“Financial freedom is available to those who learn about it and work for it.” — Robert Kiyosaki
Managing your personal finances is a lifelong journey, and there are sure to be ups and downs throughout. During each stage of life, those challenges and opportunities will probably look quite different from one another—financial independence isn’t about expecting a sudden inheritance; it’s about adopting habits that help you stay independent after a sudden windfall or years of working toward building your own wealth.
According to the Financial Times, 70% of “wealthy families lose their wealth by the second generation.” So, whether you’re hoping to be the starting point of generational wealth or you’re expecting to inherit the responsibility, today’s subject is for those hoping to make sure it lasts through prudent, lifelong financial habits.
What’s the difference between financial security and financial independence?
While the two concepts are closely related, they’re not identical:
- Financial security: debt-free, comfortably meets monthly expenses, and contributes to their savings while also being capable of covering emergency costs without the fear of running out of money now or in the future.
- Financial independence: includes all of the traits of financial security while also being able to pursue and sustain your desired lifestyle based on the wealth you’ve accumulated—traditional 9-to-5 paychecks, at this point, become optional.
Again, you might not be able to gain financial independence overnight, but learning how to prioritize financial security with whatever wealth you currently have can prepare you for eventually becoming financially independent.
How does financial security change throughout life stages?
Priorities evolve as you move from one stage of life to the next:
Young adults: establishing a foundation
Developing sound financial habits during your 20s and 30s can help you get ahead and last a lifetime if you stick with them. They lead to more informed budgeting decisions to avoid unnecessary debt, build good credit, and slowly establish a safety net for the future.
The groundwork you do at this stage will help set you up for future growth and stability.
Create a budget
A budget is essentially a plan to manage your money. Some methods are more involved than others, but in most cases, they involve tracking incomes, expenses, savings, and investments. From there, you can see what “job” every dollar is performing and if they could be put to better use elsewhere.
Even if you don’t have much disposable income or high levels of debt, both will probably grow over time. Learning how to keep on top of your finances now will be much easier than trying to learn once you get promoted and take out a mortgage.
Build good credit
Your credit score will play a role in some of life’s biggest financial decisions. It’s essentially a measurement of how trustworthy lenders see you as, and the better it is, the more likely you are to receive favorable terms.
Building a good credit score—like any reputation—takes time. Use your credit cards responsibly, pay bills on time, and don’t miss minimum payments. If possible, keep your credit utilization rate (CUR) on the lower end. For example, if you had a credit limit of $5,000 and had a balance of $500, your CUR would have been 10% before paying it off. Some experts suggest keeping it below 30% as a rule of thumb, but generally speaking, the lower it is, the better off your credit score will be.
Start an emergency fund
Your emergency fund should be able to absorb three to six months’ worth of living expenses, including rent, food, car payments, and other essential costs. If you become unemployed, it’s a safety net to help you get back on track. More commonly, it’s meant for unexpected costs, like medical bills or other emergencies.
As we mentioned earlier, expenses tend to go up throughout life, so starting your emergency fund during your younger years is recommended. Raising kids, for example, can cost over $20,000 a year in Dallas, Texas, according to a report put forward by SmartAsset.
Middle-aged: building your wealth
During your 40s and 50s, you’ll likely be focusing on progressing your career and protecting everything you’ve built for your family. It might include buying a bigger home to suit your growing family, or it could involve saving for your children’s education.
This stage of life builds off your previous success and helps you accelerate it with smart decision-making to prepare for retirement.
Responsible homeownership
Whether it’s a starter house or moving into a larger home to accommodate your growing family, homeownership is a huge milestone for every American. If you established good credit in your younger years and made a substantial down payment, your initial investment in responsible financial planning should assist with your mortgage payments.
With proper budgeting, you might even be able to pay off your mortgage faster through biweekly payments, rounding payments up, making extra principal payments, or even using lump sums when available. Further, if you need a sudden, critical repair—if a pipe bursts, for example—your emergency fund will help you cover it without eating into long-term savings.
