2 Steps to Protect Your Wealth and Build Financial Independence
Prefer to Watch:8 Steps To Financial Freedom Part 3
Building wealth is important.
Keeping the wealth you've built is just as important.
Throughout this series, we've worked through a step-by-step approach to taking greater control of your finances.
First, we focused on building a strong financial foundation: creating an initial emergency fund, starting to invest, and eliminating high-interest debt.
Then we moved into wealth creation: building a full emergency fund, taking advantage of tax-advantaged accounts, and working toward investing 25% of your income.
Now we've reached the final two steps.
At this point, the goal isn't simply to save more or invest more. It's to make sure the financial progress you've worked so hard to create isn't continually interrupted by major expenses or unnecessary debt.
Here are the final two steps I recommend.
Step 7: Plan Ahead for Major Life Expenses
Once you've completed the earlier steps, you're hopefully in a very different financial position.
You have emergency savings.
You've eliminated high-interest debt.
You're consistently investing for your future.
Instead of constantly reacting to financial problems, you finally have the opportunity to look ahead.
That's important because some of the biggest expenses in our lives aren't actually emergencies.
We know they're coming.
Your kids may eventually go to college.
You may want to help pay for a child's wedding.
You'll probably need another vehicle someday.
Maybe there's a major trip you'd like to take or another large purchase that's important to you.
The exact expenses will be different for everyone, but the principle is the same:
If you know a major expense is coming, start preparing for it before it arrives.
Give Yourself a Runway
Suppose your child is 12 years old and you want to help pay for college when they're 18.
You have six years.
If you wait until they're 18 to figure out how you're going to pay for it, you may be forced to come up with a significant amount of money all at once.
That can create some difficult choices.
Do you pull money out of investments that were intended for another goal?
Do you borrow the money?
Do you put the expense on a credit card or take out another loan?
Or do you significantly disrupt your monthly cash flow?
Planning ahead gives you another option.
Instead of coming up with the money all at once, you can begin setting aside a manageable amount each month over several years.
Depending on the goal, that might mean using a 529 education savings plan, brokerage account, savings account, or another account appropriate for the expense.
The important part is identifying:
What am I saving for?
How much might I need?
When will I need the money?
Once you know those three things, you can start building a plan.
Should You Save the Money or Invest It?
One of the questions I often hear is whether money for a future expense should be invested or simply kept in savings.
The answer depends heavily on when you're going to need the money.
The farther away the goal is, the more time you may have to accept investment risk and allow your money the opportunity to grow.
If you're preparing for an expense that's still many years away—such as college for a young child or replacing a vehicle a decade from now—investing some or all of that money may make sense depending on your situation and risk tolerance.
But as the goal gets closer, protecting the money becomes increasingly important.
If you know you're going to need the money relatively soon, you may want to consider more conservative options such as:
- High-yield savings accounts
- Certificates of deposit (CDs)
- CD ladders
- Treasury securities
- Other appropriate fixed-income or cash-equivalent options
The last thing you want is to invest money you'll need on a specific date and then discover the market has declined right before you need to withdraw it.
That's why the timeline of the goal matters.
Planned Expenses Aren't Emergencies
There's another important distinction here.
Your emergency fund should be there for things you didn't see coming.
A vehicle you'll likely replace in several years isn't really an emergency.
College tuition for a child who's currently in elementary school isn't an emergency.
A vacation you've wanted to take for five years isn't an emergency.
These are future expenses, and they deserve their own plan.
When we prepare for them ahead of time, we reduce the chances that we'll have to raid our retirement accounts, drain our emergency savings, or take on new debt.
That's how we keep the wealth-building machine moving forward.
Step 8: Begin Paying Off Low-Interest Debt
Earlier in this series, we aggressively attacked high-interest debt.
Now we're talking about something different:
low-interest debt.
This might include certain student loans, vehicle loans, or—most importantly for many households—a mortgage.
I think becoming debt-free can be a fantastic financial goal.
Eliminating debt can improve monthly cash flow, reduce financial obligations, and provide a tremendous amount of peace of mind.
In fact, I generally like the idea of entering retirement without a mortgage or other significant debt obligations.
So why didn't we make paying off the mortgage one of our first steps?
Because there's an opportunity cost to consider.
