Before you take any trip – you first have to pick your destination. If you read the “Why of FI” post – you know Mrs. TBT and I are motivated to make this Financial Independence journey as quickly as we can. Although we are a little late to game – we are in it to win it! For us, that destination is a life free of our jobs with a steady income from our investments / side hustles. We know WHY we want to be Free and Financially Independent but HOW to get there? You have to know the state of your current finances – income, savings, debt and expenses – to determine how long it will take to “reach” FI.
The goal is to create a pile of cash that can fund your extended permanent self-employed state. A safe rate of withdrawal is typically found to be 4%. That means, if your annual expenses are $40K, you would need $1M to cover your expenses (assuming the 4% withdrawal rate). As you can see in this article, https://www.madfientist.com/safe-withdrawal-rate/ , the Safe Withdrawal rate (of 4%) is actually quite safe.
But I can (almost) hear the panic setting out there – wow $1M is a lot of money – and I still have loans and credit card debt – and I can barely save anything. Others say – $40K per year, bah – we could never live on that little per year. Fear not – reaching financial independence is not as difficult as you think – but it does require a shift in your thinking and a change in your habits. These changes take the form of Four Challenges.
Your Four Challenges
In order to give your job the “heave-ho” and start your FREEcation (i.e. permanently paid vacation) – you have four challenges to master:
- Debt Elimination – eliminate your existing debt as quickly as you can
- Expense Reduction – examine your spending and see where you can reduce monthly bills
- Savings Acceleration – reserve any surplus money and save it (or invest it if you are able)
- Income Enhancement – add new streams of cash flow to your increase your income
The order of these are important and they can be done together if you can live farther “outside your comfort zone”. By mastering these challenges – you will have the tools needed to reach your ultimate goal. Before tackling these challenges myself – I looked for some examples from my own family of financial independence and frugal living.
The FI of VI
My Grandmother Violet did a great job at this. She owned her home and the farmland around it. It was paid for with the money raised from crop and livestock sales. Grandma Violet spent little – her water came from a well on the property. She raised most of her food (I still remember the fresh eggs and massive garden!) and paid only for electricity and fuel oil. Grandma made a few visits to the hair stylist and small trips to the store in her 1965 Oldsmobile, which she drove for almost 25 years. She saved almost all the money she made because her expenses were low and her needs were few.
Eventually, when she got older, she stopped farming actively and leased the land to other local farmers. Farmers always have to plan for “lean times” when rains don’t come (or too much rain falls) – they have to be flexible in their approach. Farmers are also independent – because on the farm – you are the chef, mechanic, doctor, veterinarian, and the agronomist- as well as the CEO of the business. The Farmer mindset that you should adopt on your journey to FI.
My dad was in the Marine Corps for 21 years and did two tours in Vietnam. As a Gunnery Sargent, he didn’t make a ton of money, but Marine Corps paid for housing and other expenses. Dad used the Post Exchange and the Navy Doctors on Base to help us when we were sick (bye bye tonsils) and when my siblings arrived on the scene. After he retired, he used his military pension to purchase our first permanent residence. He took a second job and continued his career for another 20+ years.
Dad’s investment in his first career provided us a good life and a great place to live – which helped us all become who we are today. My dad never complained about work or pain – he kept fighting to get to retirement, where he could live his dream life with Mom. Although he never made it there, I will always remember his dedication to his dream, his service to his country, and his love for us. The Fighter mindset will help you as you encounter difficulty on your journey to FI. Never give up – you will face setbacks and adversity – be resilient!
The Farmer and Fighter mindsets can help you as you start your journey. Think of your friends and family members that exhibit these traits. Living simply, with few needs and fewer wants should be your goal. I am sure you can find examples like these in your family. We also know those friends and family that live beyond their means – portraying an outward picture of “living the high life”. Too often this outward appearance masks the stress of growing debt and keeping the bill collectors at bay. Its important to have good role models as well as cautionary tales of what NOT to do.
Looking the Mirror
In order to prepare for tackling the Four Challenges, you will need to take stock of your current financial status. You need to know all your debts, expenses, savings and income. Look at your debts and understand the outstanding amount and interest rates associated with them. Look at your expenses in detail and understand where you are spending your money. Mint does this very well – categorizing your spending for you. The Average American Savings rate is about 3.8%, how close to this are you? This is probably one place where you will have to seriously “up your game”. Finally, think about how you can increase your income (more hours at work, pick up a side hustle, etc). Anything you can do that adds to the bottom line reduces the time until you are free.
To get a quick thumbnail view – here is a list to a TON of calculators that may fit your situation
http://www.businessinsider.com/i-built-a-spreadsheet-to-calculate-what-it-would-take-to-retire-early-and-it-was-a-shock-2016-7/#-5 (props to J Money and all contributors who created these) and if you like to get in to ALL the details – check out this one from Brandon at Mad Fientist http://www.madfientist.com/financial-independence-spreadsheet/. Take a few hours on a snowy weekend and fill this in – you might be surprised where you are. Are you closer (or farther) than you thought from the start of your FREECation? In the next post, we will discuss how to turbocharge your progress on the Four Challenges.