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There is a growing interest in financial independence. But, where do you start? How do you define your retirement number? And, how do you actually reach your financial goals once defined?
We had a great conversation with the founders of ChooseFI, Brad Barrett and Jonathan Mendonsa, that answered each of these questions. I thought I’d revisit the podcast this week to pull some of the quotables.
If you’re interested in the journey to debt freedom and financial independence (not to be confused with get rich quick schemes), then here is a breakdown from two experts on how to start and reach financial independence.
Don’t Go Into Credit Card Debt
It feels like this is where most personal finance “advice” begins and ends. In fact, it’s where most of our financial advice began and ended in our own homes.
Jonathan’s experience was no different. This is the exact advice his parents gave him.
“That’s decent advice, but it doesn’t really move the needle. … Paying down debt only gets you ‘back to broke.’” – Jonathan
Financial security is still a long way away after “debt freedom.”
The two ChooseFI creatives found financial independence engaging because it provided a path to financial freedom that didn’t involve working deep into your 60s or 70s. Equally important, it wasn’t a get rich quick scheme.
Yet, the Financial Independence Movement was still a get rich quick-ish based on simple math and simple rules. You can accomplish Financial Independence in an intermediate period of time based on the real people and real-life stories.
You Were Born to Do More than Pay Bills and Die
“I had this guy that was two years older than me that bought a house at 24. … [Inspired], I lived at home and saved 90 percent of my money.” – Brad
This worked exceedingly well for this stranger but may not be replicable for most. So what is?
Define how you plan to reach financial independence. If there is something you truly value, spend lavishly on it. If you’re only spending to buy into someone else’s lifestyle goals and it’s trapping you in a lifestyle you actually don’t like become intentional about pursuing the life you really want.
You can do whatever you want to do with your money. But, being intentional about your money informs your daily choices. That could be on the savings side, or that can be on the money side. As long as you’re making informed choices to build your net worth.
So, now that you’re motivated, how much should you start to save?
Paychecks and Balances’ favorite (free) tool to answer this question is Investor.gov, which we wrote about here: This Is How Much You Should Have Saved by Age 35 to Retire Comfortably. This website offers several great resources to help you estimate your retirement number, investment saving needs, and expected returns based on compound interest.
Another great tool used by many in the personal finance community is Personal Capital.
What Is Financial Independence?
Time is the ultimate luxury. If all of your money is going to taxes, bills, student loans or credit cards, and nothing is left at the end of the month, you are not financially independent or wealthy.
Imagine what you could do with your most precious commodity (time) if you prioritized saving like you do overspending.
“The technical definition of financial independence is that you have saved up enough money over your working career of 10, 15, or 20 years across 401ks, regular investments, and other savings where you can pull out enough money from only your savings and investments to cover all living expenses. Theoretically, you could live without ever having to work again.” – Brad
You get to a point where you don’t need the job or even a side hustle. Where you don’t spend all of your monthly income/salary every paycheck on expenses and consumer debt.
To make this dream a reality, your savings rate is what matters. Brad was able to do this by his mid-30s, yet he never felt like he was sacrificing.
“It felt like winning.”
“If you have a 1% savings rate. That means for every 99-years you work, you have enough to take one year off. But, you can’t run many of those cycles can you? If you save 25% of your annual income, every three years you work, you can afford to take one year off.” – Jonathan
If you make $500,000 and spend $500,000 you’re still effectively living paycheck-to-paycheck. You are not wealthy. If you live paycheck-to-paycheck with no savings, you have to continue working forever. There is no other choice.
“We say you have reached financial independence when you have 25x your income. So if you make $50,000 a year, you want to reach $1.25 million.” – Jonathan
Financial Independence Puts You Back in Control of Your Life, Finances, and Taxes
Control what you can control, or meet with an expert like a Certified Financial Planner (#AskACFP) to help you in your journey to wealth accumulation.
“I was an accountant, but I never made six figures. I reached financial independence by cutting expenses and saving diligently for 13 to 15 years. There was nothing spectacular.” – Brad
When you’re financially independent, you get to decide how much you will be taxed not the government. Our tax code becomes increasingly friendly and your ability to live on what you actually need versus what your employer pays you changes when you reach financial independence.
You get to control your tax rate based on your drawdown strategy or retirement income streams in any given year. Once financially independent, you are in control of your cash flow and “taxable events.”
By putting your money into a traditional 401k (or IRA) retirement savings account, you’re deferring your taxes in the present.
When you reach financial independence, the government is only taxing you on the money you pull out. That is the taxable event. You pick and choose when, where, and how much you want the government to tax based solely on your income needs for the year.
Need more, pull more. Need less, save more!
Your Blueprint to Financial Independence
Rather than focusing on the “financial independence” or the “retire early” aspects as a reason not to start, ask yourself, “Is there any world in the future where you’re going to be worse off because you have more money in the bank?”
Again, the above only highlights the memorable quotes from this awesome episode. For more great information, listen for yourself. And, if you want more, be sure to check out Brad Barrett and Jonathan Mendonsa’s book, ChooseFi: Your Blueprint to Financial Independence. You can also find them around the web:
- Website: choosefi.com
- Facebook: facebook.com/ChooseFi/
- YouTube: https://www.youtube.com/choosefi
- Twitter: twitter.com/ChooseFi
- Podcast: choosefi.com/podcast-episodes
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