Money can buy lots of things, but the greatest thing it can buy is freedom.
Most people today spend their lives in what can only be called financial slavery:
- The bank owns their house.
- The dealership owns their car.
- The credit card companies and student loan providers own a sizable chunk of their future income.
- Their boss owns every hour between 9 am and 5 pm five days a week.
Perhaps the most clever and insightful observation of the futility of the rat race comes from Ellen Goodman:
Normal is getting dressed in clothes that you buy for work, driving through traffic in a car that you are still paying for, in order to get to a job that you need so you can pay for the clothes, car and the house that you leave empty all day in order to afford to live in it.
Is this all life has to offer?
Running out the clock five days a week as you try to stay ahead of your mounting financial obligations and try to scrape together a couple of vacations a year?
Slaving away to be able to afford things that you mostly don’t use?
There has to be something better out there.
What if you owned all your possessions free and clear? What if you had enough money coming in from outside your job to not need your job? What if you had enough coming in to not need to work at all?
In the online world, this is sometimes called FI (Financial Independence) or FIRE (Financial Independence, Retire Early).
In my book I preferred the term Financial Freedom which I think is a better fit.
This may sound like a pipe dream, but it is something that you can achieve if you set your mind to it.
The short version is that if you can get rid of your debt and save up 25x your yearly spending, you can walk away from your job.
How can a reasonable person hope to pull this off? The way I see it, there are four key pillars:
- Avoid debt
- Control your expenses
- Increase your income
- Invest your extra time and money
1. Avoid Debt
When you get right down to it, debt is an agreement to pay more for something than it’s worth.
Is it slightly more complicated than that? Sure, but that’s essentially what you are doing.
It’s like going into a negotiation hoping you lose.
It makes no sense.
Are the ever reasons to borrow? Sure, the golden rule of borrowing is that you should only borrow to build. This means that you should only take on debt if your expected long-term payoff outweighs the cost to you in interest.
Usually student loans, mortgages, and loans to start a business are seen as acceptable debt. I would caution that all debt is dangerous and if you aren’t careful, all three of those forms of borrowing can blow up in your face.
The only debt I’ve ever had is a mortgage which I have been systematically paying extra on every month since my very first payment.
2. Control Your Expenses
This all starts with the big ticket items: your house (or apartment) and car.
Whether you buy or rent your home is not nearly as important as how much you pay. Especially since more expensive living situations usually come with plenty of hidden expenses (e.g. a larger house costs more to furnish and will likely incur higher utility bills)
Do yourself a favor and find a place that is way cheaper than what people tell you that you need. If your living arrangement is in the same ballpark as all the people who are shackled to their desk until their mid-60’s, there’s a problem.
When it comes to you car, buying 5–10 year old used vehicles with cash is the way to go. There are many costs of car ownership, but the biggest is depreciation, the difference between what you buy the car for and what you sell it for. The way to avoid paying for depreciation is to buy older vehicles.
I drive a 2003 Toyota Corolla with over 160k miles on it. Are there ever repairs that you wouldn’t have on a new car? Sure. Every five years or so something needs replacing and it generally runs about $100-$300.
Trust me, $100-$300 every five years or so is substantially less than buying a new car every five years.
You also need to keep your other recurring expenses low and always be on the lookout for ways to trim them.
Six years ago, My wife and I switched from paying $150 for two lines on AT&T to paying $90 for both of us on Straight Talk Wireless, a prepaid plan. Next we moved to paying $70 between the two of us at Cricket Wireless. We just switched to Red Pocket, another prepaid service that includes talk, text, and 5GB of high speed data for $37 a month for the two of us.
By the way, the $33 we are saving per month by switching to Red Pocket is going directly to paying off our mortgage faster.
The recurring expenses are the best place to trim the fat since you get ongoing savings without ongoing willpower, but it’s important to keep the rest of your spending under control as well.
For many people, eating out is an enormous expense.
When you eat out at a cheap fast food joint, you can probably get $4 for a meal. Move up to Subway or Panera and you’re probably looking at $5-$10 for a meal. Go somewhere relatively cheap where you are served and you are looking at $12+ (emphasis on the “+” — you can easily land in the $20-$50 a meal per person range by going out).
