The Four Percent Rule (a.k.a. 4% withdrawal rate or sustainable retirement withdrawal rate) is a general rule of thumb on annual withdrawals from a retirement portfolio which aids in determining whether you have enough money to retire, regardless of your present age. The sustainable long-term retirement withdrawal rates were originally addressed by Bierwirth (1994), Bengen (1994, 1996, 1997), Ferguson (1996), and Cooley, Hubbard, and Walz (1998). The "Trinity Study" then rehashed the work from Coley et al. (1998) in a 1999 publication stating the following: 

Using these findings, many recent analysis have continued to run the numbers to see if the 4% sustainable withdrawal rate is still valid. In most analysis, the 4% rate has held up well for periods up to, and occasionally beyond, 30 years. However, going back to Bengen's original research on the withdrawal rates, there are some serious assumptions that need to be addressed and understood by anyone beginning to consider drawing down on their retirement portfolio, or "nest egg".

When evaluating your retirement portfolio, ​according to Bengen, you may make a first-year withdrawal of 4 percent of your portfolio. Each year that follows, you may adjust for inflation to maintain the purchasing power of your dollars. The problem is, Bengen does not seem to suggest how to "adjust for inflation" with these withdrawals. My assumption- to which I may be incorrect- is that you can take your initial 4% withdrawal, and multiply by the anticipated rate of inflation for the year. You may either Google expected inflation rates, or attempt to calculate them on your own which typically requires you to understand changes in the CPI, as well as have a crystal ball since you take the full year's change in CPI. 

For example, let’s say your portfolio at retirement totals $1.2 million. According to the 4% rule, you may withdraw $48,000 in Year 1. If inflation expects to be 3% next year, you can give your initial $48,000 a 3% raise of $1,440 to equal $49,440 for Year 2, and so on for the remaining 30 plus years. 

Most people will stop right there and assume that they can calculate their level of financial independence simply using their net worth. This is not true! 

​Additionally, many people need to understand the premises that exist that make the 4% 

​Assumption #1 - According to William Bengen, he assumed a balanced portfolio of 50% equities and 50% intermediate term treasuries which are rebalanced. His analysis did prove that up to 75% stocks and as low as 25% bonds would suffice as well. 

Most people do not have this type of asset allocation. To reiterate, Bengen suggested keeping a stock allocation of at least 50%, but no more than 75%, of your overall portfolio. The remaining would be invested in intermediate-term treasuries. Consider that most of you, in fact, do not have every last dollar invested in their retirement portfolio the way Bengen's research suggests. Rather, you likely hold some of your money in cash, CD's, money market funds, and checking and savings accounts that are not exposed to the market which is what makes the 4% rule work. 

The trick is, you need the growth-potential of stocks combined with stability of bonds (especially with dismal interest rates on other savings vehicles) to keep your portfolio alive for a minimum of 30 years. Therefore, every dollar you have outside of this portfolio is best considered emergency or supplementary funds and not used in calculating your financial independence number. 


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Assumption #2 - The funds in which you will be drawing 4% from are in tax-deferred vehicles such as traditional IRA's, 403(b)'s, 401(k)'s, pensions, or 457(b) plans. This is a major misunderstanding in the F.I. community!

The reason this is such a big issue is because capital gains and dividends are not taxed as they continue to grow inside a tax-deferred vehicle. You will thus only be taxed on withdrawals from these accounts which will be taxed as ordinary income, not capital gains or dividend rates. This also assumes that you are of proper age- or met one of the IRS exceptions to early withdrawal penalties- to make your withdrawals after the age of 59 1/2. 

Sure, there are exceptions of withdrawing from retirement funds without penalty for scenarios such as financial hardship, first time home purchase exclusions, and others. However, Bengen did not account for those! Therefore, in order to be valid and effective, the 4% rule was based on your money being entirely in tax-deferred accounts. 

Bengen actually said the following in his paper:

• If the assets had been held in a taxable account, the conclusion might have been different, as the certainty of substantial capital-gains taxes would have to be weighed against the probability of a large stock-market decline, and the loss of the benefit of a step-up in basis upon death. Source

Further, you may not include home equity or other savings and investments outside of stocks and bonds, in the above proportions, when calculating your financial independence number. The reason for this is because the research did not analyze this, therefore we have no idea how it may hold up over time. 



