Tag Archives: Net Worth

Taxing Unrealized Gains: A Politically Dum Ideal

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“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.

References:

  1. https://www.foxnews.com/media/mark-cuban-screw-you-elizabeth-warren-declares-her-everything-wrong-politics
  2. https://www.cnbc.com/2019/04/03/top-democrats-proposed-capital-gains-tax-would-be-devastating-for-markets.html
  3. https://www.ramseysolutions.com/taxes/unrealized-capital-gains-tax

Racial Economic Disparity vs. Economic Inclusion

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“The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit.” Jerome Powell, Chairman Federal Reserve

Wealth inequality, also known as the wealth gap, is a measure of the distribution of wealth—essentially the difference between the richest of the rich and the poorest of the poor, according to World Population Review. American household wealth—the value of assets subtracted by the liabilities and debts owed—may have increased largely in the form of equity, mutual funds, and similar investments, but not equally among all Americans.

Wealth inequality is closely related to income inequality, which tracks the money people earn. However, wealth inequality includes not just income, but also the value of bank accounts, stocks and investments, homes, and personal possessions such as cars, jewelry, artwork, and other valuables. Wealth inequality is a major cause of unequal living standards in many communities.

The Federal Reserve’s statistics have confirmed the racial inequity gap related to income and wealth disparities. In its 2019 Survey of Consumer Finances, white families were reported to have had a median wealth level of $188,200, substantially larger than the median Black family’s wealth level of $24,100.

“These disparities still stand from a racism that’s systemic. It can be traced from employment to small businesses and wealth and still exist today in ways that still damage our country’s health,” Cleveland-based artist Chris Webb said.

The central bank is studying racial inequities in the U.S. economy. The Federal Reserve says it can only do so much to address earnings and wealth disparities, but feels an obligation to at least research the economic implications of uneven economic outcomes in the U.S.

While the assets of white households are equally split between real estate, equity and mutual fund shares, pensions, and other assets, the assets of other racial groups are less diversified. Almost two-thirds of Black wealth is composed of real estate and pensions, with 38% coming from pension assets alone. Similarly, 61% of Hispanic wealth and 56% of wealth from other races is composed of just these two asset types.

Additionally, according to data from the Census Bureau, 35% of white Americans are 55 and older, whereas only 24% of Black Americans are and only 16% of Hispanic Americans are. Hence, a part of the reason why wealth ownership is much lower among Black and Hispanic Americans may be due to the fact that they are relatively younger on average than white Americans. Black and Hispanic populations may be younger for a variety of reasons, including differences in life expectancy—Black Americans’ life expectancy is 3.5 years less than that of white Americans—as well as immigration trends.

The white population is more likely to be older, has earned more income over their lifetime and hold more wealth than Black and Hispanic populations.

In summary, the causes of wealth inequality in America remains deeply rooted and are systemic. And, the results of wealth inequality in America persists even today.

References:

  1. https://worldpopulationreview.com/country-rankings/wealth-inequality-by-countryhttps://worldpopulationreview.com/country-rankings/wealth-inequality-by-country
  2. https://finance.yahoo.com/news/economic-and-racial-inequalities-are-long-haul-issues-for-the-federal-reserve-220405947.html
  3. https://usafacts.org/articles/white-people-own-86-wealth-despite-making-60-population/

Budgeting 50-30-20 Strategy and Cash Flow

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Managing your money and tracking your finances is essential in building wealth, but it doesn’t have to be complicated or painful process. It can be as simple as creating a budget. And, a budget starts with listing of your income and your expenses.

One simple strategy for tracking your personal cash flow (income and expenses) is the 50-30-20 budgeting strategy. With this budgeting strategy, you divide your income into three broad categories: necessities, wants, and savings and investments, according to those ratios.

—- 50% of your income should go toward things you need

This category includes all of your essential costs, such as rent, mortgage payments, food, utilities, health insurance, debt payments and car payments.

