea of financial independence is that what you’re working and saving for will allow you to make decisions on what will make you happy versus what will make you money,” he says. Essentially, stop scrimping now to make life affordable when your kids have kids, and just start having better financial habits. You won’t have f–k you money, but you will have you have enough to not have to decide between a summer vacation and groceries.
Figure Out Your Goals
Everyone’s financial goals are different and therefore require a different strategy, but Becker’s plan is pretty universal. Step 1: Address what you want first, so you know what you’re aiming for. “You need to take some time to visualize one year down the line; 5 years down the line. What you want your life to look like?” Think less in-ground swimming pool, more part-time nanny.
“Take that vision and turn that into specific goals,” he says. “Put a dollar amount on what it would take for you to achieve it, and then you can determine the number of years and money it will take you to get there.”
Becker also stresses that you should continuously refer back to this roadmap throughout the process as it serves as a reminder and motivator to keep it in place. For example, Warren Buffet has his roadmap tattooed under his eyelids.
Figuring Out How Much You Need
First, do the math on your specific goal. For instance, if it’s to stay home with your newborn child for a year, your equation is based off how much money do you need (infinite) and how long you have before you’d like to do this (immediately).
Flickr / Sam Valadi
It looks like this: Amount you want to save ÷ Number of months you have to save = What you should be saving a month.
Now set your checking account to deduct that money and put it into a savings account automatically. The big caveat: Make sure you can live off of what you’re left with. If you can’t, time to rethink the plan.
Don’t Spend Money To Make Money
Research has shown that the best predictor of future returns is the amount you pay for your investments. As it turns out, the less you pay, the greater your likelihood of positive returns.
“It’s counterintuitive. We are used to paying more for higher quality. But in investing, it doesn’t really work that way,” says Becker. “It benefits you to pay less and accept you are going to get market returns. It lends itself to a strategy called Index Investing. Instead of trying to beat the stock market, you try to match it. You don’t need a human to do this, you can have a machine do it very easily and efficiently.”
Flickr / Zach Z.
Rewind. This financial planner just admitted you don’t necessarily need him to invest like him. “There is value in working with a good financial planner to help you create and implement and maintain an investment plan, but I do want to make it clear that not everyone needs that,” he says. “There are a lot of tools and resources out there that make it easy to put a very good investment plan in place all by yourself.”
- Balanced Mutual Funds: For a fee, these funds automatically spread your money out across stocks, bonds and cash. And, as stated above, higher fee doesn’t necessarily mean higher return.
- Target-Date Funds (TDFs): These are funds that adjust to risk based on your retirement age. Maybe more risky and aggressive when you’re younger, and pull back to more stable but less reward as you get older. “They’re a great place to start — and honestly a great place to finish.”
Stay The Course
This is the hardest part of this entire process. That, and thinking you’re going to cash out like an early Facebook investor. Becker says it’s a certainty the market will dip, and you will lose some money.
“You don’t have to have a lot of money to do this, and you shouldn’t wait until you do to start,” he says. But understand that everyone from Jim Cramer to your father-in-law is going to tell you where to put your money. “There is no right way to do it,” Becker says — and this is coming from man whose job it is is to mitigate risk and maximize return. “As long as you stick to it and keep saving money, that’s the best thing you can do.” Now, go book that flight to Vegas.