Don’t wait any longer. Take the time to sit down with the family members and discuss important financial matters.
There is rarely an ideal time to discuss important financial matters with family members. Yet, it is important to talk to your family about inheritance, guardianship, and living wills.
Important questions like the ones below never seem to get answered or considered until it’s too late:
“How will we manage the bills while Dad is in assisted living?”
“Does Dad have a durable power of attorney?”
“Where does Mom keep her will?”
“Has anybody found the key to the safe deposit box?”
Here’s a recommended list of financial topics to cover with family members.
Adult family members might use each item as a platform for discussion. Think of it as a conversation starter:
Do you have an updated will? (Attorneys usually recommend that all adults have one, not just senior family members.)
Are there specific family heirlooms you would like to give to specific family members, or is there something special you would like to receive some day? These decisions can be included in a will.
Do you have guardians for minor children?
Do you have a durable power of attorney?
Do you have a living will and/or a medical power of attorney? You have a legal right to specify the level of care you wish to receive if you are incapacitated. Most importantly, you can designate the individuals responsible for making such decisions.
Are your life insurance, pension, IRA, and annuity beneficiary designations current?
Are all your important documents in one place, such as a safe deposit box? Are designated family members’ names on the signature card?
Do you have an available list of important information? This might include bank accounts, retirement accounts, other financial accounts, life insurance policies, and other assets, as well as the names and contact information of your attorney, accountant, financial advisor, and other professionals.
Do you need to contact your attorney to update your will, or do you need to contact your insurance agent or financial advisor to review your life insurance and other financial concerns?
More Americans say they don’t feel financially secure…rising inflation and incomes that aren’t keeping pace get most of the blame. ~ Northwestern Mutual
The “magic number” for retirement has surged in recent years thanks to high inflation. According to Northwestern Mutual’s 2024 Planning & Progress Study, Americans now believe they need $1.46 million in savings and investments to retire comfortably.
Yet, this number reveals more about Americans’ anxiety than precise planning. We often overestimate our financial needs
This ‘magic number’ figure has leaped 15% in a year and an astonishing 53% since 2020. Meanwhile, retirement savings have dwindled to a mere $88,000.
The “Silver Tsunami” of retirement approaches, with millions of Baby Boomers riding the waves into retirement.
Track and prioritize your spending is vitally critical. This involves prioritizing the spending that’s most important to you and letting things that are less important fall off. You’re saying no to some things so that you can say yes to others. You might even want to employ loud budgeting.
Loud budgeting gives you permission to say no to social engagements by saying you don’t have the money for it. To put loud budgeting to work, you commit yourself and share that you’re doing it. Loud budgeting lets you spend money on true priorities while skipping things that won’t really provide or align with your values and priorities.
Loud budgeting can be a simple way to push back when you’ve spent too much. But it works best when it starts with a solid budget and a financial plan that helps you balance future goals with what you need for today. The idea isn’t to say no to everything, but loud budgeting should help you say no when needed.
Ultimately, your financial goal is to have more income coming in each month than expenses going out.
But make sure that you’re thoughtful about your spending so that you feel good about what you’re getting when those dollars leave.
Don’t sell too early. Let your winner run and experience the magic compound growth over the long term.
Capital is precious and limited, buy high-quality, avoid garbage. Doing nothing is almost always the best investing strategy and tactic. Valuing and researching great companies is also extremely important.
Sometimes, the best stock you can buy is the one you already own. Add to your winners and not your losers. Winners tend to keep on winning.
Your biggest edges as a retail investor are focus, discipline and patience, don’t waste it.
Get comfortable doing nothing. Doing nothing is almost always the best investing strategy and tactic. It’s really hard to get comfortable doing nothing, but you have to get comfortable doing nothing. Valuing and researching great companies is also extremely important.
Know what metrics to look at, and when to look at them, and when to ignore them. Study the business cycle. Know what valuation metrics matter, when they matter and when they don’t.
