The Sacrifices and Rewards of Gaining Financial Independence

Maybe financial independence isn’t for you.  If you aren’t willing to limit your home purchase price to what you can afford with a 15-year fixed rate loan, you aren’t ready.  If you need to have a new car every few years because you like the prestige and new car smell, it’s not for you.  If you want to go to resorts all over the Caribbean while you’re in your twenties and look good in a koobathing suit, it’s not for you.  If you absolutely need to have every cable and movie channel there is while you’re in college, it’s not for you.

Well, that’s not quite true.

Actually, getting to financial independence doesn’t require you be perfect; it just requires you be better than average and take advantage of the tool you have – your income – to reach the goal of financial independence.  You might be able to have some of the things listed above, but only if you make enough money to take care of the important things first and still afford them.  You can’t be buying new cars without first putting away 10-15% of your pay for retirement.  You can’t have the expensive phone plan without saving regularly for your children’s college.  You can’t be eating out every day for lunch without putting a few hundred dollars away each month for investing.  These are the things you need to be doing to become financially independent.

I’ll periodically get a comment that the strategies I outline are not realistic.  People can’t get a reasonable home for that price.  They need a new car for work because they drive clients around.  They really enjoy travel and want to get out while they’re young.  Understand that many of the tactics I put forth are things you could do to get you towards financial independence faster.  Some suit your life, others do not.

The trick is to be doing enough and making the sacrifices you need to make to get to your goal.  How fast you get to that goal and how the status you’ll have depend on what you are willing to do to get there.  Personally I would not give up eating dinner with my family and being at the kid’s activities to work a second job, but doing so would certainly build my portfolio faster.  Some people may think it is worth the sacrifice, or perhaps it is the only way they can get to financial independence with the income choices they have.  Some people take jobs for a period of time in their lives where they work 80-100 hours a week to build up some cash, and then quit those jobs and take a more reasonable schedule once they’ve gotten over a financial hurdle.

There are also emotional reasons that go beyond money.  Maybe you want to drive an expensive sports car when you are 22 and the ability to do so is worth making all kinds of payments.  Maybe you want to travel the world while you are young and able to do things you can’t when you’re older.  Maybe you want to go to an expensive private college just so you can have the experience of doing so.  Just realize that doing so comes with a cost, so don’t be surprised when you are 45, the car is long gone, the trips are but a memory, you are still paying off the student loans and you have no money in the bank.

There are huge advantages to financial independence.  You don’t need to worry about your job because you can pay for everything even if your job vanishes, allowing you the time to find the right next job instead of needing to take whatever comes along.  You don’t need to worry about when bills are paid because you have plenty of extra cash to cover the float until the next paycheck or dividend check.  You can take more vacations, buy more cars, and send your children to expensive private colleges and have these things only be a small fraction of your income because you have so many assets adding to your income.  You’ll also pay a lot less since you won’t be paying interest on them and you might even be able to get a cash discount, so you’ll get to use your whole paycheck.

So how do you know if you are doing enough to get to financial independence?  Well, the growth of money is really quite predictable, especially with the number of online calculators now available:

1) See how much you are putting away in your 401k and plug it into a calculator to see what you’ll have if you retire at 60, 65, and 70.  Assume a return of about 12% if you are investing mainly in equities (stocks).  If you aren’t happy with the results, see where you can contribute more.

2) See how much you will have in your personal, taxable investment account.  Once again, plug the amount you are investing each month into an online calculator and see where you will be at 40, 50, and 60.  Maybe see when you will make your first million, or when you have enough to stop working if you wanted to.

3) Look at your children’s college costs and see how they compare to what you are putting away.  If the two won’t meet up, see what you can do to put more money away.  Once again, see if there are things you can cut to free up more cash to save and invest, or see if there are ways you could raise your income, at least for a period of time.  Maybe see if you can pay down some debt with a temporary second job and free up cash that way.

Some people may still say that they are not willing to give up the things needed to get to financial independence.  That’s a choice that is made.  Just realize that you have the choice and look at the longterm impacts of your choices instead of the short-term sacrifices.  You won’t get to financial inpendence through hoping.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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