Beating Broke

What is Financial Independence

March 8, 2013 By Shane Ede 37 Comments

In my post “Are we Doing Personal Finance Wrong“, I talked a little bit about “Financial Freedom”. Of all the comments that the post got, that was the one thing that was mentioned most of all. Which, to me, means it bears some further discussion.

Financial freedom, or financial independence, can be defined a little bit differently depending on the person doing the defining. Like most personal finance, it’s highly dependent on the values of the person. What I define financial independence as might be a whole lot different from what you define it as. I think, no matter who is defining it, the real keystone is the word freedom or independence. We all want freedom and independence. Some autonomy from the rat race. The idea of having the financial ability to declare our independence is alluring.

What is Financial Independence, for me.

My definition of financial independence is likely pretty similar to most. In it’s most broad sense, I define it as the ability to not be swayed by financial needs. Breaking it down a bit more, it means not “needing” a job just to make ends meet. It means not “needing” a job to keep a roof over my head. It also means having the ability to take advantage of opportunities to improve my situation. Whether that means having the cash on hand to be able to buy or start a business, buy a rental property, or just take a month off to travel or learn something new isn’t all that relevant. It’s that I have that ability.

Something that needs to be said here is that at one point, not that very long ago, I thought of it as being synonymous with “independently wealthy”. Which may or may not be true depending on your definition of independently wealthy. For sure, I don’t believe that it matches up with the definition I had back then. Back then, I would have told you that independently wealthy meant retirement and not doing a dang thing. Sitting on the beach all day, every day, being utterly non-productive. That definition has changed. A lot. Financial independence, if it’s synonymous with independently wealthy, doesn’t mean that you don’t work, but that you have the financial freedom to do the work you want to do. Because you are free from the “need” part of the financial equation, you have the ability to do the work that you feel called to do without regard for how much it pays, whether it’s part-time or full-time, or whether it’s a short term project or not.

What is Financial Independence, for you.

As I mentioned above, your definition might differ slightly (or a lot) from mine. Maybe, for you, it really does mean sitting on a beach somewhere, doing nothing. Maybe it means not having to work and spending all your time volunteering instead.

However our definitions might differ is somewhat irrelevant. Our personal definitions still mean that it’s something worth pursuing to each of us. And, if our end-game is to be financially independent, I still don’t think we’re doing personal finance right. I still don’t think we’re even close. I think we need to break away from the systems we have, find the ones that work for our personal finances, and then achieve our financial independence.

Achieving your Financial Independence.

Breaking away from the systems we have for personal finance won’t be easy. Heck, our definition of financial independence will probably change along the way and require a new system again. But, achieving that financial independence should be our primary goal. Not retirement. Not our childrens’ college education. And certainly not saving up cash to pay for that big SUV. Our primary goal in our personal finance should be achieving financial independence. Once we’ve achieved that, retirement, education, and big trucks will come. And they’ll come without sacrificing anything.

The Path to Financial Independence.

Much like our definitions differ, so too will our path to financial independence differ. Undeniably, I think that the first landmark on that path has to be the complete and utter destruction of all debt. Before we worry about anything else, we have to be free of the yoke of debt. Joan Otto, the community manager at Man Vs. Debt, wrote about this recently specifically referencing retirement accounts. Take a minute or two and read it. Then, pay special attention to the comments. Aside from a few people, almost all of the comments are people who think she’s off her rocker.

Is she off her rocker? Or is she just developing a new system for her personal finance that leads towards her financial independence? It takes a certain amount of courage to admit to the thoughts and ideas that she does in that post. (I should know, see: Why I’m Withdrawing from an IRA) But, then try and remove what you’ve been taught about retirement and saving from your mind for a minute and re-read section 4 of her post. She’s not being irrational. In fact, I’d argue that she’s being overly rational. I think I’ll have to write more about that in another post, but the Vulcan, logic loving, part of me thinks she is right.

Our paths to financial independence will vary. Some of those people in the comments of Joan’s article will achieve it using the current system. Many of them will have started saving early, and found ways to drastically save. But, will they have the liquidity available to make a move on an opportunity in the 30’s, 40’s, or even 50’s? Or will it have to wait until they’re past “retirement” age and have penalty free access to their nest eggs?

Find your path. Start the journey, and achieve your financial independence.

Have you already started on your journey? Have you found your path? Have you achieved your financial independence? There are many of us here, including myself, that are new to the journey or haven’t even begun yet that could benefit greatly from your story. Will you share it with us?

img background credit:Fireworks at Swindon by Stephen_Gunby, on Flickr

Are We Doing Personal Finance Wrong?

March 4, 2013 By Shane Ede 40 Comments

As you can probably imagine, as a personal finance writer, I think about personal finance quite a bit. Often enough that I write several articles a week on the subject. I don’t consider myself an expert, but I do think that I know a great deal about it. And I’m beginning to wonder if we aren’t going about it in the wrong way.

