In this month’s edition of “Money Matters,” Scott defines financial independence and discusses steps people can take to achieve and maintain financial independence.

Money Matters: Financial Independence Transcript

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a Certified Financial Planner and Adjunct Professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. And Scott's joining us now by phone. Welcome, Scott.

0:00:24.1 Scott: Good morning, CJ.

0:00:25.2 CJ: Nice to chat with you today. So, you said that in honor of Independence Day you wanted to talk about financial independence and how do you define financial independence and how would you encourage us to think about it?

0:00:41.1 Scott: Yes. Well CJ, I hope you had a wonderful 4th of July and got to enjoy yourself as well?

0:00:46.7 CJ: Absolutely.

0:00:48.1 Scott: So, this idea of financial independence. It sounds great to most people. The idea that you've got yourself in a position where getting up and going to work is optional. What could be better than that right?

0:00:58.7 CJ: Right.

0:01:00.8 Scott: I have to say first off, I love the idea myself, but I do think and I caution people. It's part of my own plan health allowing but I think there can be real value financial and otherwise from having some form of continued employment. We've seen many times because even a modest income can go a long way towards helping to secure someone's financial picture. I think there's a lot of other potential benefits being engaged and working with others and yes actually having a positive reason to get up and get out of bed. But that aside whether it's being liberated from King George or maybe George the boss. The idea of independence can be quite inspiring and just in a nutshell I think how do we think about it? It's the idea of when your resources maybe some streams of income, social security, some folks have pensions things like that and other assets, what you have there is enough to cover your lifestyle and work becomes optional. So I've worked with many many people over the years in financial planning sessions and this is really... Actually a top three, if not the number one question people have is when can I be done or even for those who are younger and maybe excited about building their careers and retirement can seem too abstract and far off it's hard for them to pinpoint.

0:01:44.9 Scott: It might not be retirement but they really like knowing when they've achieved independence and are financially self-sufficient and work becomes optional. So, I think it is a worthwhile goal and there's a couple maybe just big cornerstone steps to work towards that.

0:02:40.7 CJ: Well, let's talk about those steps. What can you recommend for us to take towards achieving or maintaining financial independence?

0:02:50.0 Scott: Yes, well, first of all, CJ, as always, our conversation here is just a general discussion. We encourage listeners to do their own research seek their own expert advice and figure out how any of this might apply to their situation, but the first one is fairly obvious I think. We've talked about ideas related so many times but building your assets. You have people at work, you and I are working, we get up, we're trading time and effort for money, we're going to get to that point where we have money at work for us as well, putting aside excess dollars so that those dollars are in investments and they're growing and the money is working for you while you sleep as they say. It's a concept.

0:03:31.2 Scott: So building and accumulating resources some of the best places, your employer retirement plans, IRA accounts, for some people it might possibly be things like business or rental assets, many approaches but really one of the best ones is buying a very broadly diversified high quality stock portfolio where you're buying ownership in many businesses. Not all of them are going to make it or going to work out but the important thing is you cast a wide net and you catch and harness the power of our economy as it moves forward. And capital appreciation will build over time, dividend is being paid out for you. And you and I have talked about many of these wealth-building methods quite a bit over the past few years, but I think that's the first step. As we talked about when we were talking about the great old classic book The Richest Man in Babylon. Start thy purse to fattening is the first step.

0:04:24.0 CJ: Okay. All right. So, building assets and having them work for you, that's a key step but what's the next step?

0:04:31.0 Scott: Yes. So, the building assets that seems obvious. To me that's what most people think of. But even more important is managing the ratio of your expenses, your lifestyle, your budget to those assets and not just the assets but other expected income. So, there's a saying I've heard in the fitness world that I really like, that I think applies to this and that is "You can't outrun the fork" meaning that if you want to be fit and lean you can't out-exercise a bad diet and to tell you CJ this is really bad news for me. I do like to exercise. The problem is I really like to eat and so. Yes, I'll burn some calories, I'll work out, then I'll blow it all with a big cookie bin right before bed. So but the financial equivalent is that it's extremely hard to out-earn either by working or through your investment accumulation big spending habits and I've seen people with eye-popping incomes really impressive portfolios who are nowhere near financial independence because they're spending, what we might sometimes call their burn rate, is so high so they might be affluent and have the flashy lifestyle that goes along with that but they are not financial independent, they definitely need to still keep working and on the other hand, I have seen people.

0:05:49.3 Scott: I have friends, I have worked with people professionally who've had a modest income and more modest level of assets but happily achieve financial freedom and escape that tyranny of work by really keeping their budget in proportion to their assets and income and making that a priority.

0:06:07.0 CJ: Something I'm going to need to work on. Building assets so that you have money at work is important and you say that managing your outflow or the burn rate is even more important. Is there anything else that we should be thinking about?

0:06:20.5 Scott: Yes, yes, definitely. So, building assets at least is important. Being disciplined with the spending is very important in achieving financial independence, but without doubt, CJ, the most important step and this is the real big picture is to decide that you want to achieve financial independence. To make that decision, to make it a goal and to consistently take action in that direction. Without doing this, without making financial independence a goal, it might not happen or it might not happen on a timeline that you're happy with or at the level. And so, a big part of the art and science of financial planning is how do you live your life today, do the things that you want to do, reasonably enjoy your lifestyle today but not rob yourself in the future. And reading and study can certainly help here. Clearly writing out your goals and developing a written plan whether it's something that's on the back of an envelope and it's a couple bullet points that you review or very complex multi-page written out with spreadsheets and calculations. Get started and it will help you. Surrounding yourself also with support.

0:07:43.9 Scott: So, you making yourself... The goal is really important but your partner, your spouse, study groups... I've seen some amazing things in online groups CJ and social media where people are very into this and it's almost like a hobby, financial independence and wealth building. It's amazing, you are influenced by who you're surrounded by. And, of course, I would make the pitch for a good financial advisor. It can give you a tremendous lift. So, there's many common roadblocks. People think well I don't have enough money. I don't have time to do this. I'll do it some other time, it's too complicated. You know what I say is get started no matter where you are get started. And then you just work to continuously evaluate and improve. And maybe a final thought on this. It's not just me making this up CJ it's not just my opinion. If you go out and do an online search for value of a financial plan or financial planning, there's many studies that support this.

0:08:30.2 Scott: I did a quick search and saw that a well-known one by Gallup investor on retirement optimism found that 43% of investors with a written plan are highly confident they're headed towards a comfortable retirement. Whereas 43% almost less than half without a plan feel highly confident. And another one I think is very interesting is there is a giant investment company one of the largest in the world called Vanguard. I'm sure many listeners have heard of it. I think one of the interesting things is Vanguard was founded as a DIY, do-it-yourselfer, company. It's very much based on low-cost investments. The company is owned by its own shareholders. Its own fund investors—there's no outside shareholders. So, there's not necessarily that same profit agenda that there is in other companies. Vanguard has done a study for I think it's about 15 years now called Advisors Alpha. And it's very interesting and of course I'm a fan of the study but they show that a good advisor could add about 3% to your overall gains per year through tax planning, through coaching, through writing a plan, through tax optimization. Yes of course, investment work as well. So many things that you can do there to get started.