Changing Focus
This is Part 2 in this series. Check out Part 1 here.
No matter your age (but especially if you are young), specific measures can be taken to drastically increase net worth. Generally speaking, in 10 years or less, you could be putting a traditional career in the rearview mirror, in a situation where your money now makes money for you. Your input is virtually no longer needed. The FIRE (Financial Independence/Retire Early) community pursuing this movement is loaded with brilliant minds who have gamed this system. All you have to do is make some simple — yet profound — decisions on how you structure your life. For us, these are the basics:
Step 1: Eliminate Unnecessary Spending
Luckily many climbers already have a propensity towards frugality, so many of you might find yourselves already well ahead of the curve here. Look at all the ways you spend money in your life. Put every dollar into context by asking yourself:
Does this bring me happiness?
Do I get value out of this purchase?
Does this product mean more to me than freedom?
By investigating every dollar we spent, in the course of one year we cut tens of thousands of dollars out of our yearly spending, and increased our happiness along with it. We returned to finding joy in simplicity, not material possessions or costly restaurant meals.
We moved the needle on our savings rate from approximately 20% (already well above the dismal average American savings rate of less than 5%) to an average rate of 70-75%. A savings rate of 50% can drastically reduce the timeline to financial independence.
Now let’s be honest…Do you know your savings rate? Probably not. We didn’t. As the above link demonstrates, it’s probably less than 10%. And in many wealthy countries, it is not only acceptable but encouraged to spend money when it comes your way. Got a bonus? Treat yourself. Got a raise? Yep, celebrate.
Going from a single digit to a 50+% savings rate will not come without some discipline and careful questioning of priorities.
Not possible without 6-figure salary? Tell it to this guy.
Step 2: Invest Your Savings in Broad-Based Index Funds:
This is where things get shaky for most people.
Investing in the stock market gets many instantly puckered. We’ve all met someone who seems to have been reamed by losses in the stock market, but frankly, if you take a passive approach, invest in the market as a whole, and then stay the course during volatile market swings (a very real psychological test), your money will grow beyond your wildest dreams.
It would be ridiculous of me to try and explain the nuances of investing when someone like Jim Collins has put so much work into The Stock Series, and the indispensable book, The Simple Path to Wealth, which I would link, but you should support Jim and purchase the book via his Amazon link on his blog.
As with most in the FIRE community, we use Vanguard: the shimmering saint, the oasis, the savior in the investment world. If you think you are capable of picking your own stocks and outperforming the market, we wish you the best of luck. Instead, we sit back and enjoy the beauty of index investing and let the power of the US economy do the work for us.
For more details on our investing strategy, check out this and this.
Step 3: Rinse and Repeat
After eliminating unnecessary spending, you will receive much more income than you will spend each month, ideally at least twice as much. As our money grew, we no longer had much use for stock-piling loads of uninvested cash, so we keep an emergency fund only to provide 3 months of living expenses in our traditional checking or savings accounts. The vast majority of our money is tied up in the market through our personal Vanguard account, and 401k and HSA accounts, with about 90-95% in stocks and 5-10% in bonds at any given time. Need more details? Here ya go.
Come on CC, it can’t be so simple…
It is!
Well, yes and no. The devil is most certainly in the details, but if you follow these three basic steps, you will likely be light years ahead of the Joneses. Instead of buying stuff, you can now view your money as a vehicle to freedom you’ve never thought possible. In short time, you will likely have enough money in your investment vehicles to support your spending for the rest of your life, thereby making income theoretically optional. Pretty cool, eh?
There’s really no difference here than traditional retirement, you are just hitting the fast-forward button because you’ve chosen to place value on simplicity, and by placing value on simplicity, you save buckets of money. You are choosing to break free of the bonds of mainstream America, where we are conditioned to spend money on stuff we simply do not need, or uneducated on how to drastically reduce expenses on the items we do need. The more stuff you buy, the longer you have to work to fuel your hungry spending machine, the longer you delay freedom. You no longer have to wait until age 65 to get the freedom you deserve, so long as you’re willing to work for it and challenge your perspective on what brings happiness.
Once you begin to analyze the ways you spend money, you will be amazed at all the low-hanging fruit ripe for eradication from your lives.
Do you need unlimited data on your cell phone to watch YouTube videos?
Eating out much?
Have 3 minutes to make your own coffee?
It’s all about assessing value on every dollar spent, a topic we’ll explore much further.
On a lighter note, the next post will discuss the timeframes and metrics to achieving financial independence.