Paying Down Debt vs. Investing
Every extra dollar you have can only be used once.
Suppose you have additional money available each month.
You could use it to pay your mortgage down faster.
Or you could invest it.
Paying down debt gives you a benefit equal to the interest expense you avoid.
Investing gives your money the opportunity to grow, but that growth isn't guaranteed and comes with investment risk.
If you have relatively low-interest debt, there may be situations where investing additional money has greater long-term potential than aggressively paying that debt off.
That's one reason I generally don't prioritize low-interest debt until we've addressed the earlier steps.
Before aggressively paying down a low-rate mortgage, I'd rather see someone establish emergency savings, eliminate high-interest debt, and build a strong habit of investing for retirement.
Once those things are taken care of, we have much more flexibility.
There's More to the Decision Than Math
It's also important to recognize that this decision isn't purely mathematical.
There is real value in peace of mind.
Some people hate owing money.
They may look at the numbers and understand the potential benefits of investing additional dollars, but they'd still sleep better at night knowing their home is completely paid off.
I don't think that's a bad financial goal.
Personal finance is personal.
For one person, maximizing investment opportunities may provide the greatest sense of financial security.
For someone else, walking into retirement with absolutely no debt may provide that security.
The important thing is that we've reached the point where we're making that decision intentionally, rather than being forced into it because our finances are out of control.
What Does Financial Independence Actually Mean?
Once you've worked through all eight steps, something important begins to change.
Your financial life starts giving you options.
You have cash available when emergencies happen.
You've eliminated debt that's working aggressively against you.
You're consistently investing and building assets.
You're preparing for major expenses before they arrive.
And eventually, you may eliminate your remaining debt as well.
As your investments grow and your monthly financial obligations decrease, you move closer to what I consider financial independence:
Having enough financial resources to support your lifestyle without being completely dependent on your next paycheck.
That doesn't necessarily mean you have to stop working.
Maybe you love your career and want to keep working.
Maybe you want to retire early.
Maybe you want to work fewer hours, travel more, give more generously, spend additional time with family, or pursue something you've always wanted to do.
That's the real goal behind these eight steps.
It's not simply accumulating the biggest account balance possible.
It's creating enough control over your money that you gain more control over your time.
The 8 Steps to Taking Control of Your Money
Now that we've completed the series, let's put the entire framework together.
1. Save One Month of Expenses
Build an initial emergency fund so unexpected expenses don't immediately push you further into debt.
2. Start Investing
Contribute enough to receive your full employer retirement-plan match when available. If you don't have access to a workplace plan, consider beginning with an appropriate individual retirement strategy.
3. Attack High-Interest Debt
Prioritize eliminating high-interest debt that's working against your financial progress.
4. Build a Full Emergency Fund
Increase your emergency savings to approximately three to six months of expenses based on your income stability, household needs, and comfort with risk.
5. Prioritize Tax-Advantaged Accounts
Consider accounts such as Roth IRAs and HSAs when you're eligible and they make sense for your financial and tax situation.
6. Work Toward Investing 25% of Your Income
Make 25% a stretch goal and steadily increase the percentage of your income you're putting toward your future.
7. Plan for Major Future Expenses
Identify large expenses before they arrive and begin setting aside money for them ahead of time.
8. Pay Off Low-Interest Debt
Once the rest of your financial foundation is in place, work toward eliminating your remaining debt and increasing your financial flexibility.
The Goal Is Financial Control
You don't have to complete all eight steps tomorrow.
For most people, this is going to take time.
There may also be moments when you have to move backward temporarily.
You might build your emergency fund, have an emergency, and need to replenish it.
Your income may change.
Your goals may change.
Life will change.
That's okay.
The purpose of this framework isn't to create a perfectly straight path.
It's to give you a system.
When you know what you're working toward and what your next financial priority should be, money can start feeling much less overwhelming.
You can move from building a foundation, to creating wealth, to protecting that wealth—and ultimately toward greater financial independence.
And that's what taking control of your finances is really about.
This material is provided for educational purposes only and is not intended as individualized investment, tax, or legal advice. Investment strategies, account types, debt repayment decisions, and savings approaches depend on individual circumstances. Investing involves risk, including the possible loss of principal. Consult the appropriate financial, tax, or legal professionals regarding your specific circumstances.