Assumption #3 - You never draw above 4% in any given year on your portfolio. This means if there is an emergency expense in a given year, you need to have either income from another source, or outside savings that are not part of your retirement portfolio to cover them. Further, you may not give any of your principle away since your initial 4% calculations were based on you not reducing your principal in any given year by more than 4%. This becomes a problem if you want to give money to heirs while you are still alive since this will likely put you above the 4% annual withdrawal rate. 

Keep in mind, this information is not designed to scare you. Rather, use it to help guide you into making an informed decision. The main takeaway is that when considering your safe withdrawal rate, you must use accounts that are accessible and tax-deferred (Assumption #2) and able to be invested in bonds and equities with tax-deferred growth (Assumption #1). Further, giving a large piece of your retirement portfolio away as a gift- or other unexpected expenses- likely means you need to return to the drawing board to determine your new safe withdrawal rate. 

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Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.

The pursuit of financial independence, for many, is the holy grail of personal finance. However, a common mistake is often made in pursuing such a financial milestone. Let's take a closer look at where pursuing early retirement and financial independence often goes wrong in the FIRE community. 

Let me first start by saying financial independence is a worthy goal for many.  Personally, I am not yet financially independent but am halfway towards our goal. However, use care when first starting out pursing F.I. as you can quickly lead a life of deprivation instead of enjoying the values of frugality.

Financial independence is loosely set at 25x annual expenses (aka your F.I. number). This requires some initial expense tracking (not budgeting, but tracking) for at least 12 months. You may also look at previous 12 month periods if you anticipate your expenses will reasonably remain the same. Take these expenses for an entire year and multiply them by 25. 

Why 25? This is related to the 4 percent rule of thumb originated from research conducted by William Bengen in 1994. He evaluated 4 percent annual withdrawals from a portfolio with a minimum retirement duration of 30 years. His research concluded the following:

​This research permitted the financial independence community to put an actual number on the pursuit of early or regular retirement. Saving at least 25 times your annual means that your first year withdrawal of 4% is consistent with the total amount of money necessary for the rule to remain in effect. 

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Now, there are a few problems with chasing this number. 

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Problem #1 - Bengen's research assumes you maintain a 50/50 stocks to bonds portfolio, rebalanced annually. For the young folks out there, 50% bonds feels way too conservative!


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Problem #2 - The rule only applies to money held in tax-deferred accounts. This is because your overall portfolio return would be reduced when factoring in capital gains taxes and dividend taxes therefore reducing the longevity of your money if you continue 4% withdrawals. 

Bengen actually said the following in his paper:

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Problem #3 - Your F.I. number is probably bigger than you think since we are not including home equity and largely ignoring taxation. Having an even larger financial independence number is disheartening since your original assumptions were probably based on net worth as opposed to available balance in tax-deferred accounts. This is a very common mistake in the FIRE community!


Problem #4 - Past ​returns are not indicative of future performance. This data was based on historical observations, not future predictions. Just because these 4% withdrawals survived in a 50/50 stocks to bonds portfolio in the past, does not mean the rule will hold up for the future- although I am still personally betting that it will. 
 

​This is the point where attainment of your F.I. number can quickly become pathological. Frugality is not about deprivation and therefore neither is financial independence. However, you can quickly become too consumed with your financial independence status and overall net worth and lose site of the joys of valuing a dollar and practicing frugality consciously. I am not implying that we all need to experience a life of sunshine and rainbows with no hardship along the way. Rather, I am cautioning against allowing money and net worth to rule your world over all else. I have personally made this mistake and do not wish to repeat it nor have others emulate it. 

First and foremost- this is one I have resisted the most- automate your savings. Automating your savings removes the necessity to consciously transfer money into your investible accounts and reduces the likelihood of living in the spreadsheet (see Ramit Sethi's book I Will Teach You To Be Rich for more on this). 

Second, get clear on what matters most to you on this journey. The number is a secondary outcome and should not be the primary driver of your pursuit. Most of us want more freedom to make conscious decisions with what we do with our time rather than being beholden to a toxic work environment or arbitrary rules set forth by our employers. 

Third, remember that their are no hard and fast rules for finances. Be flexible and willing to adapt on this journey. For example, the 4% rule is generally a "rule of thumb" and is not meant to be a guarantee. This withdrawal may actually fail in the future depending on market conditions.

