Financial Well-Being vs Independence

As originally appeared in The Jerusalem Post on August 6, 2022.

“I believe that through knowledge and discipline, financial peace is possible for all of us.” -Dave Ramsey

Last week the Mega Millions lottery in the U.S. had a jackpot of $1.3B. Yes, that’s correct, more than one billion dollars. It was won by a single person. Leading up to the big draw there were the usual articles about “what would you do if you won the lottery”, where random people interviewed gave the typical- quit my job, buy a new car, buy a new home- answers. The assumption is that all that money brings happiness and no more worry. The facts point to a very different picture. According to the National Endowment for Financial Education, 70% of lottery winners end up broke, and a third actually declare bankruptcy.

I bring this up because I came across an interesting article about financial well-being from Rick Kahler. Kahler, founder of the Kahler Financial Group asks, “What is financial wellbeing?” He quotes the Consumer Financial Protection Bureau’s definition, “Its definition is “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life.”

One big problem with this definition is that you could have a very large net worth yet be miserable. As soon as emotions are brought into the picture you could find someone with a low income who really enjoys life and funds it through debt would have higher financial well-being than someone with a large income. We even have a concept like this in Pirkei Avot(2:8). “The more possessions, the more worry.”

That’s why I like the term ‘financial independence’ much more. People tend to define financial independence in a multitude of ways but I am going to stick to the definition used by Wikipedia: “financial independence is having sufficient personal wealth to live indefinitely without having to work actively for basic necessities. In the case of many individuals whose financial circumstances fit this description, their assets generate income that is greater than their expenses. Under such circumstances, a person is financially independent.” No talk of enjoying life or other subjective terms. You are financially independent if your income is more than your expenses, and you don’t need to fret over basic necessities.

While many individuals believe that you need to be rich in order to be financially independent — meaning a job with a salary of $250,000 and savings of millions of dollars — in reality, you just need to be able to cover your expenses with passive income to fit the definition. It’s not all about your assets; your expenses play a huge part in the equation as well. If you scale down your lifestyle, you can achieve independence on much more modest sums of money than you ever dreamed was possible. Here are 3 tips that can help get you on the path to financial independence.

Goals

I am a firm believer that people need to set goals in order to achieve sought-after milestones. If you want to effectively lose weight, you set a goal of how much you want to lose. If you say to yourself that you want to ‘just lose weight’ without any goal of how much, you are primed to achieve minimal weight loss (if any at all). This is speaking from experience! It’s important to set a realistic date for when you’d like to be financially independent. As a guide for how much money you will need in the future, I like to tell clients that they need about 20 years’ worth of this year’s expenses to make it. For example, if you spend $30,000 a year, you will need $600,000. Now keep in mind that any pension, Bituach Leumi, or social security income that you will receive will lower the overall amount that you need. If you receive $20,000 a year in retirement income, then you will need another $10,000 as supplemental income, which means you would only need around $200,000 in savings in order to be independent.

Prioritize

You need to make saving and investing a priority. Make a habit of ‘paying yourself first’ every month. Whether you invest in real estate (where you get a monthly rent check) or you invest in dividend-paying stocks, focus on a slow and steady approach to building wealth. While not popular in an era of instant gratification, when it comes to building assets, slow and steady rules the day.

Don’t Wait

Individuals often wait to begin investing because they think that their accounts are too small. They think that if they don’t have hundreds of thousands of dollars, there is no point in investing. I recently had a meeting with a group that wanted to learn the basics of personal finance. A few of them mentioned that they have saved some money in the bank earning nothing. When I asked why they never invested the money, they said that they figured that it was such a small amount that it wasn’t worth it.

With intelligent savings and measured investing, you can be well on your way to financial independence.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.