Personal finances come first. Make sure you have an emergency fund, because life happens.
You’re going to be wrong a lot. Get comfortable with that. If you buy ten stocks, six will be losers, three will be market beaters and one will perform extraordinarily.
Find an investing buddy, or rather don’t invest alone. Get involved in a good community of investors. Find like-minded people. The Internet makes that so much easier.
Watch the business and not the market price of the stock. What really matter in the long-term is the company’s fundamentals.
“Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time.” ~ Seth Klarman
At an early age, Billionaire and Baupost Capital CEO Seth Klarman was fascinated with business and making money. By the age of ten he was investing in the stock market.
During Klarman’s time in the investing world, he’s been able to compound capital at a 20% annual return.
In 1991 Klarman wrote his book, Margin of Safety, and there have only been 5,000 copies printed. As a result of such a small supply and enormous demand, Klarman’s book is very expensive reselling for $1,500 to $2,500.
James Clear — who writes about habits, decision making, and is the author of the #1 New York Times bestseller, Atomic Habits — summarizes the book, Margin of Safety, as follows:
“Avoiding loss should be the primary goal of every investor. The way to avoid loss is by investing with a significant margin of safety. A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and make mistakes.”
2010 Baupost Capital’s annual letter
Here is an excerpt from the 2010 annual letter of Baupost Capital written by Seth Klarman. He was shocked at how quickly investors have returned to the risky investing and financial behaviors that got them in trouble during the 2008 Financial Crisis;
1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected (the Black Swan) event, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can and will be far worse.
2. When excesses such as lax lending standards become widespread and persist for some time (e.g., ninja (no income, no job and no assets) loans), people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.
3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.
4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.
5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.
6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.
7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.
8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.
9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.
10. Financial innovation can be highly dangerous, (think cryptocurrency) though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.
11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.
12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.
13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.
14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.
15. Many leveraged buyouts (LBOs) are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.
16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.
17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.
18. When a government official says a problem has been “contained,” pay no attention.
19. The government – the ultimate short-term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.
20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.
A recession is a period of economic contraction. Recessions are typically accompanied by falling stock markets, a rise in unemployment, a drop in income and consumer spending, and increased business failures. ~ SoFi
Liz Young, Head of Investment Strategy at SoFi, talks recession.
💥New blog post: "Boil, Boil, Toil and Trouble" on what to do if a recession materializes. Yes, I know GDP was positive today. Let's just be ready if it turns the other way in the next few quarters. https://t.co/m8ppgJiPWp
A recession describes a contraction in economic activity, often defined as a period of two consecutive quarters of decline in the nation’s real Gross Domestic Product (GDP) — the inflation-adjusted value of all goods and services produced in the United States. However, the National Bureau of Economic Research, which officially declares recessions, takes a broader view — including indicators like wholesale-retail sales, industrial production, employment, and real income.
Recessions tend to have a wide-ranging economic impact, affecting businesses, jobs, everyday individuals, and investment returns. But what are recessions exactly, and what long-term repercussions do they tend to have on personal financial situations? Here’s a deeper dive into these economic contractions.
It’s worth remembering some investments do better than others during recessions. Recessions are generally bad news for highly leveraged, cyclical, and speculative companies. These companies may not have the resources to withstand a rocky market.
By contrast, the companies that have traditionally survived and even outperformed during a downturn are companies with very little debt and strong cash flow. If those companies are in traditionally recession-resistant sectors, like essential consumer goods, utilities, defense contractors, and discount retailers, they may deserve closer consideration.
During a recession, it’s important to remember two key tenets that will help you stick to your investing strategy.
The first is: While markets change, your financial goals don’t.
The second is: Paper losses aren’t real until you cash out.
The first tenet refers to the fact that investors go into the market because they want to achieve certain financial goals. Those goals are often years or decades in the future. But as noted above, the typically shorter-term nature of a recession may not ultimately impact those longer-term financial plans. So, most investors want to avoid changing their financial goals and strategies on the fly just because the economy and financial markets are declining.
