Financial freedom eludes too many. But why? In today’s world it isn’t hard to obtain the financial education required to achieve financial independence (#FI). What are the problems and what are the solutions? How can you put all of the slices together, reach financial freedom and live your life to the fullest?
Achieving Financial Freedom – The Problems
Keeping Up With the Jones: Trust fund babies aside, those living a lavish lifestyle may appear to be rich with their leased sports cars, expensive clothes, and McMansion homes. However, rarely are those folks financially independent. Commonly, they spend as much, if not more, than they make. The problem is wasteful spending.
Under Performing Investments: Financial freedom requires one to build wealth over time and stocks have been one of the best ways to build wealth historically. Unfortunately, many fail or do poorly when investing in the stock market. Fact is, the average person’s investments in the market barely beat inflation according to research conducted by J.P. Morgan. (SOURCE: 20-year annualized returns by asset class (1998-2017), J.P. Morgan Asset Management, Pg. 64.). The problem is lack of financial education and/or failing to seek out good investment advice from professionals.
Limited Number of Income Streams: Although not impossible, it is hard to become financially independent with one income stream. For example, a person depending solely on income from a job. Too many people rely on one income stream to build wealth and that is difficult, in most cases. Relying on only one income stream can be a serious financial problem if you lose that income for whatever reason. The problem is failing to diversify one’s income streams.
Procrastinating: When I was younger, I didn’t spend much of my time thinking about building wealth and retirement. Retirement was a long way off and I had better things to do with my free time. I procrastinated for the most part. After graduating from college, I got a good job but it didn’t pay a ton of money. By my late 20s, I started to feel like I would never get ahead. I started to realize I wasn’t going to get rich by working for a living, no matter how hard I worked. Something needed to change.
What needed to change was my lack of financial education. I put myself through college and got a master’s degree in science. As you might guess, I wasn’t required to take any finance classes and I wasn’t educated on how to build wealth. The problem was my lack of financial education.
First, realize your financial freedom is in your control but you must focus. What do you focus on? Focus on basic financial education and the things that are in your control that have the highest likelihood of helping you reach your financial goals. Your spending is in your control. Your investments are in your control and your income is in your control.
This one is easy to identify, but often harder to implement. My wasteful spending at one time included:
- Paying too much for TV related services (i.e., cable, Netflix, YouTube, etc.)
- Paying too much for phones
- Over spending at the grocery store
- Eating out too often
- Buying clothes I hardly ever wore
- Spending too much on the house and household items, especially falling for items that were “on sale”
- Spending too much on my cars and auto insurance (i.e., multiple cars, frequent car washes, style enhancements such as fancy rims/tires, etc.)
- Not using coupons or waiting to buy when items were on sale/discounted
What convinced me to change my bad spending habits? I started focusing on paying myself first. I set higher savings goals. I focused on maxing out my IRA’s at the beginning of the year instead of the end of the year. I made saving automatic and only spent what was left. Initially, what was left wasn’t much. However, I quickly realized I didn’t really get much satisfaction from the things I once bought. I didn’t miss them nor did I feel I was making any sacrifices by not having them. I realized I was wasting a lot of my hard earned money.
As my assets grew, I felt better overall and picked up the pace with respect to wealth building. I found waiting a day or two before buying things I though I really wanted resulted in far fewer wasteful purchases. I found taking a few items out of my shopping cart before checking out resulted in less wasteful spending at the grocery store. I started planning meals based on what was in the refrigerator/panty instead of buying whatever at the grocery store. I realized I had more than enough clothing to last over a year. I realized just NOT going to the department stores resulted in fewer wasteful clothing purchases. I spent less money going out with friends for dinner by asking them over for a meal.
After a while, it started to snowball. It became almost like a game to spend less than the other guy/gal. I saved thousands and I’m not exaggerating. I became more educated on what to do with my money and that made me much happier than the things I once purchased on a regular basis. It boiled down to putting a greater value on my financial freedom through financial education. Once I realized the money I saved could make more money than I could working, well, it wasn’t hard to focus and cut wasteful spending after that!
Investing to Build Wealth
I’m one of those guilty of making poor investment choices when I started out. I’m sure I didn’t keep up with inflation as J.P. Morgan points out; most don’t. To fix this issue, I started reading financial books, articles, and I attended free financial seminars. I quickly realized you need to invest for “the long haul,” diversify your investments, and use the power of dollar cost averaging.