Further, consider if you even need 25 times annual expenses to make a true career or life change. Suppose you had $250k saved and only spent $50k per year. You still have 5 years worth of expenses saved up! This should be more than enough cushion to make a move on some real life changes if you are not happy in your present situation. If you truly dislike what you are doing please do not feel that you have to get to full financial independence before you make a move. Often times, you can begin making radical changes much sooner. If you love your job, this entire paragraph does not apply and you will likely benefit from staying the course in your pursuit.  

Lastly, control what you can control. As much as we like control in our lives, admittedly their are things that are beyond your reach. For instance, take the market conditions. Although the 4% rule worked through previously difficult economic times, again there is no guarantee it will work in the future. Can you really control what the market will do in the future? No. Therefore there is no need to worry about it. Use the 4% rule as a general framework, control what you can control, and be willing to abide by the suggestions above as time goes on.

Best of luck in your journey and remember to keep things in perspective.

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Financial independence- and thereby early retirement for those who choose- is a worthy goal for those seeking to gain back control of their time.  Simply put, financial independence is having enough savings or residual income to cover your expenses for the rest of your life without needing to rely on employment or others for assistance.

Typically, financial independence is thought of as your "retirement age" and not given further investigation by those under the age of 60. Why is this the case? Consider the following societal anchor points for retirement:

• Social Security Age (62 for early retirement and older for standard benefits)
• Full retirement age for a work pension (based on age and/or years of service)
• Medicare age for Health insurance (65 and older)
• Full retirement age for 401(k)'s and other tax-deferred accounts (typically 59 and a half)

The assumption then is that we will need to work until our 60's, at minimum, before we can contemplate early retirement. That is, until we understand that there is actual evidence and analysis that it is possible to retire much sooner than your 60's, although access to the above benefits is likely nil. 

Remember, financial independence is having enough savings and/or residual income to cover your expenses for the rest of your life without needing to rely on employment or others for assistance. Technically, this can occur at any age. 

Financial independence, as well as early retirement, can then be simplified into mathematics based on investments and expenses, not age. A commonly held belief is that age is the single most important variable regarding retirement thus neglecting the most significant variable of all, your nest egg of invested savings. Do not allow the limiting beliefs of friends and family to lead you to the idea that you will also have to work for decades, in a job you dislike, just to catch a few golden years of retirement late in life. Financial independence is all about the math.

Without further ado, let us dig into the numbers of financial independence and early retirement. To calculate your financial independence number, proceed as follows:
[Expected Annual Expenses (in dollars per 12 months) x 25] = Financial independence # (in total dollars)

​To solve for this individual equation, you will need to estimate your expected expenses per 12 months moving forward. This requires some initial expense tracking (not budgeting, but tracking) for at least 12 months. As a frame of reference, you may also look at previous 12 month periods if you anticipate your expenses will reasonably remain the same. If not, factor in recurring upcoming expenses such as increased health care premiums, increased or decreased housing expenses, etc.

Once you have your expected annual expenses, multiply them by 25 as above to determine how much you will need to your investment portfolio for financial independence and early retirement. 

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Why 25 times your expected annual expenses?
​This is related to the 4 percent rule of thumb originated from research conducted by William Bengen in 1994. He evaluated 4 percent annual withdrawals from a portfolio with a minimum retirement duration of 30 years. His research concluded the following:

The overarching theme is that for those who are long-term savers, financial independence and early retirement is not as evasive as we might think. It's merely just one giant math problem.

However, the above is a simple equation and is certainly no guarantee that your money will last forever. That said, consider that most people have no idea that there is actually solid research- as well as a way to calculate- the path to financial independence and early retirement. 

Let this math be your framework moving forward. Understand that the above 4% withdrawal rate has some built-in assumptions and problems that need to be addressed and fully understood before you begin withdrawing your money. I will be highlighting those in another post. My guess is that if this is the first time you are hearing about financial independence and the possibility of early retirement, you likely have some more saving and investing to do before you need to worry about the precise mechanics of how you will withdrawal 4% of your money. 

It is not entirely clear to me why this information is not more widely understood. I do, however, have some theories that I can share.