If your necessary expenses take up more than half of your income, you may need to cut costs or dip into your wants fund.

—- 20% of your income should go toward savings and investments

This category includes liquid savings, like an emergency fund; retirement savings, such as a 401(k) or Roth IRA; and any other investments, such as a brokerage account.

Experts typically recommend aiming to have enough cash in your emergency fund to cover between three and six months worth of living expenses. Some also suggest building up your emergency savings first, but, you don’t just want to save this money.

You want to invest it and make it work for you. That means contributing to your employer’s 401(k) plan if they offer one or saving in other retirement accounts, such as a Roth IRA or traditional IRA.

—- 30% of your income should go toward things you want

This final category includes anything that isn’t considered an essential cost, such as travel, subscriptions, dining out, shopping and fun.

This category can also include luxury upgrades: If you purchase a nicer car instead of a less expensive one, for example, that dips into your wants category.

But think about what matters to you before spending this money. As research shows, how you spend is oftentimes more important than your overall income or the amount you spend in total.

Money experts suggest you spend on experiences, such as trips or classes, rather than things. “All of the best psychological research on money and happiness tell us that spending money on experiences brings more (and more lasting) happiness than spending money on material objects,” says Ron Lieber, New York Times columnist and author.

There isn’t a one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and are wondering how to divide up your income.

References:

  1. https://www.cnbc.com/2021/06/25/best-free-budgeting-tools-2021-how-to-make-your-own-spreadsheet.html
  2. https://www.cnbc.com/2021/05/11/how-to-follow-the-50-30-20-budgeting-strategy.html
  3. https://www.cnbc.com/2019/07/22/use-the-50-30-20-formula-to-figure-out-how-much-you-should-save.html

Financial Freedom

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“It’s the ability to live and maintain the lifestyle which you desire without having to work or rely on anyone for money.” T Harv Eker

Financial Peace guru Dave Ramsey proclaims that “Financial freedom means that you get to make life decisions without being overly stressed about the financial impact because you are prepared. You control your finances instead of being controlled by them.”

It’s about having complete control over your finances which is the fruit of hard work, sacrifice and time. And, as a result, all of that effort and planning was well worth it!

Nevertheless, reaching financial freedom may be challenging but not impossible. It also may seem complicated, but in just a straightforward calculation, you can easily estimate of how much money you’ll need to be financially free.

What is financial freedom? Financial freedom is the ability to live the remainder of your life without outside help, working if you choose, but doing so only if you desire. It’s the ability to have the things you want and need, despite any occurrence other than the most catastrophic of outside circumstance.

To calculate your Financial Freedom Number, the total amount of money required to give you a sufficient income to cover your living expenses for the rest of your life

Step 1: Calculate Your Spending

Know how much you are spending each year. If you’ve done a financial analysis (net worth and cash flow), created a budget, and monitored your cash flow, then you’re ahead.

Take your monthly budget and multiply that amount by 12. Make sure you include periodic expenses such as annual premiums and dues or quarterly bills. Also include continued monthly contributions into accounts like your emergency fund, vacation clubs, car maintenance, etc.

Add all these together to get your Yearly Spending Total.

Keep in mind the lower the spending total, the lower the amount of money you’ll need to become financially independent. Learn how to lower your monthly household expenses and determine the difference between needs and wants.

Step 2: Choose Your Safe Withdrawal Rate

The safe withdrawal rate (also referred to as SWR) is a conservative method that retirees use to determine how much money can be withdrawn from accounts each year without running out of money for the rest of their lives.

The safe withdrawal rate method instructs financially independent people to take out a small percentage between 3-4% of their investment portfolios to mitigate worst-case scenarios. This withdrawal percentage is from the Trinity Study.

The Trinity Study found the 4% rule applies through all market ups and downs. By making sure you do not withdraw more than 4% of your initial investments each year, your assets should last for the rest of your life.

