Why Financial Independence is Our Biggest Long-Term Goal
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For as long as I can remember, I’ve always been a saver. Whether it was Halloween candy, packs of baseball cards, or Christmas presents, I have always placed a high importance on delayed gratification.
I’m not sure why I’m wired this way. Is it for comfort? Security? Confidence? I’ve always felt that the more I save up, the more options I have for the future.
I started working at a restaurant 2 months after turning 16. To me, it was obvious that I should be saving the money I was making. Although I knew I “should” be saving money, and it came easily to me, I didn’t have a specific goal I was working towards. I think I had the vague idea that I could use the money for college expenses.
One Blog Post Changed it All
I can’t remember how I stumbled across it, maybe it was one of the articles my dad would periodically send over to me, but one day I read a single blog post that completely changed my thinking.
The “Shockingly Simple Math Behind Early Retirement” is a classic post from Mr. Money Mustache that has had a massive impact on many people. He’s widely considered to be one of the most popular and influential bloggers of the FIRE movement (Financial Independence Retire Early). Financial independence refers to the point where your investments are able to cover your yearly expenses. Many people use the 4% rule as a guideline, so if your portfolio was $1 million, you could safely withdraw $40,000 per year.
There’s a scene in “How I Met Your Mother” where the various characters don’t notice certain annoyances about each other until someone else points them out. Once pointed out, you hear the sound of shattered glass as their bubble is burst. From then on, they can’t stop noticing each other’s flaws. (here’s a clip from the episode, Season 3 Episode 8, called Spoiler Alert)
https://www.youtube.com/watch?v=wbmW_Z1oPJw
Sparking a New Financial Goal
This is similar to what happened to me. Before reading MMM’s post, all I knew was that I wanted to save up money long-term, in preparation for a house, kids, and a very far off retirement someday. Encountering this post helped me learn about another way of thinking about money. Money could be used to buy the freedom from having to work for a paycheck, and the higher my savings rate was, the faster I would be able to reach that point. This sparked a new passion for me, and the big financial goal I wanted to pursue was financial independence.
Before this realization I used to think personal finance was boring. I was pursuing a career I was passionate about, telling myself I didn’t care about the money. My wife and I were working low-paying jobs and saddled with $40,000 combined in student loan debt. Our budget was “spend as little as possible, with a few splurges.” Why did I need to learn about money when there wasn’t any leftover to save or invest anyways?
Once I landed my first salaried full-time job, I told myself that I wanted to get our finances organized and learn more. I knew that money could often be a source of stress and conflict in relationships, and I wanted to do whatever I could to avoid that happening in our marriage. While financial independence was the big goal I eventually wanted us to reach, we had a long way to go.
Crushing Our Debt
Before we could fully focus on pursuing financial independence, we needed to achieve a few other milestones first, namely achieving debt freedom. We went through Dave Ramsey’s Financial Peace to help give us the foundation to start our financial journey. This was very helpful for us to get on the same page, break things down into smaller steps, and make the daunting goal of debt freedom feel achievable.
There were a lot of strategies we used for paying off our debt, including:
- Determining why we wanted to be debt free. When the going gets tough you need to be able to remember your motivation for starting the journey in the first place.
- Building up an emergency fund to protect against unexpected expenses and avoid going further into debt.
- Tracking our spending and cutting out unnecessary expenses. We switched our car insurance, cut cable, switched our cell phone provider, cooked almost all of our meals at home, chose free/cheaper methods of entertainment, started using travel rewards, sold items we no longer needed, and more.
- Increasing our income at our day jobs and through side hustles.
- Automating your debt payments.
All the extra money that we saved from cutting our expenses and the extra income we made, all went straight towards paying off our debt. Ultimately you want to grow the gap between your income and expenses as large as possible, and then use that gap to aggressively pay off your debt.
Our journey of crushing debt took time, persistence, and discipline, but it was well worth it. Reaching debt freedom was a huge weight off our shoulders, and meant that we could turn out attention to our next big goal: reaching financial independence.
Math is Easy, Lifestyle Change is Harder
The math is simple, the more you spend, the more you’ll need to save. The more you need to save, the longer you’ll need to work. It’s all a math problem, and it all depends on your own needs and desires. The amount you need to save is largely determined by finding your level of enough.
While the math is easy to see, making the lifestyle changes necessary to achieve this level of savings is the difficult part. The average savings rate in the US is 5% or lower. With this level of savings, it would take an average of 66 years to reach retirement!
The chart below clearly shows the impact that a higher savings rate can have on the time it will take you to reach financial independence. You can also use Networthify to play around with various numbers, to see the impact your savings rate will have on the number of years until you can retire.
Saving the minimum of 5% or less will take you 50-60 years, a 50% savings rate will take 17 years, and pushing your savings rate to 65% or higher can help you reach financial independence in less than a decade!
Now these are ambitious goals. You’re not going to go from saving 5% to saving 75% of your income overnight. The purpose of this chart is to illustrate the importance of boosting your savings rate over time as much as possible. You don’t have to be perfect to reach financial freedom. Small boosts in your savings rate can have a massive impact. The difference between saving 5% and 15% is an astonishing 23 years of work!
Financial Samurai said it best, “If the amount you’re saving each month doesn’t hurt a little bit, you’re not saving enough.”
Higher Savings Rate Equals More Options
Each time you put money into your savings and investments, you’re banking future freedom. Saving means you’re less chained to your job, less dependent on that paycheck every two weeks. The less you depend on your job, the more leverage and freedom you have. I’ve experienced this in my own life. The difference between being unemployed, with $40,000 in student loans, and dwindling savings and being debt free with a fully funded emergency fund is MASSIVE. Having this cushion helps reduce stress and helps you sleep better at night.
You should save as much as possible, even if you currently love your job. Circumstances can change quickly. Your company could have a bad quarter, your boss could leave, your job responsibilities could be adjusted, medical problems happen, and more. This isn’t meant to be a downer, but it’s important to recognize that life is short and circumstances change over time. By building up savings, you’re helping to protect yourself from these unforeseen changes.
Time is Your Most Valuable Resource
Ultimately if you have an abundance mindset, the possibilities for earning money are endless. It’s not easy, but it is possible to earn more through building additional skills, changing career paths, working more hours, etc. On the other hand, time is your most valuable resource. It is a resource that isn’t renewable, and there’s no way to “earn” more of it.
Money is just a tool that we can use to be able to choose how we spend our time. Saving money helps buy back your time, and increases your options. We spend 40+ hours per week, plus many more hours commuting, getting ready, and unwinding from work. This is a huge percentage of our lives. The more money we can build up, the more free we become to spend our time pursuing our true passions.
Final Thoughts
There’s no one path to reaching financial freedom, or one blueprint that we all can follow. Everyone has different circumstances, hardships, and talents. This whole journey is not about retirement, it’s about reaching financial independence. We’ll also have smaller goals to focus on along this journey (for example owing real estate), but all these goals will be building towards increasing our options and our freedom. We want to have enough money to have flexibility in our lives. The math is simple, but the lifestyle changes can take time. We’re just taking it one day at a time, and working on growing our savings rate to reach freedom faster.
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