Navigating Your Financial Independence Journey in the New World

The COVID-19 pandemic devastated our country and hurt families emotionally and financially. While we are still feeling the effects and the end is not quite in sight, it is important we continue working toward our financial goals with the same—or even more—commitment to our futures.

As we navigate the recovery, we should be focusing on more than our portfolios. Creating good spending habits and strategies may not only increase our wealth but decrease the possibility of losing it.  

Here are nine steps you can follow to help you lay a path to financial independence.

Stay free from adverse debt.

Not all debt is bad debt. Debt used to buy a home or start a business has collateral and can be used as leverage. But all forms of consumer debt, including credit cards, car loans, and student loans, work against you financially.

If COVID-19 affected your income stream and debt started piling up, plan to start paying it off as soon as you are making money again. A debt reduction plan should have any loans or credit cards with the highest interest rates as the priority. With interest rates at a historic low, it may also be a good time to consider refinancing some of your debt in order to save on interest.  

Spend less than you make.

A simple concept, but not necessarily easy to practice. Every financial plan should start with creating a budget that keeps your expenses less than your income. If you’re finding it difficult or impossible, it may be time to look for a new job, increase your hours, or look for a side hustle.

Platforms like Personal Capital can help you to create a budget and stick to it.

Build a risk management plan, including an emergency fund.

All the what-ifs that circle your mind (What if I’m hurt and can’t work? What will happen to my family if I die?) are situations that you need to prepare for. A risk management plan means having all what-ifs tied up. This means insuring your future (and your family’s future) with disability, liability, life, and long-term care insurance, among others.

Should something go wrong in your life that insurance can’t help with, having an emergency fund could make a huge difference. The necessary amount varies, but for a single person, it should be enough to cover six months of expenses. If your household has multiple incomes, it can be reduced to three months.

The basic idea is to be able to live on this fund should you become unemployed in the future.  Your emergency fund should be held in a simple savings or money market account at your bank for ease of access and low expenses. This is not money you should be investing.

Pay yourself first.

Essentially, the most important bill you pay each month is the one to your savings. Your goal should not be to pay all your bills and hope there’s something left over to put away. Commit to putting at least 15% of your income into savings or investments every month and to live on the remainder.

If you receive a raise or increased income in the future, make sure you are continuing to save or invest in that same percentage—or more if you can.

Maintain a current estate plan.

Building wealth is about more than your lifetime—you should be trying to build it on a multigenerational family basis. If you make wealth building a family effort and make sure there is communication within your family, your children and their children will be better off in the future.

Creating an estate plan is not something that requires a family or a large net worth. At any age after 18, you should have at least a simple estate plan. Create a health care directive, a durable financial power of attorney, and a simple will so that family members know your wishes should you fall ill or pass away.

Estate plans should be reviewed at least every five years to make sure those you name as your powers of attorney and beneficiaries are up to date.

Diversify among types of accounts.

Having retirement accounts is great. Having savings accounts is great. Having only one type of account? That is not great.

You want to spread your savings and investments among multiple types of accounts. If you only use one, you don’t have any tax diversification opportunities based on policy changes. Every time there is a new administration, various tax rates change. You should have the ability to manage your withdrawals so you can take advantage of changes in capital gains or ordinary income tax rates.

If you’re maxing out your 401(k) at work and have an emergency fund you’re comfortable with, look into opening a Roth IRA or an HSA for more tax-efficient ways to save for your future.

Diversify among traditional asset classes.

Similar to step six, it’s important not to put all your investments in one asset class. Having the right balance of stocks, bonds, and cash can protect you from fluctuations in factors out of your control.

The right balance is different for every family or individual and should be decided with the help of a financial advisor. The right diversification can help your portfolio withstand a dip in the stock market without affecting your entire life savings.  

As appropriate, expand into alternative asset classes.

Stocks, bonds, and cash are not the only asset classes available, and it could be beneficial to consider other options as well. Real estate, commodities, private equity, and private debt, among others, could be good investments and make a big difference when other portions of the market are performing poorly.

This is something you should consult your financial advisor about so you can choose the most appropriate asset classes for your financial situation.

Consider income investments as you approach retirement.

When you’re nearing retirement, you’ll start to rethink the wealth you’ve been accumulating all these years. Your focus will need to shift from long-term savings to the creation of your main or only source of income.

You still want your accounts to grow, but you need to know where your income will come from throughout your retirement and how long it will last. How will you turn your assets into income? This is a step that is critical to your financial independence, and you may benefit from professional advice in making the adjustment.

When it comes to wealth building, diversification is key (though it does not ensure a profit or guarantee against loss). Diversify your accounts, diversify your assets and, just as importantly, diversify where you get your advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Think Save Retire, Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.