Step 3: Calculate Your Financial Independence (FI) Number

Your FI number is your Yearly Spending Total divided by your Safe Withdrawal Rate.

To find the amount of money you’ll need to be financially independent, take your Yearly Spending Total and divide it by your SWR.

For example:

  • Yearly Spending: $40,000
  • Safe Withdrawal Rate: 4%

Financial Independence Number = Yearly Spending / SWR

  • $40,000 / 0.04 = $1,000,000

Who becomes financially free? According to most financial advisors, compulsive savers and discipline investors tend to become financially free since:

  • They live on and spend less they earn.
  • They organize their time, energy and money efficiently in ways conducive to building wealth.
  • They have a strong belief that gaining financial freedom and independence is far more important than displaying high social status and financial symbols.
  • Their parents did not keep on helping them financially.
  • They have a keen insight to recognize financial and wealth building opportunities.

Net worth is the most important number in personal finance and represents your financial scorecard. Your net worth includes your investments, but it also includes other assets that might not generate income for you. Net Worth can be defined to mean:

  • Income (earned or passive)
  • Savings
  • Investing to grow and to put your money to work for you)
  • Simple and more frugal lifestyle

Financial freedom means different things to different people, and different people need vastly different amounts of wealth to feel financially free.

Maybe financial freedom means being debt-free, or having more time to spend with your family, or being able to quit corporate America, or having $5,000 a month in passive income, or making enough money to work from your laptop anywhere in the world, or having enough money so you never have to work another day in your life.

Ultimately, the amount you need comes down to the life you want to live, where you want to live it, what you value, and what brings you joy. Joy is defined as a feeling of great pleasure and happiness caused by something exceptionally good, satisfying, or delightful—aka “The Good Life.”

It is worth clearly articulating what the different levels of financial freedom mean. Grant Sabatier’s book, Financial Freedom: A Proven Path to All the Money You’ll Ever Need, the levels of financial freedom are:

Seven Levels of Financial Freedom

  1. Clarity, when you figure out where you are financially (net worth and cash flow) and where you want to go
  2. Self-sufficiency, when you earn enough money to cover your expenses
  3. Breathing room, when you escape living paycheck to paycheck
  4. Stability, when you have six months of living expenses saved and bad debt, like credit card debt, repaid
  5. Flexibility, when you have at least two years of living expenses invested
  6. Financial independence, when you can live off the income generated by your investments and work becomes optional
  7. Abundant wealth, when you have more money than you’ll ever need

The difference between income and wealth: Wealth is accumulated assets, cash, stocks, bonds, real estate investments, and they have passive income. Simply, they don’t have to work if they don’t want to.

Accumulating wealth and becoming wealthy requires knowing what you want, discipline, taking responsibility and have a plan.

Hundreds of thousands of Americans have great incomes, but you wouldn’t call them wealthy because of debt and lack of accumulated assets, instead:

  • They owe for their homes
  • They owe for their cars and boats.
  • They have little savings and investments
  • They have few “paid for” assets
  • They have negative net worth

Essentially, if you make a great income and spend it all, you will not become wealthy. Often, high income earners’ true net worth is far less than they think it is.

Here are several factors and steps to improve your financial life:

  • Establishing financial goals
  • Paying yourself first and automate the process
  • Creating and sticking to a budget. Know where you money goes.
  • Paying down and/or eliminating credit card and other bad debt. Debt which is taking from your future to pay for your past.
  • Saving for the future and investing for the long term consistently
  • Investing the maximum in your employer’s 401(k)
  • Living on and spending less than you earn
  • Simplify – separating your needs from your wants. You don’t need to keep buying stuff.

Financial freedom can look something like this:

  • Freedom to choose a career you love without worrying about money
  • Freedom to take a luxury vacation every year without it straining your budget
  • Freedom to pay cash for a new boat
  • Freedom to respond to the needs of others with outrageous generosity
  • Freedom to retire a whole decade early

When you have financial freedom, you have options.

