Freedom of Money — How Will You Spend Your Freedom
How would you love to celebrate your financial freedom when you have finally achieved it? Well, we all dream of cherishing this privilege, but few achieve it. So, your efforts to maintain financial discipline and cultivate healthy saving habits have paid off. What’s next?
Of course, you would love to consolidate your wealth as you plan to live a lavish lifestyle. On attaining financial independence, you might be willing to realize your long-term dreams. Maybe you’d put in fewer hours to work each day or travel the world with your family. The concept that more expenses would bring in more fulfillment holds good up to a certain limit. It’s wise not to get carried away and squander your long-accumulated wealth.
In this article, we are going to help you with a direction after you achieve your financial freedom. How are you deciding to spend the money rather than invest it? Read on to understand how you can gratify your efforts of accumulating long-term wealth.
What Is Freedom of Money?
The meaning of financial freedom is not simply about being rich. Gaining financial freedom puts you in a position where you can control your money. Financially independent individuals cherish the privilege of having enough money to meet their expenses. This way, they can channel their time into activities that appeal to them rather than spending the time to earn their living. Financial freedom comes through years of planning and maintaining healthy savings habits.
The underlying meaning of attaining financial freedom indicates that you need to be debt-free, well-invested with your funds, and financially secure for the rest of your life. The US is currently placed in the 14th position in terms of financial freedom.
While financial independence prompts most people to live a lavish life, enjoy frequent vacations, explore fresh cuisines, and spend time outdoors, it’s imperative to capitalize on your funds. With high inflation and increasing cost of living, improper planning after attaining financial freedom can even deprive you of the desired living standard.
Remember that achieving financial freedom doesn’t necessarily mean being rich. What’s the point of having financial independence if your expenses are not in line? You would be losing your accumulated funds if you live an extravagant lifestyle without having fixed-income investments. Being financially independent means having adequate funds to fulfill the needs of your life and make smart investments.
This explains the importance of using your freedom wisely. We have recommended some strategic investment tools to help you intelligibly celebrate your financial freedom.
Where To Invest Your Long-Accumulated Wealth?
Looking beyond your financial independence, it’s time to strategize your investments wisely. Interestingly, most Americans attain their freedom of money in their late fifties. So, you’re pretty close to retirement by the time your funds come easy-flowing.
Now that you have achieved your financial freedom, it’s time to rebalance your asset portfolio. As you stride toward retirement, you’d look forward to protecting your assets and consolidating your wealth. Here’s how you can distribute your investments, playing well with aggression and precaution.
Real Estate Investment Trusts
Well, you have achieved your financial independence, so what prevents you from investing in real estate? If you already own your home and are not interested in directly investing in properties, go for REITs (real estate investment trusts).
Investing in REITs brings you the advantages of making real estate investments. From time to time, you would also receive dividends since it is a publicly traded instrument. With the real estate market in the US looking in good shape, investors have the potential to earn competitive returns from the market. Besides, investing in REITs helps you hedge against inflation. Compared to real estate investments, REITs bring you a greater level of liquidity.
Traditionally, REITs have earned 10–15% more than the average S&P 500 returns over the last 50 years. Annually, shareholders receive as much as 90% of the taxable income of REITs through dividends.
Compared to other equities, this is slightly higher. Historically, this dividend has provided a consistent income stream to the investors. Therefore, it’s wise to allocate a part of your wealth to REITs.
Government Bonds
While diversifying your asset portfolio after gaining financial independence, consider putting some funds into government bonds. A government bond refers to a loan that investors tend to the municipal or federal government for a specific period. Depending on the stage of your life, you can choose a tenure of up to 30 years. This would fetch you interest on the loan, resulting in a steady flow of income.
With an average annual yield of 3.5–5%, government bonds in the US are safe and are regarded as fixed-income security. While you have been investing in equities to achieve an aggressive investment portfolio, why not balance this risk factor with these safe government bonds? The returns or interest rates of government bonds are not too attractive. Nevertheless, these investments go a long way to anchor your retirement savings and mitigate risk from other investments.
If you are a conservative investor, not ready to play around with volatile markets, it’s wise to go for government bonds. Even when markets tumble and stock values dip, bonds continue to deliver steady returns. The lower volatility and fixed returns from government bonds make it a must-have investment retirement portfolios. Even if you are unwilling to go for long investment horizons and bypass severe market downturns, government bonds won’t disappoint you.
Corporate Bonds
Given that you have attained your cherished dream with financial freedom, you may be willing to take calculated risks. The potential of earning higher returns from corporate bonds compared to government bonds make them a lucrative investment avenue. They work in the same way as government bonds. The only difference is that you would be lending not to the US government but to a company.
Corporate bonds aren’t backed by the trust of the government and tend to be riskier. However, the right choice of corporate bond can fetch you much better yields. Historically, AAA-rated corporate bonds can fetch you anything between 4.5 to 5% annual returns.
So, it’s wise to balance your investment portfolio in bonds, picking mostly government bonds along with a few corporate ones. This way, you can maintain an aggressive growth profile of your retirement portfolio.