The second tenet is a caveat for the many investors who watch their investments — even their long-term ones — far too closely. While markets can decline and account balances can fall, those losses aren’t real until an investor sells their investments. If you wait, it’s possible you’ll see some of those paper losses regain their value.
So, investors should generally avoid panicking and making rash decisions to sell their investments in the face of down markets. Panicked and emotional selling may lead you into the trap of “buying high and selling low,” the opposite of what most investors are trying to do.
Stay the course and stick to your financial plan to survive a recession!
Inflation is measure of the increase in the cost of living which can erode the value of your money, and more importantly – the goods, services, rent and mortgages that you can purchase with that money.
The U.S. Bureau of Labor Statistics showed that falling gasoline prices helped lead to a second consecutive lower annual U.S. inflation reading, but the consumer price index still edged up by 0.1% in August, contrary to the 0.1% drop expected by economists polled by The Wall Street Journal, writes MarketWatch. The core Consumer Price Index (CPI), which strips out food and energy prices rose by a much sharper 0.6%.
The year-over-year food index component of the CPI was up 11.4% in August. Higher food prices “reflect very tight global supply/demand dynamics,” says Jake Hanley, managing director and senior portfolio strategist at Teucrium. Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.
Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.
“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”
“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”
“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated.” — Patrick De Haan, GasBuddy
Diesel and natural-gas prices have remained high, despite a retreat in recent weeks, and fuel costs are a key component when it comes to growing the food the nation needs. Diesel engines power about 75% of U.S. farm equipment and transport 90% of farm products, according to data from the Diesel Technology Forum.
Diesel “will likely remain at historical premiums to gasoline—and could see more disconnect if this winter is cold due to diesel and heating oil being essentially the same product, keeping demand elevated,” De Haan says.
Wall Street economists see the U.S. Federal Reserve lifting interest rates higher than they previously expected following the latest U.S. consumer price inflation data. Economists at TD Securities said they now expect the Fed to raise its benchmark rate by 75 basis points next week.
“A soft landing is impossible. The economy is going to go into a recession fast. You’re going to see the economy just screech to a halt. That’s what the Fed needs to do to get inflation down.” ~ Mike Novogratz, Galaxy Digital CEO
The causes of recessions can vary greatly, according to the FinTech company Sofi. Generally speaking, recessions happen when something causes a loss of confidence among businesses and consumers. The recession that occurred in 2020 could be considered an outlier, as it was mainly sparked by an external global health event rather than internal economic causes.
The mechanics behind a typical recession work like this: consumers lose confidence and stop spending, driving down demand for goods and services. As a result, the economy shifts from growth to contraction. This can, in turn, lead to job losses, a slowdown in borrowing, and a continued decline in consumer spending.
According to SoFi, here are some common causes of recessions:
1. High Interest Rates
High interest rates make borrowing money more expensive, limiting the amount of money available to spend and invest. In the past, the Federal Reserve has raised interest rates to protect the value of the dollar or prevent the economy from overheating, which has, at times, resulted in a recession.
For example, the 1970s saw a period of stagnant growth and inflation that came to be known as “stagflation.” To fight it, the Fed raised interest rates throughout the decade, which created the recessions between 1980 and 1982.
2. Falling Housing Prices
If housing demand falls, so does the value of people’s homes. Homeowners may no longer be able to tap their house’s equity. As a result, homeowners may have less money in their pockets to spend, reducing consumption in the economy.
3. Stock Market Crash
A stock market crash occurs when a stock market index drops severely. If it falls by at least 20%, it enters what is known as a “bear market.” Stock market crashes can result in a recession since individual investors’ net worth declines, causing them to reduce spending because of a negative wealth effect. It can also cut into confidence among businesses, causing them to spend and hire less.
