Financial freedom is a term that means different things to different people. At its core, it is an umbrella term for a way of life where you have enough money to never have to work again. What that means to you as an individual is highly subjective. Some people achieve financial freedom by earning a big paycheck, live in a large house, but still save a large portion of their income to retire on. Others achieve it through reducing their cost of living, or change the way they live, to such a level where they don’t need a lot of money to sustain them for the rest of their life. Whichever way works for you is best. The ultimate goal of it, regardless of how you go about it, is to have an enjoyable life where you get to choose what you do on a daily basis.
There are four basic methods that, when combined effectively, will result in financial freedom. Financial freedom takes time, organization, planning, and determination. It is simply but not easy. If it were easy, everyone would do it.
- Make More Money
This one is pretty obvious. You need money to live. More money makes it easier to live comfortably. At a certain point though, all of your comforts are met and you are no longer spending money on things you need, but on things that you want. This might be asking for a raise in your current job, changing jobs or even careers, going back to school to gain valuable skills, or working a side hustle. Recently I made this a reality. I was dissatisfied with my job and the salary I was earning was only a little above the level of my bills and retirement savings (I count this as a bill from my future self. This makes it a requirement to pay, not a “nice to pay when I have the money”). I changed jobs and negotiated a salary increase of over 20%. The financial freedom key to this though is not increasing my spending in step with my increased paycheck.
2. Reduce Expenses
You might be looking at your bills and thinking to yourself “there is no way I reduce my bills!” Well, I can almost assure you that you are wrong. How often to you read that magazine subscription that you signed up for through Amazon Prime two years ago? Do you really need unlimited data on your phone, or could you reduce how much data you have on your plan? Do you need the 14,000 channels of cable that you never watch? There are many blogs out there about how to reduce your spending. Some financial freedom gurus have gotten their costs of living down to less than $30,000. With planning, organization, and effort, my wife and I reduced our average spending as a couple from over $6,400 per month to about $4,000 per month. That is a savings of about $28k per year, from $76,800 to $48,000. In the interest of full disclosure, this did involve a move to a different state and buying a smaller house. However, we also changed how we shopped for food (and started meal prepping), changed our entertainment services, and eliminated some frivolous spending. My wife also went back to school (which deferred her student loans) and I changed jobs (which spurred the move). These were both intentional choices that furthers our goal of financial freedom.
3. Save/Invest the Difference
With that savings of $20,000 per year, we established an emergency fund.You probably want to start with $1,000 in a savings account. It has beenreported that only 40% of Americans can cover an emergency of this amountwithout going into financial hardship.[1]With $1,000 in the bank, your stress level will be reduced significantly. Ideally,you save up 3-6 months’ worth of expenses before you start investing. For us,that means having between $14,000 and $28,000 in the bank. This is quite alarge sum of money, and you might be tempted to invest it or spend it on otherthings. I would urge you to put this into a money market account or high yieldsavings account so it earns a little bit of interest in order to keep up withinflation (the process of money losing value over time). What counts as anemergency, then? It certainly isn’t that you NEEDED that pair of shoes you sawat the mall. That money is for when your car won’t start and needs a new fuelpump, or when your dog needs knee surgery.
One of the best ways to invest for retirement is through an employeesponsored retirement plan. Most companies offer a 401k, 403b, Thrift Savings Plan(military or federal service) or some other retirement plan. These numbers justrepresent their IRS code, nothing more. Many employers will match yourretirement contributions up to a certain level, so by not investing you areleaving free money on the table! Let’s say you make $50k per year. If your jobmatches your 401k contributions up to 5%, you are losing $2,500 per year thatyou would automatically be making. There are very few ways to invest where youare guaranteed to make a 100% return on your investment!
There are many different methods for investing, which is outside thescope of an introductory article. There are a lot of blogs and books aboutinvesting, but the generally accepted best plan is buy and hold investing inlow cost index fund. An index fund is a preset allocation of investments ofwhich you can buy a piece. You buy shares of index funds on a routine basisthrough your retirement fund. Instead of trying to time the market (attemptingto buy low and sell high), or actively trading stocks, just hold yourinvestments until you are ready to retire. Statistically speaking, consistentinvestment in index funds over the long term is the best choice for mostinvestors and will generate better returns on investment than any other method.Financial giants like Warren Buffet endorse this plan[2].Hold these investments for the long term and you will most likely be able toretire stress free. The longer you let your money accumulate interest, thebetter off you will be at retirement time. Don’t put it off! Start today!