When you cook for yourself, $3 a meal represents the high end of what you can expect. Get a little bit efficient with meal planning, and you can get to $2.50 per person per meal. Utilize leftovers effectively and be smart about deals and you can get $2 per person per meal. If you really want, you can go for the frugal black belt of $1 per person per meal.
If you eat three meals a day, you’re looking at over a thousand meals a year. Those per meal costs really add up over the course of a thousand meals.
I’m not saying that you should never go out to eat, I’m just pointing out that the easiest way to save money on food is to cook. The best baby step available to you is to identify one meal a week where you always eat out, and come up with a plan to not eat out for that meal. Maybe it means cooking one extra meal this week. Maybe it means cooking extra the day before and having leftovers. Maybe it means eating the leftovers that are already in your fridge. Maybe instead of going to Subway two days in a row and getting the footlong each time you go once and split the sub over two days. Maybe *gasp* you have one day a week where you eat less than three meals. I’m not a doctor, but I promise this won’t kill you. You get plenty to eat.
3. Increase Your Income
I’m a big fan of frugality, but it has one notable drawback: you can only save as much as you currently spend.
If you spend $30,000 a year, the most free cash you can generate by cutting your costs is $30,000 (and the odds are pretty low that you can actually slash your spending to zero).
On the other hand, you can increase your income by $30,000, $60,000, even $100,000+. It might not be easy, but it’s probably easier than being so frugal that you spend nothing.
Here are some options for increasing your income:
- Negotiate a raise
- Get a promotion
- Find a better paying job
- Start a side hustle
The approach for the first two is going to be similar. Figure out what your boss and other people in power want, and work hard to help them get it. Remember, they have their own agenda which they care about far more than they care about you.
Make sure you are always learning new skills and taking on new responsibilities. Keep a record of all your accomplishments and progress so that you have something to talk about.
In terms of getting a better paying job somewhere else, make sure you are always on the look. You can let friends and professional acquaintances know that you are looking and browse job listings for your area online.
Probably my favorite way of increasing your income is to start a side hustle. There are tons of options here, but there is one approach that I really like that we will cover in the next section.
4. Invest Your Extra Time and Money
The goal of financial freedom is to stash up enough money to allow you to take control of your time. Ironically, the two resources at your disposal to make money to free up time are money and time.
Time is an unusual resource in that it can’t be saved. Your life is passing by every second regardless of what you are doing.
This means that there are three things that you can do with time:
- Waste it: activities that provide no current or future benefits (e.g. mindlessly scrolling Facebook for hours)
- Spend it: activities that provide a current benefit, but no ongoing benefits (e.g. working an hourly or salaried position — where you are literally trading time for money).
- Invest it: activities that may or may not provide immediate benefits, but can set up ongoing future benefits (e.g. writing a book that can keep selling for years)
Most people alternate between the first two uses of time.
The only way to make money is to sell something, and most people choose to sell their time for money.
A better approach is investing your time into creating something that you can sell besides time.
This was a core premise of my book on personal finance. Ironically, the book itself is a good example of this approach. The time spent writing it was an investment creating something I can now sell instead of time.
If you want to build wealth, you don’t want to work for money, you want to have money work for you.
There are three major investments that have proven effective at building wealth:
- Starting a business
- Real estate
- The stock market
The first two are amazing options, but also quite a bit of work. They are investments in the sense that they are places that you can put your money and potentially receive a handsome return (better than the stock market even), but they also involve an enormous investment of time and energy. They both represent at least part-time to full-time jobs.
My recommendation is to start investing in the stock market.
Here — as simple as you’ll ever find it laid out — is a winning strategy (note that it is America-centric because that is where I live, but the principles apply anywhere):
Start with your 401(k) or 403(b) plan at work. Many companies offer a match on your investment. For example, my company matches my investment dollar for dollar up until 6% of my salary.
This instant 100% rate of return is pretty much the best rate of return you’ll ever find.
But wait, your plan has so many options, what should you invest in?