“Your worth consists in what you are and not in what you have. What you are will show in what you do.” Thomas Edison

References:

  1. https://www.phroogal.com/calculate-financial-independence-number/
  2. https://www.ramseysolutions.com/retirement/what-is-financial-freedom
  3. https://thefinanciallyindependentmillennial.com/steps-to-financial-freedom/

Wealth and Financial Freedom Mindset

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A major factor regarding effectively managing your money and achieving financial freedom is maintaining a positive and confident mindset. Maintaining a positive growth mindset takes effort and knowledge. Here are some ways to start thinking about financial matters and building wealth:

Focus On What You Want – And Take It! So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”. Play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

Confront closely-held beliefs. Spend some time dissecting and understanding the previously-held beliefs you have about money. You learn a lot about money from your family at a young age—either that money is good or money is evil, for example.

Some people may grow up believing that money is a scarce resource, while others understand money as a tool. There are many numbers of qualities that get assigned to money that are not objectively true.

If you have major fear or shame regarding money, you may want to consider working through these emotions with a financial therapist. Your feelings are valid—but that doesn’t mean you have to live with them.

Integrate affirmations into your daily routine. You may find affirmations to be a grounding part of your day. For example, affirmations such as “I am worthy of wealth,” “I am capable of managing my money,” and “There is money out there to be made by me” could act as helpful reminders that you are in charge of your money and not the other way around.

To develop a positive mindset and to become a person who is “good with money”, it is essential to understand that achieving financial freedom and accumulating wealth is a journey. So, consider taking it step by step. Start by building familiarity with your financial situation, and look for small ways to improve it and make it better every day.

Don’t Spend Your Money – Invest It. The reason you need to save your money is to grow it by investing it for the long term. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with building wealth. You’ll want to quit your regular job at some point.

Bottomline is to stop working for your money and invest, which puts your money to work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

References:

  1. https://www.lifehack.org/articles/money/develop-millionaire-mindset-6-easy-steps.html
  2. https://www.sofi.com/learn/content/am-i-bad-with-money/

Wealth Blueprint

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If building wealth and financial freedom are your destination, the journey always starts with your financial mindset, attitude and habits. Jeff Hayden

T. Harv Eker, author of “Secrets of the Millionaire Mind”, is convinced that anyone can be build wealth and become financially free. But, he opines that what holds most people back from accumulating wealth is an internal mental script or “money blueprint” that tells them that they can’t or shouldn’t.

In his bestselling book, Eker teaches people to identify their internal money blueprint and revise them. However, many critics rightfully argue that his focus on personal psychology as the sole driver of success ignores very real economic and systemic factors such as inequality, sexism and racism which can be possible determinants of one’s income bracket and net worth.

“If your subconscious “financial blueprint” is not set for success, nothing you learn, nothing you know and nothing you do will make much of a difference.” T Harv Eker

Yet, Eker argues that you have a personal wealth blueprint already ingrained in your subconscious mind that will determine your financial life and overall success. What he means is that you can know everything about saving for the future, investing to grow your money, and accumulating wealth, but if your subconscious wealth blueprint isn’t preset to a high level of life and financial success, you will never amass a large amount of wealth or achieve financial freedom.

What people have to realize is that we are all subconsciously taught and conditioned in how to deal with money and wealth, according to Eker. Unfortunately, many of us were taught by family members and acquaintances who didn’t own a lot of assets and did not have a lot of money, so their way of thinking about wealth became your natural and automatic way to think. And since you are a creature of habit, your internal thoughts and beliefs about wealth and money will determine your external results of net worth and cash flow.

“If you want to change your results, you have to start by changing your thoughts.” T. Harv Eker

Your wealth blueprint single-handedly, according to Eker, determines your financial life, because your thoughts lead to feelings, which lead to actions, which lead to your results. Thought is the ‘Mother of all Results’. It’s about a process of manifestation, that your thoughts lead to your feelings, which lead to your actions, which lead to your results.

