Imagine your perfect day — For me, it’s sleeping in late, taking a walk with friends, reading, working in my garden, and cooking dinner with my partner at home. Notice how I don’t say “work” anywhere in there? In my perfect day, I’m financially independent. But for Latinas, financial independence does not come easily or often. Latinas lose $1.2 million over the course of a 40 year career because we are not paid equally. At the same time, Latinas have a life expectancy of 84 years in the U.S. The lack of financial literacy and generational wealth are two of the biggest barriers Latinas have when it comes to financial independence. All that to say that Latinas live long but the cash flow doesn’t quite add up and that needs to change. My Dominican Nana celebrated her 95th birthday a few months ago and that reminds me, as a money nerd, that more Latinas need to be reaching financial independence.
What is Financial Independence?
Financial independence is when you have enough money in assets to cover your living costs, so that you don’t need to work for a paycheck anymore.
It’s kind of a money nerd way of saying “you’re rich, and you handle your money well.” People who are financially free usually live off the passive income that their investments earn them. How that works is like this:
You invest in Apple when it cost $150 per share. Over 10 years, the cost goes up to $250 per share. So for every share you own, you just made $100. If you own 500 shares, you just made $50,000 in earnings. So now imagine having $1 million invested in the stock market. Every year you earn 7 percent on that money, which is $70,000.
You can withdraw that money each year to spend it on things like rent, food, and travel. Meanwhile, you STILL have $1 million invested. So that money keeps earning money in the market, so that next year, you can withdraw your interest again. That’s the idea with financial independence. Of course, there’s no perfect promise with investing, but this strategy has worked for thousands of people in the U.S. And it can work for you too.
What Financial Independence Can Mean for Latinas
In a world that doesn’t always see your value, what can you do? Financial independence offers everyone a way to leave behind a toxic workplace, or an underpaid job, or a draining industry. But for women of color in particular, it offers a way to both opt out of harmful systems that can cause health and lifestyle issues, and opt in to making something of their own. Latinas are the lowest paid of any group of women in the U.S., which hurts our entire community.
When women are underpaid it means there is less money in their lives to go toward things like saving for retirement, investing in our communities, and having money for emergencies. Latinas working full-time, year-round are paid 57 cents and all earners (including part-time and seasonal) are paid 52 cents for every dollar paid to non-Latino white men. This disparity in pay perpetuates the pay gap that keeps wealth in the hands of a few.
Take this example: Veronica and Mike work the same job, but Mike makes $15,000 more a year. Veronica invests $5,000 a year, while Mike is able to invest all of his extra pay, $15,000 a year. In ten years Mike will have $207,246.72 in his investment accounts. Veronica will only have $68,971 in hers.
This pay gap is part of why the wealth gap persists in the U.S. Being underpaid means Veronica has less of a chance at building generational wealth. It means that Mike’s kids will have more assets they can benefit from than Veronica’s. Underpaying women also puts them at financial risk during their working careers; they may have to stay in unsafe personal or professional relationships because they can’t afford to walk away from them.
Working toward financial independence can give women of color the time, space, and power to build something of their own. Simply put, having more money to your name means more power and freedom. Whether financial freedom means becoming an entrepreneur, volunteering with causes dear to your heart, or finally taking up painting, the underlying truth for everyone who reaches it is that you are in charge of your time and money.
Put simply: financial independence can give you the options that corporate America withholds. Financial independence can mean leaving a job that is high stress and bad for your health. It can mean leaving an industry that doesn’t create space for your voice.
How Much You Actually Need
So how much do you need to be able to say “I’m financially free!” Well, the answer, like so many parts of personal finance is: it depends. If you live in Los Angeles or Seattle, you’ll need more money than someone living in Jackson, Mississippi. If you have children to provide for, you’ll need more than someone who is child free. In short: the lifestyle you live really matters here.
So first, sit down and add up what it costs you to live right now. That means adding up the essentials like rent, healthcare, childcare, transportation, and groceries. And then add in what makes life fun, like concerts, travel, or eating out.
Knowing these two numbers, multiply each by 12, and then multiply that number by 25. That will give you a base number to work towards.
Say your bare minimum monthly budget is $3000. Over a year, that’s $36,000 you’d need to live on. Over 25 years, you’d need $900,000 to be able to live off of.
If your bougie budget is $7,000 a month, that’s $84,000 a year. You’d need $2.1 million in order to be financially independent and want to spend $84,000 a year.
So how much you need varies on how much you need, or want, to spend.
How to Start Your Path Towards Financial Independence
But let’s talk action steps, because numbers are only part of the journey. What tools do you need to make this happen? Which accounts should you be using?
The first step towards financial independence is building an emergency fund. This is a pile of cash you keep in a high yield savings account, that you can pull from if you have an emergency.
What constitutes an emergency? A car accident. An ambulance ride. A sudden eviction. Basically: bad shit happening to you unexpectedly.
Keep four months of your bare minimum living expenses in this account. That gives you four months breathing room is you get laid off, or should cover major medical or living emergencies.
The second step is to create a debt payoff plan. You can’t be financially free if you owe Capital One or Sallie Mae money every month.
Now, por favor: hear me when I say you do not need to be TOTALLY debt free before you start doing other money moves, like investing or buying a house. But you DO need a plan for the debt. Don’t sweep it under the rug and ignore it. Debt is real and can have big consequences if not addressed.
Thirdly, and most importantly, to reach financial independence, you need to invest your money in assets that make you more money. In the U.S, that usually means the stock market or real estate.
Don’t be intimidated by the stock market! Only the movies make it seem hard. It’s very easy to invest. if you’re first gen and the first one in your family to be doing things like this, it’s not easy but there are ways to start.
Kara Perez is the founder of Bravely Go, a sustainability focused financial education company.