Financial independence (#FI) isn’t just about making more money, cutting expenses, saving more, and building a portfolio. It is about securing your freedom to make your own choices, every day. By focusing on financial education you’ll achieve financial independence sooner rather than later. For my wife and I, it’s about controlling our futures so we can live a happy and comfortable life; in the moment today as well as every tomorrow. A life free of the financial worries that cause unnecessary anxiety. And yes, that’s worth the time spent educating ourselves financially.
It is well worth an occasional sacrifice; delayed gratification. How do you do that while living happily in the moment? It’s not as hard as you might think.
Financial Independence Education
I’m a proponent of financial independence education and I learned it is a process. For example, some in the #FIRE community criticize the “latte factor.” They claim it is too small of a savings and somewhat insignificant. It’s not, if you’re just getting started or living paycheck-to-paycheck. I believe it’s not about the small amount of money either. The concept of the latte factor encompasses more than what you save by making your coffee at home.
Relatively small spending habits added up fast for us. Also, once we started tracking them we quickly realized how the little things compounded. Wasteful spending was having a negative impact on our long-term finances. So we got started. Believe me, getting started isn’t all that hard. Understanding the basics is important. First and foremost, we started focusing on:
- Learning more about finances (reading articles, books and blogs)
- Paying ourselves first (create automatic savings habits)
- Eliminating “bad” debt (credit cards, car loans, student loans, etc.)
- Cutting wasteful spending (far fewer lattes LOL)
- Invest more (priority, max out our Roth IRAs as early in the year as possible)
- Enjoying the moment doesn’t necessarily require spending a lot of money
Pay Yourself First
Easier said than done? Not at all. Once you start paying yourself first, automatically, you won’t have money to spend on the trivial things that don’t improve the quality of your life anyway. Contributing at least 10 percent, if not more, to your employers 401(k) and/or setting up a Roth IRA on your own are simple to do. Also, you can setup a separate online savings account separate from your checking account and make automatic monthly deposits. We do all of the above. It’s one of those “just do it” recommendations from any competent financial planner.
Eliminating the trivial things we spent money on took some time. It was a lot more than lattes. For example, buying new clothes frequently, eating out at expensive restaurants more than necessary, and buying way too many things for our home. My wife and I realized we were blessed and we had more than enough stuff. We cancelled magazine and other subscriptions. We became more conscious of our unconscious spending on the little things that weren’t adding value to our lives.
Not only did we stop buying trivial things, we sold a bunch of stuff by hosting yard sales and selling through Craig’s List, Ebay, and Facebook Marketplace. After a year or so, we added several thousand dollars to our retirement accounts by selling trivial items that we never used anyway.
Starting with the little things helped us create better spending habits. As a result, we ended up saving thousands more. The extra money saved was invested. Watching our investments grow over time hooked us. Becoming more conscious of our spending habits was a clear winner for us.
Planning for a Rewarding Retirement
Why worry? Worrying just makes us less productive and unhappy. It seems the more time I spend planning and taking action the less time I have to sit around worrying. It works for me and it might work for you. Retirement planning is straight-forward and includes a few easy “general” steps:
- Determine how much money you want to spend each month when you retire (create a basic retirement budget, ballpark draft)
- Set your retirement age/date and estimate how long you’ll live (make an educated guess)
- Calculate the number of years you’ll be in retirement (expected death age minus your retirement age)
- Determine how much money you’ll need to last during retirement (for example, retire at 50 and live to 90, you’ll need enough money for 40 years)
- Invest and manage your money wisely to make sure it lasts as long as you do
- Minimize the tax bite and take full advantage of retirement tax shelters to supercharge your spendable income
- Get the highest possible lifetime benefits from Social Security — and avoid what may be the single biggest mistake made by nearly half of all retirees
- Create multiple income streams to stretch your retirement savings even further
- Prepare adequately for one of the biggest costs retirees face: health care
Well that’s relatively simple, right? OK, it is going to take some time and some work. But, it is a clear path to success.