Thoughts → Feelings → Actions → Results

The reason you think the way you do about money is conditioning. You were taught how to think about money. You weren’t born with money thoughts and beliefs. You learned them. You were conditioned around money, success, and wealth by:

  • Verbal programming – what you’ve heard,
  • Modeling – what you’ve seen,
  • And specific incidences and experiences you’ve had.

No personal wealth mental blueprint is true or false or right or wrong, says Eker. It’s just how you’ve been programmed. Some people are savers. Others are spenders.

There are several important question to ask yourself: What is your current wealth and success blueprint, and what results is it subconsciously moving you toward? Are you set for working hard for your money or are you set to have your money work hard for you? Are you programmed for saving money or for spending money? Are you programmed for managing your money well or mismanaging it?

Bottomline, your wealth blueprint, meaning your thoughts and beliefs, will determine ultimately your financial life and net worth – and can even determine your personal life, according to Eker.

“The vast majority of people simply do not have the internal capacity to create and hold on to large amounts of money and the increased challenges that go with more money and success. That, my friends, is the primary reason they don’t have much money.” T. Harv Eker

References:

  1. https://www.selfgrowth.com/articles/what_is_your_money_blueprint.html
  2. https://www.knowledgeformen.com/podcast-t-harv-eker/
  3. https://www.tonyrobbins.com/mind-meaning/a-new-blueprint-for-happiness
  4. https://www.businesstimes.com.sg/lifestyle/weekend-interview/t-harv-eker

Billionaire’s Income Tax

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“Some liberal lawmakers hope the “billionaire tax” will eventually be extended to millionaires.”

A ‘Billionaires Income Tax’ would be a fundamental change in how the tax system operates in the United States, and open up a new revenue stream for the Treasury. The wealth tax plan would “get at the wealth of the richest Americans that currently goes untaxed until assets are sold”, according to Roll Call.

The Senate has proposed a special new tax on the uber wealthy, think billionaires, that Democrats will use to help pay for their next big multi-trillion dollar ‘Build Back Better’ fiscal spending package. The proposed tax on the net worth of billionaires’ stock holdings, real estate and other assets could help Democrats accomplish goals of raising taxes on the wealthy and funding their pet social safety net and climate programs.

The Senate Finance Committee Chair wants to “begin requiring people with more than $1 billion in assets, or who earn more than $100 million in three consecutive years, to begin paying capital gains taxes each year on the appreciation in value of their assets, regardless of whether they are sold”, Politico reported.

The ‘billionaire tax’ plan would reportedly hit around 700 Americans and generate several hundred billion dollars in tax receipts. “We have a historic opportunity with the Billionaires Income Tax to restore fairness in our tax code, and fund critical investments in American families,” said Senate Finance Chair Ron Wyden (D-Ore.). “The Billionaires Income Tax would ensure billionaires pay tax each year, just like working Americans.”

The proposal, should it pass Congress and be signed into law by the President, would almost certainly be challenged in federal court on its constitutionality. The Constitution restricts so-called direct taxes, ‘a term referring to levies imposed directly on someone that can’t be shifted onto someone else’. There’s a big exception for income taxes, as a result of the 16th Amendment, which allows Congress to tax income and earnings. (All current taxes are either forms of income tax or levies on transactions).

The proposed plan would tax people on the appreciation of their publicly traded marketable securities. Effectively, the plan would tax billionaires’ assets on any gains or appreciation in value of those assets. For example, if that asset became worth $110, they’d only owe on the $10 gain. And, the proposal would begin by imposing a one-time tax on all the gains that had accrued before the tax had been created.

Stocks, bonds and other publicly traded assets, marketable securities, would be assessed the levy each year. Harder-to-value assets like real estate or ownership stakes in privately held businesses would not be taxed until they are sold, but would then face an interest charge designed to approximate the tax people would have faced if they had been publicly traded assets.

