I sucked with money. For a long time. I have blown through more money than most people have had pass through their hands in the past decade. Most everyone around me was terrible with money as well, giving me the impression that I was just being normal. But after picking up a Dave Ramsey book, I realized that normal = broke, and I was well on my way to staying broke forever.
I finally learned a few things about how money works, how I should handle it, and how having a budget roadmap for every dollar of my income can change our financial legacy forever. I got extremely passionate about trying to show others the “light”, show them how wasteful and lame it was to just blow money on stuff and not know where their money was going. It became my mission to help people make the most of ALL their hard-earned cash, no matter how much or how little it was.
But something has always been missing from how I approached finances. Everything is short-term. There seems to be this HUGE SURGE OF MOTIVATION to kill off debt or hit some other HUGE goal within the next 2 years, that I never bothered to ask “what’s next?” Personally, we have student loans that need to die, and a mortgage that I want to tackle right after (sort of). When I do budgets for other people, I have them send me a list of goals they want to hit, and I tailor a financial plan for them to hit those goals.
But I never questioned if they were even the right goals.
My Definition Of Financial Independence
Most people agree on what financial independence is, and what it is NOT, but for clarity’s sake, here’s my definition:
Financial independence is having enough money to not have to exchange time for money ever again.
Financial Independence has many factors and rules around how to achieve it, but the definition is always the same. And notice I did NOT say “never have to work again.” That is very intentional. Life involves work. Raising kids is work. Marriage is work. Keeping up with chores and running errands and making sure you manage your money well all involve work.
And I know this may not be popular, but I’m going to say it anyway: WORK IS A GOOD THING! There, I said it. And some people have made it a goal that work does not have to involve monetary compensation, but just the joy of a job well done. Payment comes in the form of family hugs, a thankful neighbor or just enjoying the fruits of your labor (literally) when picking fresh from your garden.
And that’s what financial independence means to me, and why I have started looking closer and closer at how it can materialize as a family goal for our household.
Where I Learned About Financial Independence
Thinking about possibly getting to the point of not having to exchange time for money started first at the end of Dave Ramsey’s Total Money Makeover book. It was a weird metaphor, especially after spending the first 90% of his book talking about getting out of debt. But now that I think about it, it was his version of financial independence. It went something like this (paraphrasing):
“As a kid, do you remember pedaling your single-speed bike up a REALLY big hill? It was a tough climb, and it took a LOT of energy and time to make it to the top. You would ride up it like a switchback, going back and forth up the hill, ever so slowly inching your way toward the goal.
Toward the very end, you could see the top, and though your legs were burning, you kept pushing. As you finally crested the hill, you could see the whole town, you had finally made it! And now comes the best part. Just a few more pushes of the pedals, and then your bike starts to roll down the other side of the hill. Soon, it’s going faster than you could even pedal yourself, so you just let go. With the wind whipping through your hair, you no longer had to push to gain speed, it happened by itself. The joy of riding your bike now required no effort on your part anymore.
That tipping point at the top of the hill is just like your money. You work and work and work, and at some point, your money starts working for you. And soon, your money is making more than you are, and you can let go and just let it do all the work from there forward.”
The metaphor is kinda weird, but the picture is there. Work until your money makes more than you do. That sounded pretty awesome to me.
Then, a few months after I started this blog, I started connecting with other like-minded people who also has a passion for helping others succeed financially. And while searching around for financial blogs, I came across a guy who became financially independent at age 30. Mr. Money Mustache (or MMM) took Dave Ramsey’s advice, injected it with frugal steroids, and he and his wife worked only 9 years before their money made enough to cover their yearly expenses. Here’s a summary post on how to retire ASAP using MMM’s advice.
Financial Independence As A Goal
After ingesting more and more information on how to achieve financial independence, I started to realize that it’s not some far-fetched goal for extreme cheapskates or rich people, but something that can be set as a goal for the average family. The math is simple, as illustrated in this post. But the execution is where most will stumble. It’s where we have stumbled, honestly.
Michelle and I have had more and more discussions on what it would look like to have an over-arching goal of becoming financially independent. In discussing our goal, I have realize a few things about myself:
- I don’t want to quit working for money once we become financially independent.
- I don’t want to ever “retire” in the traditional Americanized sense of the word and be a lazy schlub (you know, live on the golf course and recline in front of a TV all day).
- We need a lot less than I ever thought to safely live off 4% of our savings.
- The most motivating part of the goal is the ability to spend as much time as I want with my family.
- As much as I enjoy our home and everything about it, it probably wasn’t the wisest financial decision.
- As much as we tell everyone that my wife is the spender of the family, that is NOT true.
We have started to loosely map out what it would look like for us to work toward this long-term goal. As with all goals, the best way to achieve them is to start at the end and reverse engineer them. So here’s how we set specific goals and milestones to work toward financial independence.
Four Steps To Financial Independence
- Put together a projected “F.I. budget” of our predicted future monthly expenses. This would NOT include a mortgage, because we want to KILL that sooner.
- Based on the annual expenses, figure out how much we would need to live on 4% of our total savings (Hint: multiply annual expenses by 25).
- Based on that total number, use a handy-dandy investing calculator to see how long it would take to get there based on our monthly savings amount.
- Adjust savings rate as necessary to get desired result.
Making The Necessary Changes
I think that last step above is the BIGGEST hurdle for most to overcome. Whatever your current financial situation, there are a MILLION reasons why you are only able to save the amount you do RIGHT NOW. Whether it’s that you mortgage is too big, or your income is too small, you feel that you are financially tapped each month, so how in the world could you increase your savings rate?
I’m in the same boat currently. For us, we know that our mortgage is one of that biggest reasons for that. Our long-term plan includes adjusting it down (which may include moving), and paying it off early, as well as increasing our income strategically over the next decade or so. The rest of our budget is pretty rock solid, and we are bare minimum for most every category, including free travel, not paying for clothing, and avoiding new cars. But our budget has been a work in progress for 5 years, and over the years we have continued to cut the crap out of our budget to direct our money toward the important things in life.
It’s not easy, but the only way to increase your savings rate is to either make more money, or cut out unnecessary expenses. And the only way you are going to make those changes is having your goals at the front of your mind as you review your spending and decide what is truly important to you. The goal of financial independence can be the foundation and long-term plan for you to start making those changes today.
Staying The Course
The only way Michelle and I stay the course on this thing for the next decade or two is keeping in mind the reason to pursue financial independence. Freedom to spend our time however we like.
We don’t hit this goal if our dreams are too small, and we will NOT make it if we succumb to the consumerism mentality that says more stuff = more happiness.
We WILL hit this goal if I put a BIG picture of my family on my desk at work. This goal will BECOME A REAILTY if we stay passionate for life.
If you want to make this a reality for yourself, you need to truly define what is important to you. Then you need to delete anything from your financial life that opposes that. Simple as that. And to continue to stay the course long term, you will need to filter all incoming noise that says you need more STUFF to fulfill your life.
It won’t be easy, and sometimes it feels like sacrifice. But in reality, that is FREEDOM!
Comments: What are your thoughts on the goal of financial independence? Have you considered what it would take to get there? I recommend trying my four steps above to see where you land, and what adjustments you can make to make it happen sooner.