simple finance for an extraordinary life

So You Want To Be Financially Independent?

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Until recently, I didn’t even know Financial Independence was something that can be achieved far earlier than your golden years. Heck, I didn’t even know what Financial Independence really was.

I always knew saving and investing for retirement was important, but always assumed those days would be when I was older – much, much older.

It all started when I began researching to find better ways to invest some extra cash now that our student loans had been paid off.

Clearing up our debt suddenly left an extra $1850 per month on the table and while I had some good ideas on where to put this money, I really wanted to make sure we were maximizing its potential for our future.

After googling a bit, I landed on the Mr. Money Mustache blog and started learning about this small but growing online community known as FIRE which stands for Financially Independent – Retiring Early. A few articles in and I was hooked.

I just couldn’t believe what I saw. Other people (some even younger than me – I’m 34) retiring in their  30’s or 40’s.

How could this be??

I have to admit, at first I felt like a failure thinking maybe I just wasn’t as good at managing money as I thought I was.

Then, I remember thinking there must be some catch.  They must have sold a business, received a large severance payment, a big inheritance or something. It just isn’t possible to retire that young without some sort of luck or good fortune.

The more I researched and the more personal finance blog stories I read however, it became apparent that the majority of these early retirees were in fact your average Joes.

So, then, what were they doing that I wasn’t? What did they know, that I didn’t?

Post after post it became clear. They lived like no one else! They had chosen to live in a way that could afford them a life of financial freedom.

Simply put they saved more, spent far less than most, stayed away from debt, and invested their money. That was it. There was no real secret or highly complex formula, just a commitment to do what was necessary to live life on their terms.

This really got me thinking about my own lifestyle and wondering if maybe Financial Independence was within closer reach than I thought. And, what would it take to get us there?

While I can’t say I have a well-defined plan toward Financial Independence just yet, here are some of the initial steps that I think are absolutely necessary to at least get you thinking and in the right frame of mind as you begin your journey.

Evaluating Your Current Lifestyle

To get where you are going, you have to first know where you are. Taking a good, long, hard look at how you are currently living is the single most important step on the road to Financial Independence, and probably the most difficult. Being honest with yourself isn’t exactly the easiest thing to do.

Most of us tend to find any number of reasons to justify our spending because after all, we work hard, and we “deserve” to enjoy the good things in life. Yet others are trying to keep up with spending habits of friends or family or simply trying to make themselves “happier” by buying a bunch of needlessly expensive crap.

Whatever the reason, if you are living above your means, you will NEVER get ahead. It’s that simple. The money will go out as fast as it comes in, you’ll be left with nothing left to show for it, and therefore no means by which to begin building wealth.

I am currently in the middle of reading a classic book on Financial Independence,  Your Money or Your Life – 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence  (affiliate link) by Vicki Robin and Joe Dominguez (which i highly recommend by the way).  In it, the authors recommend setting up a wall chart which is basically taking a large sheet of paper and creating a graph to track your monthly income and expenses.

In a nutshell, you list dollar increments on the vertical axis, and months of the year on the horizontal axis. Each month you put a dot for that month’s income and a dot for all expenses. Month to month you connect the income dots and expense dots creating a line for each and suddenly you will start to see a picture emerge around your financial habits.

Personally, I think this is a great way at least at a macro level to gain a better understanding of your spending patterns. In fact it might possibly bring to light the startling reality that you may even be spending more than you make.

Here’s an idea of what the wall chart would look like. The original book was written in the early 90’s which would explain why they recommend using a giant sheet of paper. My go to is always Excel, although, for some a giant sheet of paper on the wall may be a bit more interactive. 😉

What Are You Willing to Change or Give Up?

It’s amazing the number of things that you think you can’t live without. What’s even more amazing is when you live without them and you don’t really notice all that much.

After evaluating your current lifestyle and identifying the areas where you may be living above your means, you must decide what you are willing to sacrifice in order to meet your financial goals. Simply put, you can’t have it all.