Capital losses

Under the proposal, a billionaire subject to the tax whose asset values take a dive during the year would have two options. They could choose to:

  • Carry those losses forward to offset potential future mark-to-market gains, or
  • Carry them back to a year within the previous three to generate refunds for taxes paid on unrealized gains.
  • Carrybacks could only offset prior mark-to-market tax, not taxes paid on other income.

    • Nevertheless, the plan would incentivize the wealthy to move into non-publicly traded assets in order to avoid having to pay the IRS. And if the billionaire wealth tax survives the certain court challenges under the current conservative Supreme Court, you can safely bet that many liberal leaning states will follow suit and implement their own version of a billionaire or millionaire wealth tax.

    This new billionaire tax on wealth, instead on income, is a tax that some liberals lawmakers hope will eventually be extended to include every millionaire in assets, regardless of actual net worth. However, Congress always seem able to devise work arounds to exclude their own financial assets and the assets of their big re-election campaign donors from these extremely regressive tax policies.

    Additionally, this proposal, if enacted into law, would dramatically impact compound growth of assets and, would have the unintended consequences of slowing job creation and capital investments in the U.S.

    Senator Mitt Romney (R-Utah) said that the billionaire tax will leave the rich thinking: “I don’t want to invest in the stock market, because as that goes up, I gotta get taxed. So maybe I will instead invest in a ranch or in paintings or things that don’t build jobs and create a stronger economy.”

    References:

    1. https://www.rollcall.com/2021/10/27/wyden-details-proposed-tax-on-billionaires-unrealized-gains/
    2. https://www.politico.com/news/2021/10/27/billionaires-income-tax-details-wyden-517318
    3. https://www.marketwatch.com/story/mitt-romney-says-a-billionaire-tax-will-push-the-rich-to-buy-paintings-or-ranches-instead-of-stocks-11635269305

    Planning and Achieving Financial Freedom

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    Financial freedom can be an elusive—and hard-to-define—goal.

    Financial freedom is often said to be in the eye of the beholder. To some it may mean freedom of debt and being able to fund your lifestyle with your cash flow; to others it may mean early retirement on a Caribbean island. Whatever your financial goals or definition of financial freedom, there are ways and things you can learn to help you get your financial house in order.

    Once you’ve decided that financial freedom is one of your top goals, you can start taking steps to achieve it. Thus, the first step toward achieving financial freedom is to define exactly what it means for you. You can’t generally achieve something that you haven’t defined. So, once you’ve defined what financial freedom means to you, you can start taking steps toward your goals.

    “What then is freedom? The power to live as one wishes.” Marcus Tullius Cicero

    Just because you have money does not mean you have financial freedom. There have been numerous people, especially professional athletes and entertainers, who have earned millions of dollars and subsequently lost it all through reckless spending and debilitating debt. Thus, even if you have a lot of money, if you don’t know how to manage and make your money work for you, it will more than likely disappear.

    Financial freedom typically means having enough savings, financial assets, and cash on hand to afford the kind of life you desire for yourself and your families. It means growing savings and investments to a level that enables you to retire or pursue the career you want without being driven to earn a wage or salary each year. Financial freedom means your money and assets are working hard for you rather than the other way around…you’re working hard for your money.

    In other words, financial freedom is about much more than just having money. It’s the freedom to be who you really are and do what you really want in life. It’s about following your passion, making choices that aren’t influenced by your bank account, net worth or cash flow, and living life on your terms.

    Track your expenses

    It’s difficult to know how to save money if you don’t have a good idea of where your money is going. Carefully track your spending habits for a typical month. Doing this will help you to become more conscious of your discretionary expenditures. It will also reinforce what expenses are essential and remind you to plan for unexpected expenditures, like medical emergencies and car repairs. Therefore, it is vital to understand and to know where your money is going.