Theory 1. Our financial advisers and gatekeepers are paid to keep us contributing and investing to long-term programs. The problem with financial advisers largely controlling the dissemination of personal finance information to the public is that it is likely their interests will come before yours (unless you have a "fiduciary" adviser). If your adviser's compensation is based on assets under management (AUM) or load-fees, then their livelihood is based on you continuing to contribute and grow your nest egg. Again, this sounds like a good thing and perhaps it is if you detest the idea of managing your own money- or otherwise have a very complex estate to manage. However, paying higher fees and getting encouragement to continue working and investing for many years beyond financial independence will keep you working longer than you otherwise may have needed.

Theory 2. Most people are terrible savers. Period. 

​Theory 3. New media anchors us to minimum retirement age in our 60's, for all the reasons mentioned already above. 

Theory 4. Our parents, grandparents, or guardians worked forever and thus gave us a similar script with which to framework our own lives.

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Certainly tax planning is a dreaded topic for nearly everyone. Yet taxes are mistakenly overlooked when considering overall annual expenses.

Taxes on income, property, and consumer goods adds up to a significant enough total to likely be the biggest expense category for any given household. After accounting for federal, state, and local taxes, further including FICA taxes, you will take home significantly less than you originally expected to be paid.

​Consider however, that these taxes can be reduced through some very simple strategies that impact your financially independent future as well. Reducing your taxes now (legally of course) will keep you in control of a greater percentage of your dollars

Nerdwallet posted a solid article on 12 tips to cut your tax bill. 

Some of the most common strategies involve contributing to employer-sponsored retirement plans, qualifying traditional IRA contributions, and contributions to health insurance premiums and HSA's. Charitable donations are also valuable ways to positively impact the community and receive a tax deduction in the process.

Let's imagine a hypothetical example of Mr. and Mrs. Gibson. The Gibson's have an expected total household income of $150,000 for the year 2021. This firmly puts you in the 22% federal tax bracket (again, as of 2021).

In this example, keep in mind that the upper limit for the 12% tax bracket is $81,050. This means that every dollar over that $81,050 (12% tax bracket upper limit) will be taxed at 22% instead of 12%, a 10% difference. This is how a progressive tax system works.

So in our hypothetical example, how would the Gibson's save 10% on federal taxes in this year?

• If this couple took the 2021 standard deduction of $25,100, they would fall to $124,900 in federally taxable income
• If they further contributed to 401(k) or 403(b) plans up to the maximum amount of $19,500 per individual, which is $39,00 total for this household. This would then further reduce their federally taxable income all the way down to $85,500.
• Further, if their household health insurance premiums totaled $4,800 for the year ($400/month), they would drop to a federally taxable income of $80,700. 

​In this hypothetical example, all of their earnings above $81,050 would have been taxed at 22% up to their the full $150,000. When accounting for all of their deductions above, the Gibson's would have completely avoided the 22% tax bracket thus keeping more of their money working for them in retirement vehicles earning compounded growth.

Keep in mind that NONE of this is tax advice and you still need to consult with a financial professional if you do not feel comfortable planning on your own. This is for educational purposes only.

In the above fictional scenario of the Gibson's they would be able to use their federal tax savings to make greater retirement contributions while they are young, thus dramatically improving the power of compound interest over time.

Imagine year after year, as the tax rules change, learning about ways to avoid higher taxation and keep more of your money working for you instead of being handed out in taxes. These are perfectly legal strategies that are published in our tax code, but the rules do change often. For that reason, if you do not have the stomach to keep abreast of U.S. tax code, you must consult with a financial professional such as a certified public accountant (CPA) as well as a tax attorney who specializes in your state. 

Let's face it, most of the discussion around personal finance and net worth involves the Baby Boomer generation. Perhaps this is due to their overall proximity to the traditional retirement age of 60-65 years old.

Generally speaking, the Boomer's have a sad financial state of affairs given their age (more on that later). This lack of financial net worth is significant because of how many Boomers there are in this country. According to a 2019 survey, there are just over 69 million Boomers in the United States. However, most are unaware that there are actually more Millennials in the US to the tune of 72 million.

The fact that Millennials actually outnumber the Baby Boomers is lost on most people. Most of the news and media reports are focused on the Boomers proximity to receiving Medicare and requiring long-term care. It seems unwise to focus so intently on one group, especially if they are not the largest percentage of our overall population. That said, we need to put the present state of financial affairs of the average Millennial into focus.

