“Money can buy many things, but nothing more valuable than your freedom” – JLCollins
For most people, becoming financially independent seems like an unrealistic dream. In fact, studies have shown that only 5% of people in the US have enough money in their lifetimes to retire. Most people spend their entire lives working 40-50 hours a week for 40-50 years until social security kicks in to give them a few good years before they are sent to a nursing home and then… you know…
Why Normal Sucks
BUT, this is normal. If you ask what people think about all this , they say:
“That’s just life” or “Welcome to the real world”
While this might be a tolerable lifestyle for the majority, it is not something I am willing to sign-up for. Now before I continue to bash this all too common lifestyle, you might be surprised to hear that I actually enjoy my job. I get to work with fun, smart people and challenge myself daily in problems I enjoy solving but I still know I don’t want to do this forever. The problem isn’t the work, I just don’t like the conditions of having a J.O.B. The 9-to-5 till 65, 3 weeks vacation a year, live-life-on-their-terms lifestyle is a captive life with little freedom.
I have dreams of traveling the world, being home whenever my future kids are home, just sitting around doing nothing on a Tuesday (Yes, weird dream, I know). I dream of a day where I wake up on a weekday and get to do whatever it is I want to do: explore the town, read a book, write in this blog, or work on something that intrigues my curiosity. I want more freedom to do, well, whatever I want to do that day/week/month/year. I imagine some of those days I will want to work, but it needs to be something I want to be doing and on my terms.
How to Get There
Since I’m sure I am preaching to the choir about the desire to be financially independent, lets move on to how to get there. To no surprise, reaching financial independence has a lot to do with money. How much you make, how much you spend, and most importantly, how much you save. The idea is pretty simple. Save as much as you can and invest in a cash producing asset like rental properties or dividend paying stocks until the passive income surpasses your expenses (Or you have 25X your expenses saved). Wala! Financial independence explained in one sentence.
In the category of spending less, it definitely comes down to controlling the Big 3. Housing, transportation, and food/drink are the 3 expenses that will keep you trapped in your current lifestyle. Sure, there are other areas that you could cut which would still have a big impact on your finances, such as the cable/gas/electric/phone bills. However, people are usually losing most of their money from the big 3. I will go more into the details in a future post, but for now just know that the luxury house/ apartment, fancy car with payments, and going out to eat for lunch everyday is likely causing you to not make as much traction in the “building wealth” department.
Aside from lowering expenses having the positive effect of increased savings, it also means you won’t need to save as much of a nest egg, making you achieve financial independence quicker. For example, if you were previously living off of $40k per year, you would have needed to amount about a $1 million dollar net worth in order to become financially independent (assuming your investments generate at least a 4% return after inflation). But if you are able to reduce your expenses to $20k per year, not only are u saving an extra $20k each year, but you also now only need $500k in assets to be financially independent. So in a far-fetched sense, cutting your expenses by $20k/year increases your net worth by $500k since you will no longer need to save up for funding those expenses indefinitely. With a few simple math tricks, you will find that investing $300 gets you $1/month forever ($300*4%/12 months).
Making more money is the other half of the equation. It’s not as much in your control as limiting expenses but has the nice benefit of unlimited potential. You can always make more! You could increase your income by negotiating a raise with your current employer, apply for higher paying jobs, pick up a second job, or create a side business. And each raise or new found source of income shaves off even more years until you are financially independent! Attack both decreasing your expenses and increasing your income and you will be able to take back control of your time in a few short years.
The Freedom Comes Earlier Than You Think
The beauty of pursuing FI is that the freedom starts long before you reach “your number”. This is exactly where I am at. No, I have not reached financial independence, but I am starting to see the positive effects good financial decisions can have already. Not having to constantly worry about paying debts or how a job loss would totally derail my life is a nice security to have that is only attained by saving money. With every extra dollar thrown at a debt, stress is relieved and interest is no longer accruing on the borrowed money. And once your investments start to pay you, it is that much less you depend on your job’s income to support your new found simple lifestyle.