You might be saying “but I earned that money, I should get to spend it!” I agree with you up to a point. I would argue that you should spend it, but do it intelligently. Instead of spending $100 on dinner and drinks for you and your spouse, you could spend $50 on steaks, sides, and a bottle of wine to prepare at home. If you do not know how to cook, learning to cook can be extremely rewarding and save you a lot of money over the course of your life. My wife and I find that cooking together gives us a higher quality of time together than we do going out to dinner to a fancy restaurant.
4. Pay Off Debt
One of the most stress relievingand rewarding parts of the financial freedom journey is paying off debt. If youhave credit card debt, you might be paying 17% to 32% interest on you balance.That’s crazy! If you pay that off, it is like a 17% return on your investment.You may have gotten over your head with credit card purchases, had unexpectedmedical expenses, or taken on a large student loan debt to pay for college.Whatever your current situation, you need a debt repayment plan. There are manydifferent ways to do this, and it is highly dependent on your individualsituation. If you can make more money, and reduce your expenses, you can usethat money to pay off your debt while you also save up your emergency fund andstart putting money into your retirement account.
Why is this stuff so important tome? I don’t want to work forever! Most people retire at 60 or 65. There arepeople in the financial freedom movement who follow a more specific path calledFIRE (Financial Independence, Retire Early). They take these four core conceptsto the further extreme they can. Some of them have developed an extremelyfrugal lifestyle, worked their asses off at high paying job, and been able toretire in the late 20s or early 30s. Can you imagine having the freedom tonever work again? Sounds amazing. These people aren’t living like hobos under abridge, either. Many of them are digital nomads, live abroad as ex-pats, orhave some alternative to the house in the suburbs with the white picket fence.Many of them travel all over the world and live extremely rewarding lives. Theyliterally get to do whatever they want. Many of the FIRE community do work, butit is because they are pursuing a passion, not because they need money.
How much money do you need to be financially free? The rough math on this will give you a target to shoot for. The generally accepted computation is as follows. Your yearly cost of living multiplied by 25. This is invested in a low cost index portfolio that averages a 6% rate of return (the historic market average). If you used my wife and I as an example, with our reduced cost of living of $48k per year multiplied by 25, we need $1,200,000 invested. We would take out 4% of that a year to live on, and that money would last us for the rest of our lives. For people who live extremely frugally, let’s say for $30k per year (achievable according to many people in the FIRE movement), would only need $750,000. Either of these numbers are extremely achievable with some planning and dedication. There are debates about the modern relevancy of the 4% rule or 25 year rule, but these are both theories which provide a jumping off point for you to tailor your plans from.
You might be saying, “I could never save up $750k, let alone $1.2 million!” You are wrong! In the above scenario where you make $50k per year and put 5% into your retirement account (matched by your employer), that means you are putting $5k away per year. It would take you 38 years to have over $750k. If you began saving at 22 (after college or technical school), you could retire at 60. If you put 10% of your pay (plus the 5% employer match), you would have $750k 32 years from today, or at age 54. Most financial planners suggest saving 12-15% of your income for retirement. This definitely takes planning and dedication. Imagine how soon you could retire if you could save 20% per year! It is doable, and I believe that you can do it. $50k per year is $25 per hour. This is much higher than minimum wage, but is definitely achievable with or without a college degree. Start early, be consistent, don’t take on a lot of debt (or get out of debt quickly), save your pennies, and find ways to live an enjoyable life without spending large amounts of money. Like I said, simple but not easy. You can do it!
[1] https://www.cnbc.com/2019/01/23/most-americans-dont-have-the-savings-to-cover-a-1000-emergency.html
[2] https://www.businessinsider.com/warren-buffett-recommends-index-funds-for-most-investors