The problem with Personal Finance

We rail on the Joneses constantly. That, by itself, isn’t really a problem. The Joneses just aren’t very smart with their money. But, for all that we rail on them, we spend an inordinate amount of time trying to find ways that we can go about having things that are similar to what they have for less money. And that is the problem. The Joneses have the fancy cable television package? Try Netflix, Hulu, or Amazon Prime! The Joneses have a fancy new car? Try a newer off-lease car! The payments are half what they pay, and the car is almost as nice! The Joneses have a fancy house? Try making it affordable by DIY, gardening, and renting out a few of the rooms!

We aren’t the Joneses. We know that. We know that we really don’t want to be the Joneses. But, some part of our natural tendencies somehow pulls us back to them, time and again. We strain hard to become less like them, and find ourselves back where they are. That is the problem with personal finance.

Are we doing personal finance wrong?

Maybe the issue isn’t the Joneses. Maybe, just maybe, it’s us. I alluded a little to this recently (The Joneses and Jealousy), when I suggested that our tribal human history pulls us towards the leaders of our “tribe”, and that we should be looking for a new “tribe” that espouses the same values that we do. I think that we all end up returning to our Joneses because we haven’t fully made that switch yet. Because we’re afraid of what the rest of our tribe might think. What our families might think. Heck, what our spouses might think. And, maybe all this frugality and saving aren’t really what we’re looking for. After all, where does that lead us? A cheaper version of the Joneses lifestyle? Isn’t that what we’re pushing away from?

Changing personal finance

I think what we are really looking for, and what we are really jealous of the Joneses for is financial freedom. It may only be perceived in the case of the Joneses, but it’s still there. Freedom, financially, to be able to do the things we want to do, go the places we want to go, and have the things we want to have. We emulate those who have those things without giving much thought to how they got there. Maybe the Joneses did it through a boat load of debt. We rail against debt. Which only gets us so far. So many of us struggle with even that part of it. I know I have, and sometimes still do. But, I can tell you with certainty, that had my perception of debt not changed drastically from where it was when I began this journey, I would be in a far worse place than I am now. But, even that is only one small change in the way I think about personal finance. Our entire perception has to change.

What’s the personal finance endgame?

What is it that we are really looking for. We decide we want to change how we handle our finances, abandon the way of the Joneses, and make our way to a better life. But, what is that better life? If you’re thinking that a secure retirement is it, I think you’re wrong. I think there’s a better way. There has to be. HAS TO BE. There has to be a better way that doesn’t involve working for 40+ years, pinching every penny, saving every dime, only to end up at 65 or 70 with enough money to make sure you can pay for the medical bills your advanced age brings with it without having to live on welfare. That can’t be all there is to personal finance, is it? My word. What if you retire at 65, and die at 66? I submit to you, that what we are really looking for is personal finance independence. We don’t want to have to count on a job. We don’t want to count on a paycheck to (hopefully) cover the bills this month.

What is personal finance independence?

Here’s the tricky part. I think it’s going to vary based on the individual. What personal finance independence means to you is likely going to be a bit different from what it means to me. Take, for example, Jacob. Maybe you’ve heard of him, maybe you haven’t. He writes a blog about early retirement. He wrote a book all about it. It’s got more scientific content than some of the science books I remember from school. They guy is crazy smart about the subject. But, when he says it’s early retirement extreme, he’s dead right. If going to the measures that he went to in order to retire early is what is required, count me out. In fact, it seemed for a long time that it was either extreme or not. Nobody had really talked much about the in-between area. Enter Mr. Money Mustache. He, too, retired early. And, while he has his extremities, it’s not quite the same thing. It’s different for each and every person. What one person thinks of as retirement isn’t what someone else will think of. Heck, most of us have been so pre-conditioned to think that retirement should consist of afternoons golfing followed by bingo down at the VFW that it’s no surprise that we scoff at people like Jacob and MMM.

How do we get there?

Oh. Well, the truth is, I just don’t know. I think that, with a little help from the Jacobs and MMMs of the world, and a little trial and error, we can find our own personal finance independence. I think that we can take what we learn, adapt it to our lives, and make something brilliantly wonderful out of it. I know we can. We just have to try. We just have to change personal finance as we know it, and embrace something better.

Why I’m Withdrawing Money from an IRA

March 1, 2013 By Shane Ede 15 Comments

I’ve been going back and forth with myself over whether I should write a post about how I am withdrawing money from an IRA. It’s not something that is recommended, and certainly not something that most people who write personal finance blogs talks about. In fact, it’s somewhat embarrassing that I am doing it at all. And, I had decided that I might not talk about it. Until I saw this post on my friend Sandy’s blog, Yes, I am Cheap. For those of you who won’t click through the link, I’ll give you the quick rundown. One of Sandy’s readers lost her job a while back. Since then, the reader has used all of her savings to pay bills, and her unemployment status is in a sort of limbo. The reader has 21k in her 401(k), and she asked if she should take that money out to help pay the bills until she can find work.