Corporate bonds will be ideal if you are on the hunt for fixed-income security capable of generating higher interest compared to government bonds.
Dividend-Yielding Stocks
Individuals with financial freedom often find a tactical investment strategy in buying dividend-yielding stocks. Historically, dividend-paying stocks have performed better than the S&P 500, and they are less volatile.
Evidently, investors can bank on these two-pronged benefits: getting regular dividends and benefiting from the appreciation of capital value. Considering the long-term returns, the growth appreciation looks impressive. It makes sense to invest in stocks of profitable and stable companies with strong fundamentals.
However, investors should note that brokerage accounts used in generating dividend income are taxable. Each year you receive a dividend, you need to shell out tax. On the other hand, investing in stocks that do not generate dividends doesn’t require you to fork out this tax. The tax is levied only when you sell off the stock.
Some dividend growers might not immediately undergo an increment in stock value. Nevertheless, they are reliable as long as you think of generating a fixed income. So, if you are looking forward to stabilizing your income source as you near your retirement, it’s good to go with these stocks.
Fixed Annuities
Now that you have included corporate bonds and dividend-yielding stocks to achieve an aggressive growth profile, it’s time to balance it with low-risk investments. How about including fixed annuities in your investment portfolio that deliver moderate returns?
Fixed annuities are insurance contracts that pay a guaranteed interest rate to the account holder based on their respective contributions. As you move closer to retirement, it’s wise to go for fixed annuities as they warrant a specific cash inflow, with annual returns being anything between 3.6 to 5.5%.
If you have achieved your freedom of money in your thirties or forties, you can even use fixed annuities for your mid-term financial planning.
The value of a fixed annuity might erode due to inflation. This explains why some annuity providers develop COLA (cost-of-living-adjustment) riders. This elevates the value of the annuity as prices rise. However, some fixed annuity products generate a fixed interest rate over a specified period, regardless of the conditions of the market.
So, you need not worry about share prices, stock values, or the economic downturns that the country goes through. With fears of recession and inflation haunting most investors, it’s wise to rebalance your portfolio with fixed annuities.
The life of an annuity involves two stages. In the first phase, or accumulation phase, you keep investing. In the second phase, or the payout phase, you keep receiving the promised returns. So, begin with a series of cash outflows into the annuity and wait for it to grow the interest. This interest is tax-deferred and helps in growing the value of your account.
Depending on the annuity plan, the payout phase can be customized. You can either go for a single lump-sum payment or distribute the amount into a series of cash inflows over time.
Treasury Inflation-Protected Securities (Tips)
Financial advisors often recommend Treasury Inflation-Protected Securities (TIPS) as one of the investment options. The US Treasury issues these inflation-protected securities, which are somewhat similar to bonds. This special mechanism ensures that your assets remain secure against inflation and keeps them up as per the inflation rate.
The maturity tenure for investments in TIPS is five, 10, and 30 years. In most investments, you would get a fixed or variable investment amount that accumulates over the principal. Although the rate of interest is fixed, the principal value may fluctuate.
If the principal amount on maturity proves to be higher than the actual amount you invested, the profit goes to you. However, if the principal is lower than the actual investment or equal to it, you will receive the actual amount back. Based on the principal, which undergoes adjustment, interest is paid every six months. Considering this flexibility, investing in TIPS would be an intelligent move.
Endnote
Juggling your finances across different investment avenues would consolidate your wealth and balance your portfolio. It’s easy to lose your way amidst real estate investments, stocks, bonds, mutual funds, CDs, TIPS, and fixed annuities. Again, it’s your financial literacy that can bail you out of this dilemma!
Acquiring financial freedom calls for a level of financial education. Now that you are looking forward to holding the fort, look beyond your financial independence to consolidate your long-term wealth.
FAQ
What Is The Goal of Financial Freedom?
The goal of financial freedom is to give you the liberty to control how much and where you spend. At the outset, you eliminate debt as you walk on the road to financial freedom. Next, you attain the privilege of spending quality time on things you love rather than earning money all your life.
What Type of Life Can You Lead After Attaining Financial Freedom?
After attaining financial freedom, you need not stress yourself with thoughts on how to earn money. Rather, you need to think about how to use your money correctly. Individuals attaining financial freedom need to make serious money-related decisions and make calculated investments to use their wealth to the maximum.
How To Grow Your Life Financially?
Financially resilient individuals habitually set their financial goals and live on a budget. Focus on clearing your debts and automating your savings. Also, start investing as early as possible and maintain a healthy credit score. Lastly, but most importantly, educate yourself financially to grow your wealth.
Should I Stop Working After Gaining Financial Freedom?
Whether you should quit your job or profession after achieving financial freedom largely depends on your priorities. Besides, this depends on the type of lifestyle you desire to lead. Do you want to travel the world or spend most of your time outdoors? Or simply allocate your assets into different investment channels and earn a fixed income every month?
If you gain your financial freedom close to your retirement, you might decide not to work anymore. However, individuals reaching this benchmark early in their careers may continue to work and further consolidate their wealth.