As stock prices drop, businesses may also face less access to capital and may produce less. They may have to lay off workers, whose ability to spend is curtailed. As this pattern continues, the economy may contract into recession.
4. Reduction in Real Wages
Real wages describe how much income an individual makes when adjusted for inflation. In other words, it represents how far consumer income can go in terms of the goods and services it can purchase.
When real wages shrink, a recession can begin. Consumers can lose confidence when they realize their income isn’t keeping up with inflation, leading to less spending and economic slowdown.
5. Bursting Bubbles
Asset bubbles are to blame for some of the most significant recessions in U.S. history, including the stock market bubble in the 1920s, the tech bubble in the 1990s, and the housing bubble in the 2000s.
An asset bubble occurs when the price of an asset, such as stock, bonds, commodities, and real estate, quickly rises without actual value in the asset to justify the rise.
As prices rise, new investors jump in, hoping to take advantage of the rapidly growing market. Yet, when the bubble bursts — for example, if demand runs out — the market can collapse, eventually leading to recession.
6. Deflation
Deflation is a widespread drop in prices, which an oversupply of goods and services can cause. This oversupply can result in consumers and businesses saving money rather than spending it. This is because consumers and businesses would rather wait to purchase goods and services that may be lower in price in the future. As demand falls and people spend less, a recession can follow due to the contraction in consumption and economic activity.
How Do Recessions Affect You?
Businesses may have fewer customers when the economy begins to slow down because consumers have less real income to spend. So they institute layoffs as a cost-cutting measure, which means unemployment rates rise.
As more people lose their jobs, they have less to spend on discretionary items, which means fewer sales and lower revenue for businesses. Individuals who can keep their jobs may choose to save their money rather than spend it, leading to less revenue for businesses.
Investors may see the value of their portfolios shrink if a recession triggers stock market volatility. Homeowners may also see a decline in their home’s equity if home values drop because of a recession.
When consumer spending declines, corporate earnings start to shrink. If a business doesn’t have enough resources to weather the storm, it may have to file for bankruptcy.
Governments and central banks will often do what they can to head off recession through monetary or fiscal stimulus to boost employment and spending. “It’s hard to not underestimate the huge impact that the response to COVID-19 had on all assets. We pumped so much liquidity into the markets it was crazy, we had never seen anything like it. We were throwing trillions of dollars around like matchsticks,” said Mike Novogratz, Galaxy Digital CEO.
Central banks, like the Federal Reserve, can provide monetary policy stimulus. The Fed can lower interest rates, which reduces the cost of borrowing. As more people borrow, there’s more money in circulation and more incentive to spend and invest.
“Honestly, I [Mark Cuban] don’t think Elizabeth Warren knows that’s all what she’s talking about when she deals with this. I think she just likes to demonize people that are wealthy, and that’s fine, it’s a great political move for her, but I just don’t think that they really understand the implications of taxing unrealized gains.” ~ Mark Cuban
U.S. Senator Ron Wyden, D-Oregon., has proposed a so-called mark-to-market version of the capital gains tax. Put more simply, investors would pay capital gains taxes each and every year in which their assets go up in value, instead of only when they are sold.
Additionally, President Joe Biden wants to introduce a new tax that targets the wealthiest families in the country. It’s called the Billionaire Minimum Income Tax—except that it doesn’t only tax billionaires, it isn’t a minimum tax, and it’s not really a tax on “income” either. But it is a tax . . . so at least they got that part right!
A wealth tax would apply to assets traded in liquid markets, like stocks and bonds, and to illiquid assets like real estate, private companies and complex investments.
This tax on unrealized gains would be not only difficult to implement but also could devastate markets, especially liquid markets, where stocks, bonds and commodities trade.
The annual tax would also apply to illiquid investments like the value of a private company, real estate and other complex investments.
This means that every year, these assets need to be revalued to determine if their worth went up or down (you can write off the estimated loss if the value of the company, or real estate, if realized), but this means annual appraisals for essentially every investment you own.
