Financial Freedom Fourth

Happy Financially Free Fourth! On a day where most American’s celebrate the countries independence, I thought I’d take this opportunity to write about Financial Independence…again.

This isn’t going to be chocked full of insights or new ideas. Today’s post is just a quick look at four steps we’re taking to achieve Financial Independence (FI). Some of the steps we’ve already accomplished, others are still a work in progress. So, without further ado, let’s dive in:

4 Steps We’re Taking to Reach Financial Independence (FI)

1 – Debt Freedom

In my History with Debt post, I outlined my journey into and then out of debt. While neither leg of the journey was particularly enjoyable, the resulting debt freedom has become the launching pad towards Financial Independence.

I’m not breaking new ground when I say carrying debt will hinder financial success. However, you don’t often think of the other areas of your life that improve when you become debt free.

It’s easier to ask your boss for a raise at work when you aren’t petrified of going into collections if you lose your job. You can begin to enjoy social outings with friends and family without the guilt of knowing you can’t actually afford it. You can take vacations without worrying about how you’ll pay for it. And you look forward to Christmas rather than dreading the dent it’s about to put in your bank account.

In addition to all of these other benefits our debt freedom laid a firm foundation on which we’re building our financial independence. Without having taken this first step, we wouldn’t be in a position to take the following steps.

2 – Maxing out the 401k

Step two of our FI blueprint is to max out our 401k. We implemented this shortly after paying off our debt. Our first full year of maxing out our 401k was in 2016.

2016 was also the first year I started tracking our net worth. It was a huge source of encouragement to watch our net worth jump up by thousands of dollars each month. (It helped that it was a great year in the stock market as well.)

Maxing out our 401k has also provided me with huge peace of mind. Simply taking this one step has essentially assured we’ll have a comfortable. Even a luxurious retirement depending on how much longer we continue to max out our 401k’s.

If we stopped contributing today and our balances compound at 7%, we’d end up with close to $2 million by the time we reach retirement age (assuming we don’t withdraw from it in that time). I sleep a lot better at night knowing that our futures are secure.

3 – Maxing out our HSA and Roth IRA accounts

At the end of 2015 we opened and then maxed out our HSA account. What kind of financial independence plan would this be if it didn’t include the Ultimate Retirement Account?

Maxing out our HSA each year serves a dual purpose. The first is it provides security from any major catastrophic medical issue. We obviously carry health insurance, but have a high deductible plan. Having a high balance in our HSA account gives us a nice cushion if a medical condition required us to meet our deductible for multiple years in a row. (We’d likely be able to cover one year with other savings at this point.)

Second, maxing out our HSA lets us realistically look at early retirement without too much worry about covering medical expenses. When we get closer to pulling the trigger on the retirement part of our FI plans, I’ll look more at the healthcare implications. (It seems fruitless to do so now as health care is an ever-changing part of the landscape.)

In addition to maxing out our 401k and HSA accounts, I’d like to start maxing out our Roth IRA’s (combined we make too much to contribute to a traditional IRA). While we haven’t been able to implement this part of the plan as of yet, I’m hopeful we’ll be able to do so soon.

In addition to being an added cushion to our FI plans, funding these IRA’s also gives us a secondary option when it comes to helping our kids with their college expenses. I don’t anticipate needing to dip into our IRA’s to help pay for college, it is nice to know that we have the option.

4 – Paying Off the Mortgage

There is some debate in the FI community as to whether paying off the mortgage is a good idea for early retirees. You have the math purists on one hand, who suggest it is mathematically foolish to pay off a mortgage at 3-4%, when you can earn 7% or more in the market.

Others feel there is an intangible element to being unencumbered by any debts that transcends mathematics. I see the merits of both arguments and believe FI can be achieved no matter what side of the fence you find yourself on.

However, personally I find myself emotionally pulled towards that latter argument despite my logical tendencies. The plan is to spend the next 3-4 years putting away the money necessary to completely pay off the mortgage. After we hit the magic number, we’ll re-evaluate if paying off the mortgage is still aligned with our goals.

Final Thoughts

There you have it. In a nutshell, the four pillars of our financial independence plan.

Have a great Financially Free Fourth!

Tell me what you think. Am I on the right track? Can you see any glaring omissions in my plan? What are the pillars of your financial plan? I’d love to hear from you, share your thoughts below:

14 Comments

  1. The 4th of July is a great day to celebrate our countries independence as well as to reflect on our individual financial independence. I follow an approach similar to your 4 steps to freedom. I wish we had a HSA, but we don’t. We put the extra money into a brokerage account. Happy 4th of July.

  2. I’m with you on paying off the mortgage. To truly see the math, purists should include the massive tax benefits of having a low-income retirement. With a mortgage to pay every month, one would likely need to generate more income from the probably taxable “mortgage payoff account” and that might push an early retiree into a higher tax bracket.

  3. Good post again MSF! This day is also a good one to all of you US dwellers to be exceptionally grateful for the strong economy you live in and the powerful vehicles mentioned above which make possible to any Average Joe to reach FIRE through just don’t being dumb and contribute to these great opportunities. Appreciate it, because these can give concrete solid foundations to your financial future. Many of us, even in the developed heart of Europe neither have them nor any easy (“achievable”?) way to reach FIRE. Happy Financially Free Fourth! 🙂

      1. I see what you did here. 😀 Lets insert random Matrix movie level epic intro video here with the text in the end: Coming soon – Fall 2017…

  4. Apart from your points, our 2 major trigger points before retirement are student loan payoff and college savings completed—college savings might mean 529s, taxable investments, or “pay as we go” with retirement cashflow.

    Happy Fourth!

    1. Thanks Dr. Curious! Those are 2 great additions to this list. Fortunately, we’ve already knocked the student loans out of our life, but this was definitely a necessary step in our journey to FI.

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