This week, well be observing the Fourth of July. But at some point in your life, youll want to celebrate another type of Independence Day – Financial Independence Day. When will it occur? Its up to you. Here are a few suggestions for speeding it along:
*Feed those retirement plans. The most important thing you can do to hasten your Financial Independence Day is to continually save and invest for retirement. Take full advantage of your 401(k) or other employer-sponsored retirement plan. Your earnings have the potential to grow on a tax-deferred basis and you can create an investment mix that reflects your risk tolerance, time horizon and retirement goals. Also, even if you have a 401(k), you may be eligible to invest in a traditional or Roth IRA. A traditional IRA has the potential to grow tax-deferred, while a Roth IRA has the potential to grow tax free, provided youve had your account at least five years and you dont start taking withdrawals until you are at least 59-1/2. And you can fund your IRA with a wide range of investments, such as stocks, bonds and certificates of deposit (CDs).
*Dont let your debts get out of hand. You probably cant avoid all debts, and some of them – such as a mortgage – at least offer the possibility of tax write-offs. But the larger your debt payments, the less money youll have to invest, so do what you can to live within your means.
*Prepare for emergencies. If you face some unexpectedly large medical bills, or if you need a new car or a major appliance, will you have the money available? If not, you may have to dip into your investments – and that can slow your progress toward your eventual financial freedom. To avoid this problem, build an emergency fund containing six to 12 months worth of living expenses. Put the money in a liquid vehicle – one with a lesser risk of loss of principal.
*Be a tax-smart investor. Taxes can eat into your investment returns, so youll want to become a tax-smart investor. As weve already mentioned, your 401(k) and IRA offer tax advantages, so youll want to contribute as much as you can afford to both these vehicles. Beyond that, perhaps the most important step you can take is to follow a buy-and-hold strategy. By purchasing stocks, and holding them for many years, youll put off capital gains taxes until you sell. This technique also can help you hold down commissions and give your stocks a chance to appreciate. Another tax-advantaged move that could benefit you – particularly if youre in one of the higher tax brackets – is to invest in municipal bonds. Your interest payments will be free from federal taxes; if the municipality that issues the bond is in your state, your interest payments also may be exempt from state and local taxes. (However, some municipal bonds are subject to the alternative minimum tax, so do your research before you invest.)
By making the right moves, you can someday reach your own personal Financial Independence Day. So put it on your calendar of the future – and then do what it takes to reach that happy date.