Most Millennials (generally considered those born between 1981-1996) entered the workforce around The Great Recession between 2007-2009. That said, with rising costs of education and living in general combined with decreased earnings, the unfortunate average financial net worth of a Millennial is below $8,000 per household according to a 2019 study by the Deloitte accounting firm.

​Typically parents want their children to do better than they did. Consider how low that bar might actually be set given that the average Baby Boomer household retirement savings is $144,000, per a recent Transamerica survey. Boomer's are widely considered those born between 1946-1964. That leaves some Boomers older than 75 years old with the youngest Millennials in their early 20's (as of 2020). Some Millennials may be up to 50 years young than some of the oldest Baby Boomers. 

According to recent U.S. Census data, 60% of married Millennials and 80% of unmarried Millennials earn less than $40,000 per year. The folks over at SmartAsset report that the average salary of a Millennial today is an estimated ​20% lower, in inflation-adjusted dollars, than the average salary that a Baby Boomer had at the same age. Although generally Millennials are off to a rough start, there may just be hope for the future.

First, let's assess the biggest areas where Millennials are failing. Then we can take a look at what might give Millennials hope fore the future.

The vicious cycle of spending and consumption that follows societal expectations is leaving Millennials in a difficult situation financially. It is unattractive to live with your parents, drive an old car, and wear old shoes and clothes, so we don't. Instead Millennials have an ever-present pull towards consumption because most of their friends and family mistakenly judges success by your possessions. According to modern society you must be broke and failing if you do not own nice things. This is one of the most pervasive fallacies of the West in the 21st century.

Displaying a high social status is not a measure of success. I would argue that conforming to societal expectations of increasing possessions by giving into unnecessary spending behavior to impress others is borderline pathological. 

So how has this absurd idealism and pathological societal expectations impact the average Millennial?

• Millennials across the U.S. carried an average of $4,712 each in credit card debt in Q1 2019 - Source: Experian
  • Older Millennials (age 38) carry more debt than younger Millennials (age 22) at $6,675 and $2,288, respectively (Source: Experian). Older Millennials simply have had more time on their "spending journey" than younger Millennials. 
• Borrowers age 25 to 34 $497.6 billion in outstanding student loan debt for about 15.1 million borrowers. This translates to an average student debt of around $33,000 dollars for each borrower according to Forbes.

Perhaps Millennials demonstrate the most resilience out of any prior generation. Recall that nearly every young person in the Millennials generation entered the workforce during The Great Recession, or otherwise one of the greatest economic downturns of any of our lifetime's. 

To make matters worse, when Millennials were supposed to be experiencing stability typical of approaching or entering your 30's, a had a pandemic hit. During COVID-19, the unemployment rates have spiked sharply. Another economic downturn was bestowed upon this generation making their increased debt and financial obligations even more difficult to combat.

Millennials also tend to attain higher education, specifically college education. The downside to this is the ever-increasing student loan debt but there at least demonstrates the continued resilience to endure a 4 year liberal arts education and at least give themselves a crack at becoming more enlightened (although this doesn't always happen).

Another positive attribute is the entrance of women into the workforce. According to the Pew study, In 1966, when Silent Generation (born 1928 to 1945) women were between the ages of 22 and 37, only 40% of the women were employed. Compare that to today where 72% of Millennial women are employed. With increased participation in the workforce, families are at least given the chance to earn more money than prior generations, although this has not yet proven to be true largely due to two significant economic downturns during the earliest earning years of a Millennials life.

Despite the woes of the Millennial generation they do demonstrate some additional positive attributes:

• A greater willingness to save than older generations (source)
• Earlier participation in retirement plans compared to previous generations (source)
• Greater confidence than previous generations in facing difficult financial situations (source)
• Greater tendency to spend on experiences compared to material possessions (source)
• They move less often thus reducing total transaction costs (source)
• Start families later in life which could increase the probability of starting a family from a position of financial strength (source)

I believe overall the potential for Millennials in the future is great despite previous history treating them unkindly. Millennials demonstrate their resilience in the face of increased student loans, higher costs of living, The Great Recession, and now a pandemic. We must encourage the entire Millennial generation to continue to increase their financial wit through reading, researching, and asking prudent questions. They have demonstrated that they are willing to ask for help, but this is when the rubber meets the road.

