This is Part 1 of a 2-part series:
Around this time last year, I had got to class early one day and was browsing the internet when I decided to type in how to retire by 40 years old. The thought of having to work for 40 plus years till I was 65 years old or later seemed dreadful to me and I thought to myself there has to be another way. I came across articles on this concept of financial independence. It talked about much you need to save to retire by 40 and then gave stories and tips from people who had actually did it. My interest kept growing and I eventually came across this idea of FIRE (Financial Independence Retire Early) According to ESI Money, Financial Independence means “You are not beholden to a job to provide for your livelihood, instead your wealth supports your lifestyle. You do not have to work, you can choose to if you like but it’s not required. Your expenses are covered by your assets and the income generated by them. You draw down on your assets and your assets cover your expenses indefinitely.”
I thought to myself wow this sounds great! From then on, I started researching and reading up more on this concept and how I would be able to achieve this one day. As I learned more I told my parents about this idea and asked them their thoughts on it as well as telling my friends and it was very interesting to hear their responses and perspectives on this topic. Today I am going to share with you what I have learned and what my goals related to this concept are.
Track Your Spending
The first thing you need to do if you want to achieve financial independence (FI) is to lay out a goal for how you are going to achieve it. There are 4 steps that you can do as your start off on this journey. The first thing that you should do is to track your spending and see which areas you are spending the most. Most likely you are over consuming and little things here and there can really add up. Once you have analyzed where your dollars are going, you can then begin to cut back on some of your spending. If you like having Starbuck’s coffee every day before work and that makes you happy that is fine, you just need to look at another area of your life where you don’t really need it and don’t spend on that.
According to BLS.gov the top 3 expenses for an average person are housing at 37%, transportation at 18%, and food at 14% totaling 69%! That is a huge number and there are definitely ways to cut down on these three things. Some basic things are not buying the biggest house you can qualify with a mortgage. Kevin O’Leary who is a multi-millionaire and probably best known as Mr. Wonderful from Shark Tank says that your mortgage payment should only be 1/3 of your after-tax income. For transportation instead of buying a brand-new car, buy used because cars depreciate very quickly. You can also try to live closer to work, take the train, or even walk or bike. And for food you can cook at home more and go out to eat less. If you can cut these three big expenses down to say 45% of your budget instead of 69%, and save and invest the difference, that can go a long way into reaching your financial independence goals!
Once you’ve cut your spending down your next step should be to focus on saving more. The higher the savings rate the better. I’ve read stories of people who had a savings rate of 50% and even up to 75%! While the higher savings right might be easier if you’re in a high-income profession, you can still save even 20-30% of what you make. However, you shouldn’t save just to save and have your money sitting in the bank. While you do want to have an emergency, fund set up of 6-9 months of expenses, even with a high interest savings account giving you 1.5% interest, your money isn’t even keeping up with inflation. You should be saving with the thought process of investing. One of the books I read, Richest Man in Babylon talks about paying yourself first. For me the first thing I do is take out money for tithes. The next thing I do is pay myself first from post tithe dollars and that can be anywhere from 10-50% and be your savings rate. If you automate it you will be more likely to reach your goal and your money will have a better chance of growing.
Now there are many different investment vehicles that you can choose from as well as choosing an investment advisor or having passive or active management. A lot of people who aspire financial independence early use low cost index funds which can be easily managed by yourself. The great thing about low cost index funds is that over time as your assets grow the fees you pay are small compared to if you have an advisor. Their fee can take a large chunk out of your portfolio causing you to miss out on hundreds of thousands of dollars by the time you retire! By investing early and letting your money grow, you get to reap the benefits of compound interest which the great investor Warren Buffet calls the 8th Wonder of the World.
Additional Revenue Streams
Because you can only trim down savings so much, instead of worrying about what you have to keep cutting out, instead focus on earning more! In multiple discussions it is said that the average millionaire has 7 different income streams. While most people rely on the one income stream which is earned income from their job, there are so many different ways to generate money, you just have to get creative and use the God given skills you already possess, as well as learn a few new ones and you can have a multitude of different income streams. This in turn can become your side hustle or your job you do outside of your earned income job. Essentially you are becoming an entrepreneur. Not only will this help you reach financial independence earlier, but in the scenario where you were to lose your job, if you have money coming in from other places, the impact won’t be felt as much and the pressure of finding a new job won’t be as great. Generating extra income once you put in the initial work can turn into great forms of passive income which could potentially be paying you in perpetuity. Some forms of extra income are dividend income, income from real estate, royalties from a book you, starting your own business and the list goes on!
My side hustle is this blog. While I am playing professional basketball (earned income), this is my side business, and whether I will make money off of it or not, I don’t know yet, but that’s not the goal. The goal is to provide great content while bringing value and helping people!
For me the purpose of trying to achieve FI is that I am striving to create the life that I want for my future. It's more about the financial independence part for me and and if I get to 40 and have a achieved this goal and still love and enjoy what I'm doing than I can keep working, but it's all about having that option. I also want to create generational wealth for my family and by pushing myself and being creative with generating different revenue sources that is a way to make it happen. Life is all about choices and having the choice to spend your younger years traveling more, enjoying the things that truly make you happy is worth working hard when you're younger to enjoy time when you are older!
Since this is a two-part post, next week I am going to talk about the different types of “FIRE” and some of the math behind it, as well as my own personal goals relating to this topic!
I hope you enjoyed my first post related to a financial topic and I would love to hear your thoughts about this in the comment section below!