Unrealized Capital Gains
Capital gains—which are profits (or potential profits) from an investment that goes up in value after you buy it—can either be realized or unrealized.
Unrealized capital gains show you how much your investment has increased in value before you sell it. Once you sell an investment for a profit, you now have realized capital gains.
The difference is that unrealized gains are only on paper—they’re not really real —while realized gains represent real money that’s in your pocket.
Whenever a stock or investment you own is worth more than what you bought it for, you can sell it for a profit—and those profits are called capital gains.
If you decide to hold on to the stock and not sell it, then what you have are unrealized capital gains. After all, you can’t just walk up to your grocery store cashier and pay for milk and eggs with your stock—no matter how much it’s worth on paper.
Problems With an Unrealized Capital Gains Tax
There are three significant reasons why any proposal to make this a reality probably won’t make it too far.
1. A new unrealized capital gains tax would be a headache to enforce.
For a tax like this to work, thousands of taxpayers would need to evaluate the value of all of their assets every single year. That raises the question: How in the world would the IRS—which is already understaffed and overburdened as it is—be able to audit all those filings?3
2. The proposed tax probably doesn’t have enough support in Congress.
“wealth tax” proposals have hit a brick wall on Capital Hill every time it has been proposed. It doesn’t look like this one is any different.
It’s important to remember, Congress treats the release of the budget from the White House more like a list of suggestions than something that’s written in stone.
3. A tax on unrealized capital gains might be unconstitutional.
It may be ok legal to tax unrealized capital gains. The Constitution makes it extremely tough for the government to impose direct taxes. In fact, Congress had to pass a constitutional amendment just to put a federal income tax in place.6
Basically, any tax that is passed must be spread evenly among every person in every state. And a tax on unrealized capital gains could be considered a direct tax because it’s a tax on the personal property of a select group of people.
The distinction between Qualified and non-Qualified dividends has to do with how you’re taxed on those dividends.
Qualified dividends are taxed at 15% for most taxpayers. (It’s zero for single taxpayers with incomes under $40,000 and 20% for single taxpayers with incomes over $441,451.)
Ordinary dividends (or “nonqualified dividends”) are taxed at your normal marginal tax rate.
The concept of qualified dividends began with the 2003 tax cuts. Previously, all dividends were taxed at the taxpayer’s normal marginal rate.
The lower qualified rate was designed to fix one of the great unintended consequences of the U.S. tax code. By taxing dividends at a higher rate, the IRS was incentivizing companies not to pay them. Instead, it incentivized them to do stock buybacks (which were untaxed) or simply hoard the cash.
By creating the lower qualified dividend tax rate that was equal to the long-term capital gains tax rate, the tax code instead incentivized companies to reward their long-term shareholders with higher dividends. It also incentivized investors to hold their stocks for longer to collect them.
Qualified Dividends
To be qualified, a dividend must be paid by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.
Importance of dividends
From 1871 through 2003, 97% of the total after-inflation accumulation from stocks came from reinvesting dividends. Only 3% came from capital gains.”
To put this into perspective, take a look at the example used by John Bogle, where he writes: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded)—an amazing gap of $32 million.” The reinvestment of dividends accounted for almost all of the stocks’ long-term total return.
Dividends are an important consideration when investing in the share market as they provide a reliable source of return while you wait.
“It’s important to view money not as something that allows you to buy things, but view it as a means of giving you more choices in how you want to live.”
Grant Sabatier, the author of “Financial Freedom”, views money not as something that allows you to buy things, but as a means of giving you more choices in how you want to live. “With every dollar you save, you give yourself more freedom and options in life,” he said. “Based on how much you have saved and invested, ask yourself, ‘How many months of freedom have you acquired?’”
Sabatier’s 7 levels of financial freedom
Level 1: Clarity
The first step is taking stock of your financial situation — how much money you have, how much you owe, and what your goals are. “You can’t get to where you want to go without knowing where you’re starting from,” Sabatier says.