There is hope in the future yet as long as we continue to grow stronger and wiser with our finances and realize that their still may be many challenges yet to come.

Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.
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Today, we outline a common theme in the financial independence community, delayed gratification. In financial terms, saving and investing is the equivalent of delayed gratification.

The ability to save is heavily dependent on spending behavior. But why do we spend so much as a society? What is it about spending that taps into our internal reward system? Enter the concept of self-gratification.

Delayed gratification is actually a form of self-gratification. It is the ability to restrain oneself from immediate indulgence in exchange for a later reward. Delayed gratification also happens to be a highly useful tool for increasing your net worth.

The concept of delayed gratification is simple: instead of immediately indulging yourself for a reward (instant gratification), the temptation is resisted in an effort to attain a future reward. 

​The negative connotations around immediate reward is ever-present in contemporary society. Instant gratification is centered around consumerism and reward-seeking behavior which happens to be the crux of modern day America. Financially speaking, instant gratification is also known as keeping up with the Joneses.

We are driven by a culture of consumerism and spending in the United States. Some estimates indicate that we see up to 10,000 ads per day, and that is only from digital sources. That number doesn't even include how many billboards, newspaper ads, magazine ads, and physical advertisements we are exposed to on a daily basis. Being driven by consumerism is not friendly when it comes to personal finances. Instant gratification- keeping up with the Joneses- is inherently self-defeating when it comes to finances. The downward spiral begins when you realize that the first purchase often does not lead to the amount of reward that you originally anticipated. This can often lead to more purchases on the tail-end of a recent purchase, also known as the Diderot effect.

The Diderot effect is named after French philosopher Denis Diderot who sudden came into money after the sale of his library. What he did with his windfall was purchase a beautiful red dressing gown, which is exactly where his troubles began. Suddenly, this red gown was the nicest thing Diderot owned and it made all of his other possessions look lousy. He realized there was only one way to fix this- purchasing new items to "live up" to the beautiful red gown. He began replacing straw chairs and old tables until all of his possessions were suddenly beautiful, all at a great expense to Diderot.

We have this happen all the time as well. Buying a new phone comes with purchase of a new case, a protection and insurance plan, premium app purchases, and a higher monthly bill to boot. Redoing your deck leads to new furniture, a brand new gas grill, plants, and the trending decorative lighting. This is the Diderot effect in full force. Your goal is to interject before the spiral of consumption begins.  

In 1972, a study was published from a group of researchers out of Stanford. The design of the study involved giving children the choice of immediate gratification or delayed gratification. The children were placed in a room with an investigator and given a marshmallow. They were told that if they waited and did not eat the first marshmallow, they would be given a second marshmallow. Then the investigators left the room for a short period to let the children decide for themselves- eat the first marshmallow immediately or wait and have two to eat in the future. In other words, instant gratification versus delayed gratification.

Now understand that these children were preschoolers, the most likely crowd to give in to the temptations of instant reward and gratification. The remarkable fact is, some didn't give in. Some waited. So what happened to the children who were able to wait? They followed up years later with the original cohort of preschoolers and cross-referenced the data of those who waited versus those who didn't. You can see the studies for yourself here, here, and here. So what did they find when they followed up with the original students?

On average, the students who avoided eating the first marshmallow in exchange for two marshmallows later (i.e. those that demonstrated delayed gratification):

• More academically and socially competent, verbally fluent, rational, attentive, planful, and able to deal well with frustration and stress. Source
• Higher SAT scores. Source
• Lower rates of Obesity 30 years later! Source

Not bad for the pain of waiting a few extra minutes for two marshmallows. ​So what does this have to do with finances?

The children who chose delayed gratification in the Stanford research experiment overall scored better in nearly every objective measure when assessed years later than the children who chose instant gratification. With better ratings of academic competence, social competence, rationality, attentiveness, planfulness, and improved ability to cope with stress, who better suited to resist keeping up with the Joneses than those who displayed delayed gratification!

Perhaps the traits the preschool children showed early in life can help inform us of how delayed vs. instant gratification can effect our finances.

