Considering that a quarter of Generation Z already plans to retire by age 55, reaching financial freedom is likely at top-of-mind for even the youngest members of the workforce. Every week we talk to clients who have similar financial goals. Some aim to quit the workforce and live off of passive income while others want to transition into a new phase of life – by working fewer hours or perhaps charting a new, second career path.
Regardless of your ultimate destination, we believe setting yourself up to have career and spending options in your pre-retirement years (typically your 50s) is sound investment planning. In our opinion, we believe by following 6 principles you can help work toward financial independence. While this is not an all-inclusive list, we believe these are 6 principles that can help.
1. Practice Mindful Spending
Mindful spending is a concept that refers to being aware of and intentional about your spending habits. It involves making conscious decisions about where you allocate your money and avoiding impulse purchases. And before you think that the practice sounds too difficult, rest assured that mindful spending is not about deprivation. It’s about deciding what matters most to you and spending your hard-earned money accordingly.
The cornerstone of mindful spending is to decide on a spending limit for each category of expenses, such as food, entertainment, and transportation, and stick to it. After that, take time to think about whether a purchase is necessary or just “a want” before making it. Avoiding impulse purchases can help accelerate your savings potential. Similarly, save up for big-ticket items, such as a new car or a vacation, instead of financing them or putting them on a credit card and risking interest charges.
2. Maintain A High Savings Rate
Now that you’re prioritized your spending wants and needs, aim to save a high percentage of your income and increase your savings rate whenever possible. In our opinion, a common target for those seeking financial freedom is to target a savings rate of 30-70% of net income. This would allow you to build your savings and investment portfolio more quickly and achieve financial goals faster. MoneyUnder30.com maintains a fun calculator to allow you to play around with your savings figures.
Can’t hit 30% just yet? Not a problem. Use that target as a goal. Whenever you earn a raise or bonus, try to keep your spending relatively constant while allocating the extra cash toward savings. It’s important to find a balance between saving and spending that works for you and allows you to work toward achieving your financial goals while still enjoying life. The key is to be intentional about your spending habits, prioritize your needs and wants, and regularly review your progress to ensure you’re on track to reach your savings goals.
3. Diversify Your investments
Invest in a diversified portfolio, and consider using tax-advantaged accounts, such as a 401(k) or IRA, to grow your wealth. Your portfolio of investments should probably include a variety of different types of assets, such as stocks, bonds, real estate, commodities, and cash with an aim to minimize overall risk without sacrificing much in terms of returns. Diversification can help when there are market downturns.
And remember that diversification is not just about asset allocation. Consider investing in assets from different countries and regions, as the performance of one country’s economy may not affect another. Remember that diversification does not guarantee a profit or protect against losses. However, using the Wells Fargo Envision Process can help plan over the long term.
4. Increase Your Income
Ultimately, we feel the way you really move the needle toward financial freedom is by increasing your income, particularly in your early years. That’s because eventually you’ll run out of discretionary expenses to cut and you’ll want to maximize your chances to let compounding of investments work for you: and that requires earning more money. Easier said than done, though, right? Here are some simple tips.
- Get a higher-paying job: Consider applying for jobs within your field that offer higher salaries or negotiate a raise with your current employer. According to PayScale, a whopping 70% of people who asked for a raise received one.
- Invest in education and training: Investing in your education and professional development can help you advance in your career and increase your earning potential.
- Network: Attend professional events and conferences, and build relationships with people in your industry. Networking can help you find new job opportunities and stay up-to-date with industry trends.
- Be proactive in seeking opportunities: Look for opportunities within your company to take on new responsibilities, lead projects, or pursue other career advancement opportunities.
Consider starting your own business: whether a side project, ongoing consulting, or some way to monetize a new skill, your own business can provide earning potential if successful.
5. Work to Minimize taxes
Take advantage of tax-advantaged accounts, such as maximizing contributions to your employer’s 401(k) or your personal IRA can help you minimize your tax liability. Tax deductions such as those for mortgage interest, student loan interest, charitable donations, and business expenses will also reduce your taxable income. It goes without saying that if you qualify for tax credits such the American Opportunity Tax Credit or Earned Income Tax Credit to be sure to understand the income limits for claiming them.
You’ll also want to structure your finances and investments strategically to help minimize taxes. Consider hiring a tax professional to help you navigate the tax code and identify strategies for reducing your tax bill. A wealth professional can also help you develop a comprehensive capital gains management plan as well as optimizing your investment asset allocations. We covered these any other tax efficient strategies for wealth planning in our blog series last year. Be sure to check it out for additional insights.
Striving for financial health definitely isn’t a set it and forget it endeavor. You’ll need to regularly review your progress and adjust your plan as needed to ensure you’re on track and your plan still aligns with your financial priorities. Regularly review your financial goals to ensure that you are still on track to reach them. Consider factors such as your current income, expenses, savings rate, investment returns, and changes in your life circumstances to see if any adjustments are needed.
You’ll also want to regularly evaluate your risk tolerance to ensure that your investments still align. As you age, progress in your career and develop new investment goals, you may find that your tolerance for risk also changes. personal circumstances. Finally, consider seeking the advice of a financial professional to help you review your retirement progress and adjust your investment plan as needed. He or she can provide guidance on investment strategies, tax-efficient strategies, college affordability, and retirement planning, among other things, and direct you to more specific resources as the needs arise.
Final Thoughts On Six Principles Of Financial Health
Whether your aim is an early, traditional retirement or simply to have more flexibility in your later work years, the earlier you start the better positioned you’ll be for success. And even if you’re getting started too late to retire at age 35, adhering to the principles outlined in this article will help build a strong financial foundation for anyone.
Remember, pursuing financial freedom is a highly personal goal, and what works for one individual may not work for another. It’s important to work with a financial professional to create a journey that’s right for you. For More Information About Our Wealth Management Strategies for Young Professionals, Contact Our Team Of Financial Advisors Today!
Wells Fargo Advisors and its affiliates do not provide legal or tax advice. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFAN), Member SPIC. Magellan Financial Robert Cahill Jonathan Soden Heirloom Wealth Advisors Wells Fargo Advisors Financial Network is a separate entity from WFAFN.