Saving for education
Post-secondary education can cost tens of thousands of dollars, but it can significantly increase your children’s earning potential—according to Forbes, the median lifetime earnings for a high school diploma holder are $1.6M, whereas those with a bachelor’s degree earn nearly $2.8M.
Higher education isn’t for everyone, nor is it a requirement to lead a fulfilling, successful life, but what’s important is leaving as many options open as possible for your children. A 529 plan is a state-sponsored investment account that can be used to cover qualified education expenses, including college, K–12, and apprenticeships. They can enjoy the benefits of tax-deferred growth and help minimize the need for costly tuition loans that can turn into decades of debt.
Retirement planning
With an established emergency fund, education savings, and your mortgage payments all planned for, you can begin funneling more capital towards funding your ideal retirement through tax-advantaged accounts like your 401(k) or IRA.
Retirement isn’t just an event; it’s a whole part of life that needs to be accounted for. Medical bills might increase, or you could finally travel with your newfound time. While certain expenses start to creep up, your income will likely diminish without a salary. Thankfully, your portfolio can help—diversify your investments and start considering an income-focused investment strategy to support your new stage of life.
Seniors: making it last
People typically stop prioritizing growth and accumulation once they turn 60, and their attention often turns to wealth preservation, estate planning, and ensuring their financial plan is built to last.
At this point, most of the “hard work” is done, and if you were diligent throughout life, now’s the time to enjoy the benefits.
Social security benefits
During your career, a portion of your paychecks goes towards social security. Once you’re 62 years old, you can start claiming those lifelong benefits to supplement your income. That being said, many choose to wait before they start taking social security checks because it can permanently increase your monthly distributions by 5% to 8%, depending on your age.
Ultimately, this comes down to your life expectancy, immediate needs, and other income sources. There’s nothing wrong with either choice—what matters is optimizing these benefits within the context of a wider, more holistic financial plan.
Estate planning
Transferring wealth can be costly, especially if it’s not planned out accordingly or taking advantage of tax-efficient strategies. For those hoping to leave an enduring legacy and make a long-term difference for their families, estate planning is crucial.
In our experience, the “best” estate plan is subjective, and instead of focusing exclusively on certain pieces of advice that might work for someone else’s situation, you should plan around your own values. Sit down with your advisor, take inventory of your assets, discuss your wishes, and come up with a plan that makes each piece work together towards the bigger picture—crafting your legacy.
Portfolio adjustments
Work with an advisor who regularly rebalances your portfolio to better serve your needs. Equities certainly have the potential for growth, but given all the planning that’s seen you through to retirement, growth might not be the priority anymore.
At this stage of life, our clients tend to derisk their portfolios and transition to an income-oriented strategy. Retirement is meant to be enjoyed—not only can reliable fixed income securities help you do that, but highly volatile investments can easily distract you from simply enjoying retirement as it was intended to be.
How an advisor helps
As we’ve seen today, being financially secure isn’t an isolated event, and it evolves alongside your situation. Financial independence is based on these same best practices, and preparation matters.
People have different priorities, opportunities, hardships, and values—if you receive an inheritance or sell your successful business, they won’t suddenly go away; they’ll simply adapt to your circumstances. As SEC-registered investment advisors, we’re held to the fiduciary standard—a legal obligation to consistently work in your best interest—and our services are designed to help you move through life with a financial plan that adapts to your evolving needs.
We aim to identify your goals, understand the motivations behind them, and develop a strategy to make them a reality. As your financial steward, our goal is to provide you with the necessary tools, confidence, and advice to pursue your financial goals with clarity and support.
Whether you’re inheriting, accumulating, preserving, or distributing your assets, we’ll be there to support you every step of the way.
This material is provided for informational purposes only and does not constitute personalized investment or tax advice. Advisory services are offered through Promus Advisors, an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. All investments carry risk, and past performance does not guarantee future results.