More and more I hear and read about people wanting to attain financial independence and retire early aka FIRE. Even though the acronym FIRE is pretty cheesy I love the idea of financial independence. But is it really as attainable as many make it out to be? In this episode I’m going to break down what financial independence really is, how one might go about attaining financial independence, and if it is attainable how you can do it earlier in life as opposed to later in life. Also, as a side note I’m going to abbreviate financial independence to findie. Financial independence takes too long to say and write plus findie is much more fun to say.
Wouldn’t it be great to be able to leave your 9 to 5 job and still have money coming in so you could do whatever you wanted to do? I think this would be pretty amazing! This is what being findie could offer you. Findie means that your investments are bringing in more income than you have for expenses. Therefore, at the end of the month, for example, you have more money than the start of the month even after you pay for your expenses. Finance geeks might argue on specifics but that’s what financial independence is to me. The greatest thing about findie is that it gives you the freedom from not being tied down for 40 plus hours per week working at your J.O.B. Can you imagine all the things you could do if you didn’t have to punch in and out of a time clock all week! You could travel the world, start a business selling your favorite crafts, be involved in a community outreach program, you could even have time to mow your yard before the yard waste bin is picked up! Crazy! I know! It sounds too good to be true, but is it? For some people findie is an attainable goal, but for others, they will likely never attain findie – they won’t even get close.
So, how does one go about attaining findie? In short, you can get there by taking one of two paths. You either have to win Powerball or you have to work hard and be smart with your money. The latter is much more likely something that you can do, so that’s the option I would choose if I were you. However, winning Powerball sounds like it would be pretty fun.
So what does working hard and being smart with your money entail? Let’s break this down. If our goal is to attain enough monthly income from our investments to cover our expenses, then we first need to accumulate a certain amount of wealth. This is where working hard comes into play. If you’re like nearly everyone you’ve started out with almost nothing. Maybe now you have a good education and you’re working at a steady job. That’s good. That’s where a lot of people are. What you need to do know is figure out how to maximize your income. You need to ask yourself, “What can I be doing to earn more money?” Maybe you can pick up some overtime. Maybe you can get a side job. Or maybe you can go to a trade school or higher education that will allow you to move into a job that pays twice as much as your current job. The goal here is to figure out how to bring in more money so you can maximize the amount of money you can contribute to your investments. Ok, so that’s the working hard aspect. You have to work hard to earn as much as you can – got it.
The next aspect of becoming findie is being smart with your money. So, you’ve got the good job, you’ve been putting in overtime, and you’re doing everything in your power to maximize your earn potential. Perfect. A lot of people make it this far. But, where 97% of people fail at attaining findie is the next part – figuring out how to keep the money that they earned. Most people don’t have a problem working hard for their money. The problem they have is once they get their fingers on their paycheck, they just blow it on whatever they come into contact with. A trip to Wal-Mart, they blow it. A trip to the car dealership, they blow it. They see a new home they like, they blow it. Drink a little wine and jump on Amazon, they blow it. Oh look, plane tickets to Hawaii are cheep this week, I blew it. Yep, I’m guilty of that one. What I’m saying is that we humans are exceptional at spending money. We’re so good at spending money that we spend money that we haven’t even earned yet, hence credit cards, personal loans, lines of credit, and countless other ways to spend now and pay later. We are exceedingly better at spending money than we are at keeping money. This is the primary reason that most people will not attain findie. Let me repeat that, this is the primary reason that most people will not attain findie. Out-of-control spending is the biggest road block to attaining findie there is. Why? Because you have to have money to invest in order to have a passive income coming in. But you don’t have a passive income because you don’t have an investment because in stead of investing your money you blew it on a garage full of junk! Hmmmm… I think I get it now.
So, how do I build an investment? First, you create a budget that you actually use. Just creating a budget will get you absolutely nowhere unless you stick to it. A budget will help you maximize the amount of money that you can put into an investment. This way your money will not be spent on stuff for your garage accumulation campaign, but instead, can be diverted to your investments. Perfect… we’re going to take over the world! – not really…
When you’re first starting out investing I recommend investing in a few diversified mutual funds. There’s a bunch of companies out there that you can find online that will be happy to invest your money in mutual funds for you. But before you give anyone your money do your homework. Let me repeat that again… Do your homework. After investing in diversified mutual funds for a while you will eventually have enough money to potentially buy some real estate. For the right person real estate can be a good option, but real estate isn’t for everyone. As you become more of a savvy investor you might decide to take a small portion of your investment funds and build a portfolio of stocks. By the way, stay away from day trading. Occasionally I hear of someone who thinks they want to be a day trader as a hobby. Let me tell you now, that it’s not going to end well. Do not become a day trader because you will loose money. Look at the statistics and you’ll realize that even most professionals don’t consistently beat the market. What that means is that the day trader’s returns are not greater than the returns of the S&P 500. Anyways back to general investing. When you invest, you need to invest for the long-term. Investing should be a marathon not a sprint. Keep in mind that there are what seems like endless investments out there that you can put money into. Don’t feel like you have to be confined to the investments that I mentioned. The key is no matter where you invest you need to spread your money out to different things to keep your investment portfolio diversified. That way if one area of the market tanks, you don’t loose all of your eggs.
The next question you probably have is “How soon can I become findie?” This depends on the big three: how fast you can put money away towards your investments, how much income your investments can produce, and what your expenses are. These are the three biggest factors that can determine how soon a person can become findie. Therefore, the faster you can build a significant investment that produces income and the faster you can cut your monthly expenses, the faster you will become findie. For most people who actually attain findie, it takes them a majority of their adult life to get there. I would stay, that most people that I’ve met who achieve findie, first hit the findie mark when they are in their 60s. They’ve worked and worked and worked and saved for retirement and then once they get into their 60s their investments are generating enough income that these findie people can withdraw a calculated monthly amount from their investments indefinitely. Meaning regardless of the withdrawal from their investment, their investment will still continue to grow. The reason most of the findie people I’ve seen don’t hit findie until they are in their 60s or older is because it takes a long time for people to build that nest egg that will produce a high enough income. Can findie be done at a younger age? Of course. But it often isn’t for the exact reason that we already talked about – people are spendaholics. If someone was very disciplined with their money and had very low monthly expenses, I’m guessing depending on the big 3 and all that, the average person could reasonably attain findie by the time they were in their 30s if they took putting money away for investments to an extreme. But again, it all depends on the big 3. Someone could attain findie quite easily if they had almost no expenses because their investments wouldn’t need to produce much, which would mean they would need a lot in investments.
If you want to become financially independent I’m willing to bet that you can do it, as long as you’re willing to be disciplined with your money. That’s really what it comes down to, discipline. If you’re willing to make the sacrifice now, so you can reap the benefits later, you will be able to achieve findie. How soon will you achieve it? That’s totally up to you. I might take you 5 years or it might take you 50 years. I think becoming findie is a worthy goal that has almost endless benefits and of course some downsides too. If you take on the challenge of striving for findie, I sincerely applaud you. I wish you the best of luck and all the success that can be had as we strive to reach that mark together.