Side Note – Dollar Cost Averaging: Dollar-cost averaging (DCA) is an investment technique which requires buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the investment’s price. You, as the investor, end up purchasing more shares when prices are low and fewer shares when prices are high. For example, say you have $100 to buy widgets each month. One month the widgets cost $10 each; you buy 10 widgets with your $100. The next month the widgets are $5 each; you buy 20 widgets with your $100 this month. You just bought more widgets when the price was low (20 widgets) and fewer widgets (10 widgets) when the price was high.
By spacing out an investment over time and dividing the amount of money invested equally, you basically avoid buying an investment when the price of that investment is high. Over time, some purchases will end up being for a higher per-share cost, and some will end up being lower. The technique does not guarantee that you won’t lose money on your investments. Rather, it is meant to lower your risk of buying high and missing out when prices are low, on average. You are likely using this approach if you invest in a 401(k) plan on a monthly basis. Learn more about DCA at Investopedia here.
As I learned more about investing, I realized buying stocks and bonds was a good way to build wealth but it wasn’t the only way to go. I needed to diversify my investments. I started reading books on real estate investing. I spent a ton of my free time in the library. In addition, I bought one of those real estate programs advertised on TV that promised you could get rich buying real estate with no money down. Although that never panned out, I did learn a lot from the program about buying and managing rental properties.
The bottom line, I educated myself on real estate investing and I purchased a house with very little money down when I was 28 years old. Three months later, I got a job in another state, moved, and turned the house into a rental property. One real estate book I read said to buy property near a university. I did and it was relatively easy to rent. My wife and I still own this rental property and it has produced a steady income stream for decades now. Educating yourself and making better investment decisions is a solution.
Diversify your income! Make your money work for you and build wealth. Focus on opportunities that provide you with income either now, or later in life when you retire. There are practically an unlimited number of ways to produce more wealth and income. The key is to identify the opportunities and determine what will work for you. Here are a few examples of what worked for my wife and myself:
- Interest and sign-up bonus money from our multiple online savings accounts produces income.
- Dividends paid to us from our stock market investments produces income.
- We own a business that produces income. It also enables us to hire sub-contractors and freelances which, in turn, helps them create income from side hustles.
- Money earned from our side hustles produce some income, albeit limited (i.e., blogging, affiliate programs, referral programs, etc.).
- Owning and managing rental properties produces income in the long haul (i.e., equity growth & principal payments, rent).
- Home ownership increases our net worth over time as we pay off principal and our equity increases.
- Wisely managing our debt. Instead of paying off our mortgage, we are cutting our tax liability by investing larger sums of money in our self-employed retirement accounts (i.e., SEP, Solo 402(k)). This alone allows us to increase our net worth beyond that which would occur by paying off our mortgage.
- Using credit cards not only cuts our expenses (cash back), it also produces income for us (i.e., sign-up bonuses and rewards from managing multiple new cards annually)
The list goes on. My point here is to encourage you to look for ways to produce multiple income streams. You’ll soon find your income growing and you’ll build wealth faster than you ever thought possible.
Take Action – Control Your Future Today
- Review my expenses for the past month. It was my birthday last month and we splurged a little. That’s OK, we hit our savings goal, maxed out our 2019 Roth IRAs and added funds to our retirement accounts in January. Still, we reviewed our January expenses this morning and agreed to cut back on a few things in February. It’s a habit now.
- Review our investments and determine if we need to re-balance our portfolio. It only took me a few minutes today because we now have a clear picture of our investments and net worth all in one place, for the most part. We use Mint.com to review our monthly expenses and income. To evaluate our investments, we use the charts produced by our brokerage companies (i.e., Vanguard, Etrade, etc.).
- Schedule bill payments and move any extra funds out of our low interest checking accounts to higher interest online savings accounts. We keep as little money as possible in our business and personal checking accounts with our credit union given they pay little interest. Also, we have multiple online savings accounts to manage because we like increasing our return for our emergency funds.
- Read a few financial articles. I do this everyday; usually early in the morning (done). I shared a few of the articles on twitter | @bossmanjax
What are you doing today for your financial independence?