What that post did for me, and the reason that I’m writing this post, is remind me that I’m not an island in the personal finance ocean. When I started this blog, I didn’t have a 401(k), or really even know what one was. I was up to my eyeballs in debt, and contemplating bankruptcy. As I searched the internet for information about that and other personal finance related topics, I decided that I wanted to share what I was learning, in an effort to help others who might be in a similar situation. Sometimes, when writing post after post, here, I forget that I’m not the only one who has the same questions, or who is in the same situation. There are other people who’s circumstances might make them cringe when bills show up at the door. It’s for those people that I write here and share here. And it’s for those people that I am writing this post. I think this may be the longest introduction to a post I’ve ever written. 🙂 Let’s get on with it, shall we?

Those of you who are regular readers will recall that I quit my job in November of 2011. It was a decision that I had been coming to for many months, and a decision whose timetable was advanced by several situations at that job. All of those situations made it very unhealthy for me to be there anymore. So, I quit. I didn’t do much planning, and hadn’t done much saving. I had to quickly cancel the mortgage paperwork we had been trying to push through as we wouldn’t be able to afford the house we had been planning to buy. All in all, it wasn’t the greatest idea, financially. Emotionally and mentally, it was the best idea I’d had in a long time.

Why I needed to withdraw from an IRA

I then spent about 7 months working part time while trying to rapidly build my blogs, here and elsewhere, to a point where they might sustain my without having to get another full time job. I didn’t succeed. And I ran out of savings about a week and a half after I had taken a new full time job. It’s a good job, and I enjoy it quite a bit. But, it doesn’t pay nearly as much as my other job had. When I started there, our finances were still bleeding. They continued to as we continued to try and make ends meet.

Sometime last fall, it became apparent that the ends were going to begin to not meet. If you’ve ever been there, you know that looking forward to a month where you might have to decide which bills to go delinquent on isn’t a very comfortable spot to be in. It became very apparent, after several hours going over our budget, that we had a cash flow issue. Too much going out, not enough going in. The problem wasn’t with discretionary spending, however, although we did find some places to cut there too. The problem was that we had too many payments taking up too much money. If we wanted to survive, financially, we needed to find a cash flow solution.

I should say that it wasn’t an easy decision to tap into my IRA. At the time, I’d only recently rolled my 401(k) from my old job into it, so I’d just taken a hit by doing that. But, I needed a way to create some cash flow, and an infusion of money would do it. So, I called my adviser and had him issue a check for the amount I needed.

It’s my money.

There will surely be a few naysayers who come upon this post. Most of them will tell me (and you) that what I did was a terrible thing to do. That I’ve permanently set myself back for retirement, and that there had to be other ways to accomplish the same thing. But, there weren’t. Trust me when I say that I know my finances.

Yes, it will set my retirement saving back by quite a bit. Yes, I’ll have to save more in the future to achieve any sort of retirement nest egg. I know all that. But, I feel that remaining current on my bills, and not having to potentially declare bankruptcy is more important than that.

There’s also a rebellious part of me that would like to just say that it’s my money and I’ll do with it what I want. 😉 In all honesty, it is my money. Just so much as the money in your IRA or 401(k) is your money. And, in my opinion, our money is only worth anything when it is improving our situation. My situation needed improving now, not in 40 years. (not that it likely won’t need improving then too)

Using the withdrawal from my IRA

For those of you who are thinking to yourselves that if I made a withdrawal from my IRA, it’s ok for you to do it too, just stop. This was a last ditch effort to stop us from going into delinquency on several accounts. Would it have bankrupted us eventually? Maybe. I’ll never know, and I didn’t want to find out. But, what I will tell you is it took a good deal of thought to make the decision, and it took a good deal of determination to use the money properly when I did get it.

When the check arrived, I cashed it and went to the casino.

Just kidding! Ya’ll were looking so dang serious! I deposited it. Directly into our checking account. During the decision process, I’d taken a full audit of our bills each month and determined the ones we would need to, and could, eliminate in order to get ourselves back on the right track. So, even before I asked for the withdrawal from my IRA, I had a list of the things that I was going to pay off. Over the next several weeks, as those bills came in, I send them payment in full. Until all but one of them was completely paid off. The one remaining was a bonus bill. I didn’t have enough to pay it off in full, but was hoping that I could get them to negotiate the amount down. I wasn’t able to. So we still have that payment. But, once it was done, we eliminated several hundred dollars worth of monthly payments. More importantly, we cut our monthly payments by enough that we have enough each month to pay the remaining bills while still having enough left over to pay a bit extra. We’re on the right track again, and making strides to keep it that way.

Would you withdraw from your IRA?

There are only a handful of reasons that most people will tell you that making a withdrawal from an IRA is a good idea. Most of them involve exemptions from the tax penalty. Would you ever take a withdrawal from your IRA? In my situation? In any situation?