Most people think they can never become financially independent – that state where you have enough money to live the rest of your life without a job. Instead, they decide that they’ll need to labor away the rest of their lives, always have a car payment, a mortgage, and a HELOC. They figure they’ll retire someday, somehow, but have no idea how they’ll pay for things then. Maybe the government will take care of them. Maybe they’ll move in with their kids. Maybe they’ll just work until they die.
The thing is, it doesn’t need to be that way. If you’re in your twenties, thirties, or early forties and reading this post, simple choices you make today will get you financially independent by the time you’re in your forties or fifties. If you’re in your fifties, you might not end up financially independent before retirement, but at least you can put yourself in a position where you’ll be able to make it through most of your retirement on savings and then perhaps get some help from family at the end. Here are some really simple things that people who become wealthy do:
Choose the right career
It starts while you’re in college. You might really like the ancient Egyptians and want to spend your time studying them. But what then? In a free enterprise society, you make money in by doing things that people need. Do you know many people who need someone with knowledge of the Ancient Egyptians? Maybe you’ll sell a couple of hundred copies of a book or do a couple of talks per year, but certainly not enough to sustain yourself.
In a free enterprise society, you make money in by doing things that people need.
People need engineers to design and build things. They need computer programmers to make the things engineers build think. They need people to manage their business for them. They need people to create artwork for their marketing and presentations. They need people to prepare food for them. They need people to clean-up their homes and offices. They need people to write articles for newspapers. They need people to get them home from the airport.
This doesn’t mean you can’t have a career that you enjoy. It just means you need to find something you like doing that other people need you to do. Maybe you can take a few elective classes on ancient Egyptian writing while you pursue an accounting degree and then visit Egyptian museums as a hobby. Don’t expect people to pay you for something just because you like doing it and you need money. Remember that you need people to do things like grow food and make things for you, which they do in return for you’re doing something they need. You can’t get your needs met if people were just doing things they enjoy, so you shouldn’t expect to make a living doing what you enjoy but which does not have value to others.
Buy used cars for cash
The mantra of those who will stay in the middle class all of their lives is that they will always have a car payment. Buying a new car on payments every five years will cost you anywhere from $2,500 to $5,000 extra in losses due to depreciation when compared to buying a new car, and between $3,000 and $7,000 in interest over the life of the loan when you buy new cars using payments every five years. That’s $3,100 to $6,200 you could be investing each year instead – enough to fund college savings accounts or put a good amount into an IRA.
Buying new cars, you’re spending $3,100 to $6,200 extra each year that you could be investing each year instead – enough to fund college savings accounts or put a good amount into an IRA.
Instead, save up and buy used cars that you can afford to buy for cash. If you work a few extra hours or save up for a few months and scrape together $2,000, you can get a perfectly adequate car to get you where you need to go reliably for cash from a private owner. Even if you put $1,000 in repairs into it each year, you’ll still be saving over $2,000 per year. Save that up for three years, and you can move up to a four-year-old used car that will look nicer. You can then start putting half of your savings away for the next car, moving up in car at least one more time, and invest the rest. Keep this up over your working lifetime and you’ll have over a million dollars from the money you save on cars and invest alone.
Learn to cook
Eating out is costly, even eating fast food. Meals in a fast food place will cost you two times as much as an equivalent meal at home. Meals in nicer places will cost you four times as much. You can easily find ten thousand dollars a year or more to invest if you currently eat out all of the time if you start cooking and eating most meals at home. This is enough money to allow you to become financially independent in your mid-forties. Even heating up boxed meals will cost you significantly more than cooking from scratch, plus meals you cook yourself will be healthier and taste better.
You can easily find ten thousand dollars a year or more to invest if you currently eat out all of the time if you start cooking and eating most meals at home.
The reason many people give up cooking when they first try is that they pick recipes that are way too complicated, involve way too many steps, force them to buy lots of ingredients where they use a little and throw the rest out, and dirty every pot and pan in the house. Instead, get an all-purpose cookbook like Betty Crocker or The Joy of Cooking and learn the basic preparation of things like chicken, roasts, and fish. Also, find cookbooks with recipes designed for using only one pot and/or five or fewer ingredients. You can venture into more complicated recipes if you enjoy cooking and have more time to cook some nights, but you need the easy, quick recipes to just get dinner on the table.
You can venture into more complicated recipes if you enjoy cooking and have more time to cook some nights, but you need the easy, quick recipes to just get dinner on the table.
You can also use some time savers to make things easier for when you’re busy. Buy frozen vegetables that you just need to steam and serve as sides. Make a big pot of soup or chilli on the weekend, then add a small serving to your dinners throughout the week. Likewise, make a bowl of salad greens (lettuce and carrots) when you have time and then add fruits like tomatoes and peppers at dinner time.
For the ultimate in easy dinners, get a book of crockpot recipes. When you’re going to be rushed the next day or get home late, you can put together dinner for the next night the evening before in the crockpot and refrigerate, then just start it going before you leave for work the next day. When you get home, you’ll have a hot meal waiting for you.
Buy a smaller house
Many people take the bad advice to buy the biggest home for which they can get a loan. This leaves you house-poor, where you have a good income but you’re spending so much on your mortgage payments that you can’t save and invest. You then end up taking out a HELOC or a second mortgage when you need to pay for something like college, a home repair, or even a vacation. Plus, big homes come with big maintenance bills.
To avoid feeling house-poor, you should be able to pay the mortgage using no more than 25% of your gross pay.
Instead, buy the home that you can afford and the size that you need. To avoid feeling house-poor, you should be able to pay the mortgage using no more than 25% of your gross pay. Plus, save up at least a 20% down payment to reduce the risk that you’ll end up owing more on the home than it’s worth and to save the cost of mortgage insurance. If that means you need to start with a smaller home and then add-on or upgrade in ten years, that’s better than buying a McMansion to start and possibly going through a bankruptcy in a few years or not being able to put money away for retirement.
Choose a low-cost area in which to live
A lot of people will say that there is no way they can do the things I’ve described because things just cost too much where they live or they are not practical. Well, move somewhere else. There are a lot of great places to live that cost a lot less than New York or San Francisco. You can get a bigger house; land; safe, high-quality public schools; and pay a lot less for insurance, food and practically everything else. Obviously, some people have a really strong reason for living in the big cities and it is worth it for them to pay out all of their income to do so. If there is not, look around. It is a lot easier to become financially independent if you lower your cost of living.
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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.