    Make a budget

    Once you’ve taken inventory of your expenses, next step is to create a budget. While budgeting can sound like a cumbersome task, you may want to start by using a budgeting calculator to get a feel for how you are currently spending your money and how you’d like to change your spending.

    One popular budgeting method is the 50/30/20 rule. The 50/30/20 rule is a way to divide your post-tax income based on your needs, wants and savings. The rule states that people should spend 50% of their income on their needs. This includes health insurance, housing, transportation, and groceries. Then, the guideline states that people should spend 30% of their income on wants or non-necessities such as entertainment, travel, and more. Finally, the last 20% of a person’s income should be saved or invested. This might include retirement savings and building a stock portfolio.

    Once you have created a budget, don’t put it in a drawer and forget about it. Instead, make it a working and living document that you check and refer to often. Spend a half-hour per month reviewing how your actual expenses match your budget and make adjustments as necessary.

    Automate your savings

    Automating your savings and investing is one of the easiest steps you can take to ensure that you are on the path to financial freedom. You can set automated contributions to your employer-sponsored investments, including your 401(k) contributions and employee stock options.

    When your savings and investing are automated, your money will continue to grow without you having to think about it. This will help you to reach your financial goals easily and quickly.

    Have some percentage (10% to 20%) of your paycheck automatically deposited into a separate account—whether it’s a savings account, a 401(k) or an IRA. Money that isn’t easily accessible is not easily spent.

    Unfortunately, many Americans are not saving enough to maintain their current standard of living during their retirement years. It was found that about 21% of Americans have nothing saved for retirement, according to the Northwestern Mutual’s 2018 Planning & Progress Study.

    Start investing early

    Follow the adage, the best time to start investing was twenty years ago; the second best time is today. You should start investing in a tax deferred account, preferably with your employer matching a portion or all of your contribution.

    Planning for retirement is a marathon and not a sprint. Even if you are starting small, the most important thing is to get started. Therefore, it will likely take decades to reach your goal. Therefore, it is important to remember why you want to achieve financial freedom. Keeping your purpose, goals and the bigger picture in mind will help you navigate the day-to-day financial decisions.

    Once you become financially free, you have more choices of how to live your life and spend your days.

    When you decide that you want to start working toward financial freedom, it is important to remember that you will not become financially free overnight. However, according to certified financial planner David Rae, in a 2018 article in Forbes magazine, there are eight hierarchies of financial freedom that you can work towards:

    1. Level 1: Not Living Paycheck to Paycheck – The first level of financial freedom is building up an emergency fund and paying off any credit card debt. Unfortunately, living paycheck to paycheck is the reality of millions of Americans. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017, some 40% of households could not cover a $400 unexpected expense.
    2. Level 2: Enough Money to take a sabbatical from your work – Accumulating enough money to be able to take a break away from work can be rewarding. This does not mean you have to quit your job, but it sure is a good feeling to know you can.
    3. Level 3: Enough to be Financially Happy and still Save – it’s about enjoying your life and having the money to do it. There can be peace when you are earning enough to save, doing the things you enjoy and still having extra at the end of the month.
    4. Level 4: Freedom of Time – Many people desire more flexibility with their schedules. Freedom of time and financial independence go hand in hand. Together, they are about following your passion, or spending more time with family, and not going completely broke doing it.
    5. Level 5: Enough for a Basic Retirement – Think about what your bare minimum retirement would look like. By knowing your bare minimum retirement, and knowing that you have enough money saved to at least cover some standard of living in your retirement, will also influence other life choices you may make along the way.
    6. Level 6: Enough to Actually Retire Well – Knowing you are on track to accumulate a nest egg to support that lifestyle is a big win. Well done to those who have accumulated enough assets, or passive income streams, to be in a position to retire well.
    7. Level 7: Enough for Dream Retirement – It would feel great knowing that you are on track to have enough money to retire and be able to live your dream life. What is stopping you from getting there.
    8. Level 8: More Money Than You Could Ever Spend – Having more money than you expected to spend is great. Building enough wealth so that you could not possibly spend all of it is another.