Level 2: Self-Sufficiency
Next, you’ll want to be standing on your own two feet, financially speaking. This means earning enough to cover your expenses without any outside help, such as contributions from Mom and Dad.
At this level, Sabatier notes, you may be living paycheck-to-paycheck or taking on loans to make ends meet.
Level 3: Breathing room
People at Level 3 have money left over after living expenses that they can put toward goals such as building an emergency fund and investing for retirement.
Escaping Level 2 means giving yourself some financial leeway, which Sabatier notes doesn’t necessarily mean making a much bigger salary. Indeed, 31% of working Americans making over $100,000 live paycheck-to-paycheck, according to MagnifyMoney.
“Just because you make a lot of money doesn’t mean you’re actually saving that money,” Sabatier says. “Most people in this country live through debt.”
Level 4: Stability
Those who reach Level 4 have paid down high interest rate debt, such as credit card debt, and have stashed away six months’ worth of living expenses in an emergency fund. Building up emergency savings helps ensure that your finances won’t be thrown off track by unexpected circumstances.
“At this level, you’re not worried if you lose your job or if you have to move to a different city,” Sabatier says.
When calculating how much you’d need to have saved, thinking about what your financial picture might look like understand exigent circumstances, rather then your regular, everyday expenses, financial experts say.
“If you have a job loss, you’d make some changes. You’d probably cut your gym membership and get rid of your subscriptions, for instance,” Christine Benz, director of personal finance and retirement planning at Morningstar, told Grow. “Think about the bare minimum you’d need to get by.”
Level 5: Flexibility
People at Level 5 have at least two years’ worth of living expenses saved. With those kinds of savings, Sabatier suggests, you have the ability to think about your money terms of the time it can buy you: “You could take a year off from your job if you wanted to.”
You needn’t carry all of this money in cash, Sabatier notes: It could be a sum total from your savings and investment accounts. As long as you’re able to access that money somehow, if you need it, you have the flexibility to untether yourself, at least temporarily, from the workforce.
Level 6: Financial Independence
People who have achieved financial independence can live solely off the income generated from their investments, according to Sabatier’s framework.
“You generally have one of two things,” says Sabatier. “You either have a large pile of money in an investment portfolio that’s generating interest, or you have rental properties, and cashflow from the rent covers your living expenses, or a hybrid of the two.”
To get here, you’ll have to invest a high percentage of your income, which could require you to shift to a more modest lifestyle to drastically lower your cost of living. Pursuing this lifestyle requires a change in thinking away from the traditional paradigms of personal finance, Sabatier says.
“People are being taught to save 5%, 10%, 15% of their income, and maybe you’ll be able to retire when you’re 65,” he says. “Thankfully, more young people are starting to understand that if I aggressively save and invest, I can work less and have more control over my future and my destiny.”
Level 7: Abundant Wealth
Financially independent folks who live off their portfolio income rely on the “4% rule” — a retirement rule of thumb that posits that an investor can safely withdraw 4%, adjusted for inflation, from a balanced portfolio of stocks and bonds each year, and be relatively certain that the money will continue to grow and won’t run out.
Although economists debate whether 4% is the optimal number (some more conservative observers think the right figure might be closer to 3.3%), the calculation behind it serves as the basis for establishing a FIRE number — the amount of money you’d need to retire and earn an annual income you could comfortably live on.
The 7 levels of financial freedom, according to a millionaire — 50% of U.S. workers are at Level 2. (via @CNBCMakeIt) https://t.co/ze81Wvu46q
While those in Level 6 need to monitor swings in their portfolio to make sure their retirement is still going according to plan, those in Level 7 have no such worries. “Level 7 is abundant wealth — having more money than you’ll ever need,” Sabatier says. “You don’t have to worry about money, and it’s not essential to your day-to-day existence.”