The best part though, is that you don’t necessarily have to sacrifice everything.

I have always striven to strike a balance between being financially responsible and also doing the things I enjoy.

For example, I personally had to start cutting back on my Starbucks habit. It’s true, I tend to look for any excuse to drop into a Starbucks for a hot cup of dark roast and the occasional cinnamon swirl coffee cake.

I got to the point where I would reload $20 or so on my Starbucks card often twice per month. While I haven’t completely given it up, I have cut down to spending about $10 per month or so, and tend to make coffee at home more often now or drink the free coffee at work. The end result is still enjoying something I love from time to time, and also a good feeling while I watch my Roth IRA grow.

While this may be a small example, finding ways to save $30 per month here and $50 there, etc., investing those savings, and letting compound interest take hold, can lead to some pretty significant savings and growth over time.

A good place to start would be making a list of things you spend money on that are non-necessities. This might be eating out, coffee, clothes, tech gadgets, gambling, hobbies, etc. You can look back through your credit card or bank statements, but chances are you probably already have an idea when it comes to your spending habits.

Out of the items on the list give them a ranking from 1 to 5 (1 being those you could easily live without, and 5 being those you really enjoy). The lower ranking items 3 and below you should very easily be able to cut out with a little effort and determination.

The remaining items with a ranking of 4 and 5 simply need to be re-evaluated. This is where a little bit of will power comes in. If you aren’t the type of person that can just quit things cold turkey, or make sudden drastic changes, then perhaps committing yourself to making small cutbacks each month and slowly increasing the amount as you go is the right plan for you.

The key here is to take the savings you are generating by spending less and redirect that money to either accelerating debt payoff or just putting into a savings account to help you build up an emergency fund. The results you see from increasing your debt payoff, or building up cash for a few months may just entice you to scale back your spending at a quicker pace. Often, before you know it, it sort of becomes a game.

Planning for the Lifestyle You Want

I want you to stop for a minute, close your eyes, and imagine what you’d be doing if you were financially independent – meaning you no longer have to actively work to make money if you choose not to.

Are you off travelling the world, volunteering for a cause you believe in, spending time with your kids or your family, taking up a new hobby, or simply following your passion? Whatever it is, these are the types of activities that Financial Independence can buy you, literally.

As I mentioned above, to get where you are going you must first know where you are. The other piece of that is deciding where you want to go. In between those two, is the plan you have to put together to get you there.

At a minimum, that plan will include a budget, an emergency savings account, and an investing strategy.

In many cases, it may also include a plan for getting out of consumer debt, paying off student loans, automobiles, or any number of things.

As you begin thinking about Financial Independence ask yourself the following questions:

  • What is it that I want most out of life?
  • What are some of the things that I value most in life?
  • If I didn’t have to work for money, what would I do with my time?
  • Am I willing to change the way I live to become financially free?
  • At what point in my life do I hope to be financially independent?

Once you have made the decision to pursue Financial Independence the following questions should help you get going as you start to formulate a plan: 

  • Do I have an emergency fund of 3 to 6 months of expenses in place?
  • How much of my after tax income am I currently saving and can I find ways to save more?
  • How much am I currently contributing to my retirement account(s) (401k, IRA, etc.), and am I maxing out those accounts where I can?
  • Does my employer offer a retirement account match, and if so am I taking full advantage of that match?
  • Am I taking full advantage of tax favorable accounts such as 529 plans for college savings, or a Health Savings Account (HSA) (if applicable)?
  • What types of debt do I have, if any?  What is my plan to eliminate this debt?

The Takeaway

Financial Independence (especially at an early age) is indeed possible but like anything else it will come at a price. That price is hard work, plenty of sacrifices, and changes to your financial habits and the way you manage your money.

Just like anything else in life we must define where we want to be, come up with a plan to get there, and keep hustling until we succeed.

Achieving Financial Independence isn’t going to be an overnight process. And, depending on the several variables around your current financial situation and future goals, it may take many years to get there. But, you can’t finish the race if you never start. So, what are you waiting for?

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