    Bottomline is that if you want to be financially free, if you want to be able to live the lifestyle of your choosing while responsibly managing your finances, you need to become a different person than you are today and let go of the financial mindset that has created your current financial predicament and has held you back in the past.

    Attaining financial freedom, which means having enough savings, investments and cash flow to live as you desire, both now and in your later years, requires a continuous process of growth, learning and emotional strength. In other words, whatever has held you back and provided you comfort in the past or kept you less than who you really are will have to be replaced. You will have to become comfortable for awhile being uncomfortable. And in return, the financially empowered, purposeful, and successful you will emerge — like a butterfly shedding its cocoon.

    References:

    1. https://www.richdad.com/what-is-financial-freedom
    2. https://smartasset.com/financial-advisor/financial-freedom
    3. https://www.forbes.com/sites/davidrae/2019/04/09/levels-of-financial-freedom

    U.S. Middle Class Owns Few Financial Assets

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    U.S. Middle Class Households Have Few Financial Assets, According to New Analysis from the National Institute on Retirement Security (NIRS)

    New analysis finds that across generations, middle class households in the U.S. own few financial assets and the median amounts held fall far short of the assets needed to fund a secure retirement.

    In 2019, middle class Millennials owned only 14 percent of their generation’s financial assets. The numbers are even worse for middle class Gen Xers and Baby Boomers, which owned eight percent and six percent, respectively, of their generation’s financial assets.

    “In America, the middle class can no longer afford retirement. Middle class Americans face sharp economic inequality, with ownership of financial assets highly concentrated among the wealthy,” explained Tyler Bond, National Institute on Retirement Security (NIRS) research manager. “Now that we have a retirement system largely built around the individual ownership of financial assets in 401(k) accounts, middle class Americans are struggling to accumulate sufficient financial assets during their working years. This means the retirement outlook for many in the middle class is bleak at best.”

    The research also finds low numbers when examining the mean and median financial assets owned.

    • For middle class Millennial households in 2019, the mean financial assets owned were $17,802, and the median was $7,800.
    • Middle class Generation X households had mean financial assets of $62,944, and median financial assets of $39,000 in 2019.
    • For middle class Baby Boomers, the mean amount of financials assets held was $93,298 in 2019, while the median was only $51,700.

    Baby Boomer households are retired or near retirement, but their assets fall far short of what’s required to finance a secure retirement,” Bond explained. “A nest egg of $51,700, the median amount middle class Boomers hold, would generate only $2000 of income annually over 30 years. This means that many middle class Boomer households may struggle in retirement and could face a sharp reduction in their standard of living.”

    The research indicates that implementing pragmatic fiscal policy solutions can help middle class households get on a better path to saving for retirement including strengthening and expanding Social Security; protecting defined benefit pensions; and ensuring access to a retirement savings plan through an employer.

    For this research, the middle class is defined as those between the 30th and 70th percentiles of net worth, or the middle 40 percent. The research is based upon data from the Federal Reserve’s Survey of Consumer Finances (SCF). It examines financial asset ownership, a broader category than retirement assets.

    According to the SCF, the category of financial assets consists of liquid assets, certificates of deposit, directly held pooled investment funds, stocks, bonds, quasi-liquid assets, savings bonds, whole life insurance, other managed assets, and other financial assets. It does not include physical assets such as a home or a car.

    The data for this research is for households rather than individuals.

    References:

    1. https://www.nirsonline.org/2021/10/middle-class-u-s-households-have-few-financial-assets/

    Difficult Financial Conversations

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    The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.

    Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
    Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments

    “Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”

    “Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”

    References:

    1. https://www.fidelity.com/learning-center/personal-finance/women-talk-money/investing