The answer is the stock market itself, the whole market, by buying low-cost, broad-based index funds.
By “low cost” I mean a low expense ratio and the absence of any extra fees. In investing, you get what you don’t pay for. The higher your fees, the less money that stays invested working on your behalf.
By “broad-based” I mean as close to the whole stock market as you can get. This will likely be a total stock market index fund, but if that isn’t available, and S&P 500 will do just fine (the S&P 500 is 500 of the largest American corporations and represents something like 70 or 80% of the total market).
Here are some exact ticker symbols to look for which all come from my favorite low-cost brokerages, Vanguard, Charles Schwab, and Fidelity:
- VTSAX — Vanguard Total Stock Market Index Fund
- FZROX — Fidelity ZERO Total Stock Market Index Fund
- SWTSX — Charles Schwab Total Stock Market Index Fund
- FSTVX — Fidelity Total Stock Market Index Fund
- VFIAX — Vangaurd S&P 500 Index Fund
- SWPPX — Charles Schwab S&P 500 Index Fund
- FUSVX — Fidelity S&P 500 Index Fund
My 401(k) plan doesn’t have my preferred VTSAX, but it has VFIAX so that is what I am invested in.
If you can’t find any of the funds above, be on the lookout for terms like “Index,” “Total Market,” and “S&P 500” and find a fund with a low expense ratio.
If all else fails, most employers have a “target retirement date” fund. Pick one with a date close to your theoretical retirement date and move on.
Once you’ve hit your employer match and are able to free up more cash to invest, you can either increase your contributions until you’ve hit your limit ($18,500 in 2018), or open an IRA (Individual Retirement Arrangement: $6,000 contribution limit in 2021).
If you max out both of those (or if your income is too high to contribute to an IRA), you’ll need to open a regular taxable brokerage account.
For both IRA’s and taxable accounts, I recommend opening an account with Vanguard and investing in VTSAX — if you can. The downside is there is a $10,000 minimum.
If you don’t have $10,000, no problem. Just head over to Schwab and invest in SWTSX (note: you have to first transfer money into your Schwab account and then go back in and use it to buy SWTSX. Make sure that you are aware that this is two steps).
When investing, you should invest as much as possible, as early as possible and not panic and sell when the stock market takes a dip. No matter what, stay the course for the long haul.
Since we’re keeping this post simple, we won’t go any deeper, except for answering a couple of burning questions:
Q: Isn’t investing in 100% stocks risky? Shouldn’t there be more diversification?
A: An index fund provides plenty of diversification. You are essentially buying every publicly traded company in America.
Sure, there is still some volatility in the stock market, but this is smoothed over a little by the fact that you are actively making contributions.
You could smooth the ride a little more by allocating your assets across a few different classes, but your best bet for growth during the time you are building your wealth is to invest in stocks.
Plus, you may be diversified beyond stocks already. If you own your home, that is another form of investment that you are holding.
Will you ever want to move away from 100% stocks? Sure, once you are no longer contributing and need to live on what you saved, you probably want to add some bonds in, which are more stable.
Think of that as the investing 201 class on asset allocation.
Q. You mentioned retiring early but then said to invest in retirement accounts. Aren’t there penalties for taking this money out early?
A. Yes, but there are (legal) ways around everything. They are beyond the scope of this post, but if you want an in-depth treatment, check out these posts from the Mad FIentist:
These posts are dense and are only for those who crave more info.
For everyone else, the path forward is simple, at least for now:
Invest as much as you can as early as you can in low-cost, broad-based index funds, prioritizing tax-advantaged retirement accounts and your employer match.
If you made it to the end of this lengthy article, congratulations. You have the first thing necessary to actually achieve financial freedom: the ability to learn and grow.
I tried my best to give you the basics, but there’s still a lot to be learned, and much of it will need to be learned the hard way: going out and trying things for yourself.
Like anything else worth doing, there will be some doubt and uncertainty. You can never be sure when you set off on your bid for financial freedom that you’ll actually be successful.
But you can do it.
Plenty of people have gone before you and there are plenty on the way.
Taking back your time is one of the most satisfying projects you can work on.