Shows such as Extreme Cheapskates are fun to watch, although you can’t help but wonder how much of it is true. When talking to most normal people about budgets and saving in order to reach financial independence, however, that is the kind of lifestyle they may picture in their minds. While cutting open toothpaste rolls and dumpster diving might get you on a reality show as a spectacle, there are plenty of people all around you who live perfectly normal lives who nonetheless find a way to grow wealth and become financially independent during their lifetimes. This financial independence may mean an early retirement, or it may just mean a more secure retirement at a normal age or the ability to travel and do things in retirement rather than being confined to a small apartment for lack of resources.
Fundamentally there are two things needed to grow financially independent. These are 1) to live on less than you make and 2) to increase your income to the point where you can amass enough money to be financially independent within a reasonable amount of time. Increasing your income can come from training and career choices to make your work income larger, but most people cannot attain the kind of jobs that pay the quarter million dollar plus salaries needed to grow wealthy from work income alone. Many also don’t want to make the sacrifice needed to start a business and make it successful, or have the business skills needed to do so. For the vast majority of us, wealth comes from a middle class income, growing into an upper middle class income through work advancement, combined with investing to increase the rate of wealth accumulation.
Investing is only half of the equation, however, since without money to invest, you can be the best investor in the world yet still fall far short of your goal within your lifetime. As the saying goes, “It takes money to make money.” This is where the sacrifice comes in, but the sacrifices are not as great as many may think. They are little things that people who get rich do and those that stay in debt and a slave to a job do not. Here are a few:
1. Go to a college you can afford, or skip college altogether and go into a trade that pays well. This can be a really tough sacrifice since when you are graduating high school you think going to your top school is the most important thing you can do. Some people think that their lives will be radically different if they go to an Ivy League school or an expensive private college than if they go to a state school. The truth is, unless you are planning to work for a few, very select firms that only hire those from ivy league schools, your outcome in life will not be that different if you go to Harvard or you go to Oregon State. It won’t even be that different if you start at a community college and then finish at a university. The important thing is to learn the skills that will help you provide things to people that they need, because that is how income is generated. Few people will pay you for your knowledge of French History, even if it comes from Oxford. Many will pay you to design their home or create an app that makes their lives better. If you or your parents have a half million dollars set aside for your education, going to an expensive school is a luxury you can afford. If not, your life will be better with an education you can afford without going into debt.
College also isn’t the only path to a high income. The people with the highest incomes tend to be those who start a successful business, many of whom never went to college, giving them time to get things going while their friends from high school were busy taking remedial algebra. Also, a skilled craftsman can often make a bigger income than many college graduates (just call a plumber or a bricklayer and see). These are also good occupations in which to work for yourself, allowing you to keep more of the income you generate. If you can get through a trade school in a year and come out a skilled welder, you can make $150,000 in income while those going to college are racking up $50,000 in debt, putting you $200,000 ahead of them from the start.
2. Drive used cars until you are a millionaire, then switch to new cars if you wish. A new car will cost you $5,000 a year in depreciation alone, where you can buy a perfectly running used car for $5000 or less. This gives you an extra $5000 per year to invest during four out of five years if you buy used cars every five years instead of new cars. You can even trade up after you’ve gone through a few older used cars to something costing maybe $10,000 or $15,000, which will look an awful lot like the new cars your coworkers are driving. Today’s cars are very sound mechanically and will go for hundreds of thousands of miles before any major repair work is required.
3. Eat in more often. The sugar packets used to say “Enjoy life, eat out more often.” If you eat out most meals, however, it quickly becomes old and does not add to your enjoyment of life. You also blow through a lot of money, not to mention expand your waistline. If you learn to cook just simple meals at home with fresh ingredients, you’ll find that you can make better tasting meals than many restaurants (who often are just warming up frozen food). You’ll also be saving a lot of money. Giving up just one restaurant meal a week for a family of four will save you between $2000 and $3000 per year. Going from eating out every night to going out once a week will save you ten thousand dollars a year or more. That’s a lot of money to invest.
4. Look for little ways to spend less. Hopefully not many people would buy an $8 bottle of water like we found at a hotel one time, but do you drink bottled water at home or at the office when a tap is sitting right there? How about using a refillable bottle instead of grabbing a new bottle out of the fridge each time? Not only will you reduce the amount of plastic waste you’re generating, you’ll save on the order of a few hundred to perhaps a thousand dollars a year.
Other things you can do are: 1) Skipping the overpriced snacks at the movie theater. 2) Carpooling to work to save on gas and parking. 3) Buying clothes you can wash in a machine at home rather than dry clean only clothes. 4) Taking up hobbies that cost little like hiking or Frisbee golf rather than expensive hobbies like regular golf. 5) Limiting your trips to the grocery store or Wal-Mart to reduce the amount of impulse buying you do. There are many other ways to cut a few dollars from your lifestyle that can add up to big savings and money for investing.
Note, it is not necessary to do all of these things. It is just a matter of doing enough to have a few hundred dollars each month to invest. The larger your income, the more you can do and still grow wealthy, or alternatively, the faster you can grow wealth and become financially independent. If people making a quarter million dollar salary would live like someone making $50,000, they could easily have a couple of million dollars in the bank in ten or fifteen years and be financially independent in their thirties. Someone making $60,000 will take 25 or 30 years, but it will happen.
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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.