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It happens to everyone – the feeling. It comes during busy season, after a particularly rough day, or Sunday night. It happens so often for many of us that we stop thinking about how we can actually fix the problem. What is this feeling?
Is this all there is to life – being dependent on a job that doesn’t bring happiness to our lives? A job keeping us from the freedom to live life how we want.
That feeling is what lead to creating this website. I hit the point in my career where I dreaded going to work. I tried changing jobs to try and jump start my desire but left me realizing I needed to change the path I was taking.
I needed to take back control of my life. I needed to achieve financial independence.
What is Financial Independence?
Financial independence is accumulating enough investments to fund your living expenses indefinitely. Instead of working for your money, your money works for you and provides the income to support your life.
At a deeper level, financial independence is much more – it buys you your freedom.
Instead of being dependent on a job for money, you can choose work based on what excites you. You can explore new types of work – things you have always thought about but never attempted. Financial independence releases you from the burden of work. Instead, it makes passion and excitement the cornerstones of work instead.
Financial Independence and the 4% Rule
An important concept in the financial independence world is the 4% Rule, based on the Trinity Study.
The Trinity Study found that if your investments reach 25x your annual expenses, you can withdraw 4% of your investment balance each year and would have a high likelihood that your investment funds would not run out over a 30 year period.
Based on the 4% rule, you become financially independent once your investments hit 25x your annual expenses.
For example – say your expenses each year is $45k. Following the 4% rule, you need $1,125,000 in investments ($45k x 25) to cover your expenses. If your total investments are over $1,125,000, you are financially independent. This would allow you to withdraw the $45k needed per year from your investments.
This is a great way to judge where you are on your FI journey but it is only a rule of thumb. It takes much more thought to forecast your expenses 20 years down the road. We will leave that discussion for another day.
It’s Simple but Not Easy
The math seems simple enough but the journey is difficult. Today’s world doesn’t make saving simple. In fact, people are almost looked down upon if they save. As of November 2017, Americans only have an average savings rate of only 2.9%!
The economy is judged on how much money people spend, whether that is money people have or not.
We congratulate people on new homes, cars, or gadgets they buy. No one ever asks about what percentage people save into their 401k.
This sort of behavior will kill your journey before it even begins. To achieve FI, you need to think differently. Challenge the expectations society places on people. Instead of thinking of what this money can buy, think of where it can lead you.
How to Get Started
So you are ready to make the leap towards financial independence. You are pumped up. You want to go all in.
1. Where are your dollars going?
Saving is the most important part of working towards financial independence. But it is hard to save what you don’t have so you need to figure out where your dollars are going each month. Most people have no idea but you aren’t most people. You are ready for more.
Accumulate and categorize all your expenses from the past month. Even if you think you have a good feel for what you spend, I bet you will find many surprises.
2. What are you worth? Figure out it out!
Now that you know how much you are spending it is time to figure out how much you are worth. This step can be the most intimidating because, for many, this number may be negative.
But you need to figure out where you are starting at so you can see the progress you are making on your way to FI.
Let’s calculate your net worth (your personal balance sheet). Create two columns on a piece of paper named Assets and Liabilities. In the Assets column, write down everything you own (ex. cash, 401k, investments, house, etc). In the Liabilities column, write down everything you owe (student loans, credit cards, mortgage, etc).
Total up each column and subtract your Liabilities from your Assets. This number is your Net Worth and the starting point on your journey.
If this number is low or even negative, don’t worry! This is only the beginning!
3. Create a debt payoff strategy
So how does the Liability section of your net worth look? If you are like most people, there are some debts that need destroying. Debt is the rain cloud that follows you everywhere so it is important to get rid of it.
List out each debt you currently have, including the total amount owed, interest rate, and minimum payment. You can ignore your mortgage for this step. Consumer debt usually have higher interest rates and aren’t related to assets (like your house). We want to tackle those first.
Next, you need to figure out the best way for you to pay these debts down.
There are two methods of knocking out debt: the snowball and avalanche methods. I’m a believer in the avalanche method because you pay less in interest. But, I understand the mental advantages the snowball method can provide. It doesn’t matter which one you pick. The important thing is you pick the one you can be successful with and get your debt gone.
4. Start saving and investing
You’ve got a plan to knock out your debt. What’s next?
Financial independence requires assets. You can use stocks, real estate, or other investments. Assets are the underlying freedom generator. Working towards financial independence is turning your dollars into growing assets.
Make a move to start saving more money now. Increase your 401k contributions by 1%. Grow your emergency fund. Open and contribute to a Roth IRA. Start a taxable investment account.
The important thing is to start saving more than you are today and put that money to work
It’s Time to Start
Today is the first day of moving from a career crisis to a life of freedom. Freedom takes time and sacrifice. If you can move away from social norms and start putting your dollars to work, you will be on your way.
Gain back your freedom – financial independence will help get you there.