The Sacrifices Needed for Financial Independence

You may think from reading posts from personal finance bloggers that you need to be an extreme cheap skate who uses the plies from two-ply toilet paper separately and makes their own toothpaste to gain financial independence.   You might also think that you need to work all the time, never take a nice vacation, and go without television so that you can sock away every dime.  While this might be true for a period of time if you’ve already dug yourself into a deep hole – for example you have $150,000 in student debt, $30,000 in credit card debt, and a huge mortgage and two car payments such that you spend $1000 more than you make each month – the truth is that the sacrifices you need to make really aren’t all that big and the rewards are huge.

So what are the rewards of living in a fiscally responsible way and saving and investing?  Well, looking at our personal finances, we are in our low forties and are in the 15% tax bracket with a single, middle-class income job.  We have more in our retirement accounts than most people in their late fifties and should be able to double their value every 5-7 years.  We should therefore be able to increase our retirement accounts by 1600%  by the time I am ready to retire even if we don’t put anything else into them.  This will enable us to not worry about paying for medical bills, which average about $400,000 per couple over their retirement years, or other living expenses throughout our retirement.  We will be able to travel as we wish, pay cash for a summer or winter home if we wish, and pay for in-home health care if needed.   We will also be able to take more risks with our money, such as leaving most of it invested in equities, since we will be able to wait out any market fall and still have plenty of money to pay for day-to-day expenses.  This will generate additional income, allowing us to make 10-15% annualized in stocks versus 2% in a bank CD.  For each$1 M of money in our portfolios, that will mean average income (over long periods of time) of $100,000-$150,000 versus $20,000 in a bank CD or $60,000 in a bond mutual fund.  There will be no need for longterm care insurance (we’ll just pay cash), really no need for home insurance (unless we just want to), and no need for life insurance.

We also have paid off our home a few years early from the 15-year loan we had taken, which has provided peace of mind and an additional $1000 per month or so that we can use for investing or expenses.  We have never had car payments (at least since we wised up and started buying used cars for cash in our late twenties), giving us money to save to replace cars and pay for other expenses.  We have children’s college funds to the point where we have enough to fully fund about half of a four-year in-state degree including books, room, and board with our children yet to enter high school.  We also aren’t ready to retire, although we probably could retire and survive if all we did was buy food and clothing.  We do, however, have enough saved to sustain ourselves easily for a number of years should we lose our employment income.

So what sacrifices have we made to get where we are?

1.  We have bought used cars that we could buy with cash and driven them for 6-8 years.  While this may sound dangerous for those who think a car will only get 100,000 miles and then die at the side of the road, we have actually been able to buy Toyotas and drive them until they have 250,000 miles or even 300,000 miles.  The first car we bought for about $3000 with 175,000 miles and drove for five years,  We finally sold it at 320,000 miles, not because it was on its last legs but because we just wanted something else.  In the years we had it we put maybe $800 per year in repairs into it and never got  stranded on the side of the road.  We saved $4,000 per year per car in car payments.  This makes it a lot easier to put away money for college and retirement.

2.  We have limited our eating out and entertainment expenses.  Early on we agreed to go out to eat once per week and set aside a couple of hundred dollars each month.  We were living in California at the time, so we would typically spend $40-$50 for a mid-priced restaurant with tip, so we had a budget of $200 each month which we took out in cash at the start of the month.  As time has gone on we’ve increased the amount we spend each month (adding a couple of kids increases the expenses), but we still have a fixed amount for eating out and other entertainment such as movies.  This allows us to know that we will still be able to pay for other important things and have peace of mind when we do enjoy a meal out.  It also makes it more special than it would be if we went out for most meals.

3.  We don’t spend a whole lot on clothes.  We certainly don’t walk around in threadbare outfits, but we also don’t worry about wearing the latest designer fashions.  As a family we probably spend somewhere between one and two thousand dollars on clothes each year.  We probably could increase that to $5000 each year if we wanted to and buy a lot of designer clothes using the money our investments are generating, but we’ve found that we really don’t care to keep up with the Joneses.

4.  We haven’t done any major kitchen or bathroom upgrades until more recently.  We have replaced the bathroom faucets and very recently we upgraded the kitchen counters to granite and replaced the sink.  After a number of years we also decided to replace the stove top, which we changed to gas, because the old one was a really poorly designed electric model that made it impossible to cook rice and other things you needed to simmer.  We were easily able to pay $1,200 for a new stove top from our savings.  We also changed out the kitchen floor (vinyl) one time because it was getting old. We’ll probably replace it again soon with hardwood or tile now that it won’t be a big expense to do so relative to the income we’re getting from investments.

5.  We have taken vacations each year, but haven’t been doing foreign vacations or gone to any lavish resorts.  For the early years when we were just getting started, we would take a flight and spend perhaps a ten days on vacation each year, normally to visit relatives.  After we had children we would normally drive to save airfare (especially after TSA fees got so high).  We recently have started to take nicer vacations, such as a cruise last Spring, and a couple of long weekends a year on the beach or elsewhere.  We are able to fit these things in the budget without pulling out the credit cards because we aren’t paying interest for anything and are generating income from investments.

6.  We haven’t bought the latest technology as it came out.  My wife did recently get an i-Phone, and we have been on the Internet since the beginning, but we don’t feel the need to get the latest gadgets as they have come out.  In fact, I find that I am happier not being connected to everyone when I’m out fo the house.  We also tend to keep computers for 5-8 years instead of upgrading every couple of years.  Really considering most of what we do is to use the Internet or check emails, there is no need to upgrade very often.

These are the kind of sacrifices we have made and as you can see, we have been able to reach a good place by our early forties.  We have no fear of losing our home or not being able to meet bills should we lose our employment income.  We will be able to send our children to college without student loans.  We should have several million dollars in retirement, providing ample security, letting us do the things we want to do and make choices like home healthcare instead of nursing homes, and increase our income by having money we can put at more risk than we would be able to do if we had just enough to scrape by.  Getting to financial independence doesn’t require you become a cheap skate.  It just requires you wait a little while until you can afford some things and make some smart choices.

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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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