Bucket List: Financial Independence

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Bucket and Sand

Most people do not use all their skills at their place of work, so these other skills become hobbies. I am no exception. I love playing the piano and singing, and I secretly would love to design typefaces, be a calligrapher, or write a book, but these skills are not really needed at my current job (except for the writing, but we are more into non-fiction on the blog). Furthermore, these jobs traditionally require expensive training that does not fit into my current budget, and are not guaranteed to pay steadily enough to support me (at least, not at the level I have attained in these hobbies).

I have other skills which I utilize on a daily basis, and these are how I earn money, and thankfully, I enjoy using these skills at my current job. What I need to pursue these other dreams is financial independence, that is, decoupling my need to eat from my skill as a pianist or calligrapher or author, since I am not sure I am skilled enough to pursue those otherwise.

We need a financial bucket for this, the “independence bucket.” If you talk to other people, they will probably call this a “retirement account” or retirement bucket, but the word “retirement” leads people to think of a life of leisure. For a person like me, who works normal business hours, a vacation sounds restful for a little while, but then I think I would want something else to do.

If ceasing work is all there is to your retirement, you probably will get bored. So you need a bucket of savings so you have the financial freedom necessary to pursue your dreams and have your living expenses covered. These dreams could be travel, spoiling grandchildren, learning a new trade, or further pursing a familiar hobby, just to name a few.

Whatever your dreams are, storing money in this independence bucket now means you will have the opportunity to live comfortably even when you won’t be earning the same amount of money.

For this bucket, you may have several accounts.

401(k) or 403(b)

First, your employer probably offers a 401(k) or 403(b), so stash some money there (maybe around 3-5%), if your employers offers to match some or all of the money you put away. This match is free money—take it! Money toward your 401(k) or 403(b) is taken out pre-tax, which means it gets tucked away before you have a chance to spend it. If your employer offers a Roth 401(k), that is even better. One thing to note about a 401(k) or an IRA is that your money goes in pre-tax and is taxed when you take it out in retirement.

If your employer does not match any of your contributions, consider skipping the 401(k) with its limited investment options and going straight to the next account.

Roth IRA

You should have another account to stash money away for retirement: your own Roth IRA. This money goes in post-tax, so you will have to remember to save money for contributions, as it isn’t automatic. There is also a contribution limit of $5,500 per year, and you should max this out every year. That works out to about $416 a month. The good news about Roth accounts is that once you put money in, it is never taxed again, and hopefully this account will grow tremendously over your working career. If you only have one kind of retirement account, this is the account to have. You can open a Roth IRA most places where you can open a brokerage account.

When your contributions per year are added up, this probably comes to around 15% of your income. This seems like a lot to save, and it is, but if you want to be retired and financially independent one day, then that means your savings will have to pay for your standard of living as well as your dream. You should probably save an extra chunk as “long-term savings” as well as specifically retirement accounts. If you haven’t saved much, you won’t have much to live off of and might become financially dependent again.

All this is not to say “don’t follow your dreams.” Do look for work that is satisfying, but realize that sometimes you cannot follow your dreams immediately (or you may need to modify your plans to include more mundane-sounding work as well as the exciting). Practice your hobbies on the side, building up your abilities, and who knows, someday your dreams may pay the bills, and by saving, you will also have the freedom to dream even bigger.


Other Bucket List Articles:
A Bucket for the Unknown

Photo by mil8 under Flickr Creative Commons license.

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Wealth Manager

Austin Fey is a Wealth Manager at Marotta Wealth Management, specializing in charitable giving and asset allocations. She is a regular contributor to our Marotta On Money articles, often giving advice to those just getting started in finance.

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  1. Austin Fey

    This post was featured in the Carnival of Retirement – Dividend Investing Edition: http://www.dividendgrowthinvestor.com/2013/06/carnival-of-retirement-dividend.html