Liz Pulliam Weston

The Basics

Your financial Independence Day

It's up to you to create a financial future by making smart decisions about the things you can control. Here's how to plan for your own day of independence.

By Liz Pulliam Weston

You and I can't control the economy.

We don't decide when the country falls into recession or how long it stays there. We can't dictate what happens to the stock market. We can't stop home prices from falling, make gas prices drop or stop inflation at the grocery store.

But that doesn't mean we're powerless over our finances. Far from it.

The vast majority of us have control over how we spend our money, whether and how much we save, and how we invest. Those things, in the long run, will have far more effect on our wealth than any of the bad news we're being bombarded with today.

I've been thinking about this a lot lately because it's time for our annual financial checkup.

Each year, while the nation is gearing up to celebrate its freedom, my husband and I evaluate how close we are to our own Independence Day:

  • We check our net worth and see how much it's risen in recent years.

  • We monitor our investments and see whether our portfolios need rebalancing.

  • We review our spending and see which categories need adjustments.

  • Most important of all, we determine whether we're still on track for all of our important goals, from our preschooler's college fund to retirement for ourselves.

Like most folks, we faced some headwinds this year: a lousy stock market and falling real-estate values (although our neighborhood hasn't been as hard hit as elsewhere).

But our net worth still grew, and we're way ahead of where we were five or 10 years ago. We're moving ever closer to the day when we can switch permanently to part-time work, which -- since we love our jobs too much to quit entirely -- will be our version of retirement.

The ball is in your court

Your definition of financial independence may be different. It could be the day you say goodbye to the corporate life for a job with the Peace Corps. Or you may be longing for days when your only responsibility is making it to your 11 a.m. tee time on the golf course.

You may need to be willing to work for decades to achieve independence, especially if you want to fund a lavish lifestyle. Or you could make it there in a few years, if you practice the kind of radical thrift encouraged by many in the "simple living" movement. Some of these folks retire in their 40s, 30s or even 20s, living on a fraction of the income the rest of us would consider subsistence. (If you're intrigued by this notion, read "Retired by 50: What it really takes.")

The point is, it's up to you.

Making a plan for your own financial Independence Day means taking back the reins of your life. It takes some time and effort, and you'll probably have to make some trade-offs along the way. But if you define your goals, make a plan and stick to it, eventually you'll get there.

Of course, the first step toward financial independence is giving yourself some breathing room. (See "Money troubles? It's your own fault.") You've got to move beyond a paycheck-to-paycheck lifestyle by getting a handle on your spending, creating a debt payoff plan and saving up a little something for a rainy day.

Books like Eric Tyson's "Personal Finance for Dummies" are excellent primers, and you'll find lots of information about budgeting, paying off debt and investing here on MSN Money.

What you've got to work with

You'll also need to understand that building wealth is actually pretty simple. Wealth is your net worth, and your net worth is just your assets minus your liabilities.

So to build wealth, you need to increase your assets and decrease your liabilities. Buying a home you can afford, investing for your goals and having an emergency fund all build your wealth.

What doesn't: running up credit card debt, taking out home-equity loans for frivolous purchases and leasing or buying a new car every few years. (If you're unclear on the last point, read "The real reason you're broke.")

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In the years that the stock and real-estate markets don't cooperate, you may have to work harder to stay on track by:

  • Contributing more to your savings plans.

  • Speeding up your debt repayment plan.

You may face other setbacks: unexpected expenses, illness, layoffs. We certainly have. But goals and a plan keep us going. Consider what's helped our family so far:

  • Investing, no matter what. We know that, over time, no investment offers better returns than a diversified stock portfolio. We invest in good markets and bad. Our investment portfolios have more than doubled in the past five years, mostly because we kept shoveling in the cash.

  • Owning a home. Falling real-estate prices are a tragedy only if you're forced to sell. If you can afford to sit tight, home prices will bounce back eventually, and over time houses are a pretty good way to build wealth. We've owned our home long enough that we're sitting on pretty nice pile of equity, and we've helped our net worth grow further by continuing to pay down our mortgage.

  • Tracking our spending. Knowing where the money goes helps us ensure that it's getting to the right places and isn't dribbled away on unimportant stuff. Monitoring our spending also helps us spot where we need to make adjustments. If our fuel or food spending rises, for example, we can find ways to spend less in those areas or trim other expenses so that we don't run out of money before we run out of month.

  • Not carrying credit card debt. This simple habit ensures that we're living within our means. Better yet, we're not at the mercy of fee-charging, rate-boosting, fine-print-spewing credit card companies.

If you want to do your own Independence Day checkup, I highly recommend investing in some personal finance software like Money or Quicken. These powerful programs can help you monitor your spending, manage your investments, pay off your debts and coordinate your investing goals.

I'm also a big fan of the resources at Morningstar.com for evaluating your investments' performance, something you should do a couple times a year if you invest in mutual funds and nearly constantly if you're a stock owner. MSN Money's Investing home page has plenty of information and tools to help you keep on top of your investments as well.

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Get going -- and make your own good luck.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published July 3, 2008

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