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Strategic Financial Planning for Financial Independence

by Bethany
strategic financial planning for FI

Financial independence is the dream, but getting there requires laying some groundwork. You’ll need to define your dream, your values, and your budget over a longer period of time before you can begin to make meaningful progress. Here are some ways you can implement strategic financial planning for financial independence. 

Disclaimer: The information contained in this article is the opinion of the individual author based on personal observations and years of experience. The author has used its best efforts in preparing this content, and the information provided herein is provided “as is.” I am not a financial planner or financial advisor as a professional. These are things that have worked for me, but your situation may be different so enlist the help of a credentialed advisor if you want investing advice. 

What is Financial Independence? 

The official definition of Financial Independence (FI) is having enough income to pay for your living expenses for the rest of your life without having to work full time.

That said, financial independence means something different to everyone. Some people achieve this through saving and investing over many years, while others build successful businesses that can generate passive income. Some will consider themselves financially independent once they’re able to walk away from a job they don’t like. Others want enough money to pay their bills in perpetuity.

Why FI? 

Ask yourself, ‘Why do I want to be financially independent?’ 

FI takes time and dedication to achieve. If you don’t have a strong ‘why,’ you’re going to have a hard time sticking to any financial plans you may create. Without the proper motivation, life is likely to get in between you and your goals.

Everyone will have a different answer to this question, but most answers boil down to three basic concepts:

  • Freedom.
  • Flexibility.
  • Financial security.

You may want flexibility to travel whenever you want. Or you may want more flexibility so you can spend more time with your grandchildren rather than working a 9-5. Or you could be pursuing greater freedom so you have the power to walk away from situations you don’t like in your personal and/or work life. 

strategic financial planning

Financial freedom gives you the ability to do whatever you want!

Finally, it could be financial security so you don’t have to deal with the anxiety of wondering how you’re going to cover the mortgage next month.

Whatever your ‘why’ is, it’s important. It’s what will keep you on track as you set strategic financial planning goals.

How to Create a Strategic Financial Plan for FI

Now that you know why you’re pursuing FI, you have to sit down and figure out the nuts and bolts of ‘how.’ 

Know Your Current Expenses in Detail 

To calculate how much you need to save to achieve FI, you will need to know how much you need to live on. A great way to figure this out is by first looking at your current expenses and spending habits in detail.

If you’re super frugal and have extraordinary innate financial management skills, you may look over your bank and credit card account statements, finding that your spending is exactly in line with your needs and values. There is no fat to trim.

For most people, though, you’ll likely be surprised by the percentage of your budget that’s spent on things that aren’t actually important to you. Most of us do some type of unconscious spending, and unless we purposefully seek the behavior out, it’s hard to identify and change it to better align with our true values. 

The money you save by cutting expenses can then be applied towards your goal of financial independence.

Predict Your Future Expenses 

Knowing how much you need to get by this year is one thing. But as you age and your family situation changes, your budget will likely change, too. 

Project your future expenses, remembering to include these costs in your calculations:

  • Inflation.
  • Costs of having a family if that’s on your list.
  • Healthcare needs as you and/or your family members age. 
  • Expenses related to whatever you plan to do with your time once you achieve financial freedom. Examples include travel, startup costs for a new business, etc. 

Determine What Investments You Need to Grow 

Stashing money in a savings account isn’t going to cut it if you’re pursuing financial independence. For starters, the interest rates on most savings accounts don’t currently match the pace of inflation. 

On top of inflation eating away at your money, there are other places you can put your money that will help it grow more quickly. 

Diversifying our investments has been important for us.  I know that if one of my investments starts performing poorly, I won’t lose everything all at once if I’m are well diversified. Investments that tend to yield higher rates of return include:

  • Real estate. 
  • Tax-advantaged retirement accounts.
  • Taxable investments in the stock market. 

By diversifying and using strategic financial planning to reach our FI goals, we’re creating a secure future for yourself rather than relying on a single investment vehicle.

(Again, I am not able to give investing advice, only share what we are doing for FI) 

strategic financial planning

Index Funds

Both taxable stock market investments and some tax-advantaged retirement accounts contain index funds as an investment option. Index funds contain a little bit of ownership in a large, diversified set of companies that track a stock market index, such as the S&P 500. For this reason, some argue that particular index funds in and of themselves serve the need for diversification.

The idea with traditional index funds is that they track the market as a whole — and over long time horizons, the market has only ever gone up. This makes them a common favorite for investors looking for more stability and less speculation. As a note, we are all about VTSAX index funds, but your situation may be different so you should consult a credentialed advisor for investing advice. 

Dividend Investments

Your taxable investments may also include dividend investments. These stocks will pay you quarterly in proportion to the company’s profits. Tanja Hester and others have used them as one of their initial sources of income in early retirement, as there’s no way to defer the taxes on the payouts.

Socially Responsible Investing

You can even look at Socially Responsible Investing (SRI) as an option. SRI investments generally meet or have to report on environmental, social and governance (ESG) standards. Not all SRI investments are created equally, and it will be important to research each one to ensure it aligns with your own ethics.

If you’re feeling overwhelmed by all of your options, enlist the help of a credentialed financial planner you trust. They can teach you basic financial management skills and guide you through all of your investment options. If you are on your way to FI, it is best to find one who actually knows what FI and FIRE is and how to help you get there.

Save and Invest Your Way to Financial Independence 

You now know how much you spend and how you want to cut that spending to invest the difference. Now it’s time to put your plan in action. 

As you take your perfect-on-paper plan and apply it to real life, you’re going to hit some unforeseen bumps in the road. You’ll still have to pay off debt while saving for retirement. Anything from a medical emergency to a change in family situation could throw off your financial plans. Something as unpredictable as the coronavirus could wipe out your job. 

This is why the ‘why’ is so important. Knowing it will keep you motivated to step back up to the plate when life inevitably throws you a curveball.

Don’t Forget to Enjoy The Journey 

Life is not easy and even the best-laid plans will need adjustments along the way. But that doesn’t mean that you have to run yourself into the ground in pursuit of your goals.

strategic financial planning

We are taking our time to get to FI. We believe in balance and we don’t really hate our jobs. Our goal is to enjoy life while we are young, while still being responsible with our money. We can enjoy this journey while still implementing smart financial management to reach our larger goals.

The Secret to Strategic Financial Planning for Financial Independence

The math behind FI is relatively simple. The real secret to strategic financial planning for FI is knowing yourself and what money means to you. That means spending and investing according to your values and understanding your ‘why.’

Financial independence is the goal, but the strength of your ‘why’ will in large part determine your success. It will help you cut spending that doesn’t align with your values, allowing you to invest more and achieve your goal more quickly than you would have otherwise — even with all the bumps in the road. 

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