For example- someone who is more inclined to value delayed gratification might avoid the temptations of a quick purchase in exchange for long-term growth of your net worth. If you can resist temptation to purchase new things and you value savings, you are likely in a better situation to invest. By investing over a long period, you are likely to participate in the profound powers of compound interest. All of this begins with the simple ability to resist instant gratification in exchange for the future rewards of compounded growth. A better life is often the fruits of displaying delayed gratification. Working out once is not going to give you the body of your dreams. Skipping a small purchase at a gas station is not instantly going to make you wealthy. Eating one salad will not ameliorate the risks of eating poorly at every other meal. Rather, it is the cumulative effect of these choices to delay your gratification and reward system in exchange for a better future self.

Make the difficult sacrifices now to provide better financial means in the future. Purchasing everything now, in the moment, destroys your ability to participate in one of the greatest mathematical phenomena known to man- compound interest.

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We are living out the cautionary tale urging us to live below our means. Consider that some estimate that we make roughly 35,000 decisions per day. A survey conducted by Dan Goldstein and Principal Financial Group indicated that although we make thousands of daily decisions those who lack financial confidence are 64% more likely to postpone major financial decisions- such as managing investment or retirement accounts. 

We live in a consumerist society filled with things we likely do not need to impress people we probably have no business trying to impress. Consider what might happen if you spend a weekend with friends who own a large home and two new cars. Or maybe a long weekend with parents or relatives who own a beach house with a inground swimming pool. How might you feel coming out of that experience? I assure you that this recent experience will have you more likely to spend.

For most, success and failure seems to be judged by material possessions, especially in comparison to others. Worse yet, time spent with friends or family who are spenders subjects us to a psychological theory known as recency bias. This type of bias is an error where we place greater importance on events that occurred more recently compared to events occurring further back in time. That explains why you suddenly want a new car or to upgrade your kitchen after you spent time with anyone who is a big spender concerned with the display of high social status.

Taking a moment to stop and assess whether your financial decisions are related to competing with others versus your long-term goals is an enormous step worth taking. Taking that step is more difficult than you might initially think. Remember that we make 35,000 decisions per day, many of which I bet are around finances, or making the decision to further procrastinate finances. Amidst all those decisions, you need to discover a way to consciously address those related to financial decision making.
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This process of becoming aware of your financial situation will bring about many challenges. Admittedly, I have often experienced the strong urges to display my financial status to others by competing with their purchases. Yet I resist because it is in the best interest of my future self to do so.

• To give context, presently I live in the low-income part of town above an old automotive shop and drive a car with over 200,000 miles. I purchase everything I can at discounted rates and have not seen a new pair of shoes in over 8 years. Despite the appearance of struggling financially, my wife and I are rapidly approaching a net worth of half a million dollars- which we aim to attain by early next year.

Given the context above, imagine the frustration of sitting with friends and family who readily assume that we are not "doing well". Imagine the outrage I might have of knowing what real financial strength means, and listening to a dozen people sit around talking about who "has money" and who doesn't. This is a fruitless conversation often coming from those who have no real financial values of their own.

Displaying financial prowess with the purchase of material possessions should not be top priority along your path to financial independence. Very few people around us actually have any idea how much wealth we are actually accumulating. Why? Because we don't buy things that display how much money we have. The reality of the situation is you have to become alright with nobody knowing how much you are worth. You have to realize the only person who needs to know your financial worth is you and a significant other, provided you have one. Living a life of frugality and wealth accumulation is often not very attractive early on in the process. Unless you want to walk around and show people your account balances (I do not recommend this), the only person who really needs to knows how "well" you are doing financially will be you.

I suggest regularly, perhaps even daily, going through the following reflective steps to incrementally build awareness:

​1. What are you thinking about, or regularly, purchasing? 
Like it or not, purchasing decisions are always near the forefront of our minds. Whenever you see something you like, you immediately picture yourself possessing it, wearing it, driving it. This is just basic human nature and the sooner you realize you are drawn to acquiring more things, the sooner you can begin to break the habit of purchasing needlessly. This is the foundation for developing awareness. You are thinking about either consciously or subconsciously, it's just the nature of our being. 


2. Why are you thinking about, or regularly, purchasing?

• What spurred the decision to purchase this item? Was it out of need/necessity or because I just saw somebody else with one and I have FOMO (fear of missing out for the older folks)?
• Is this purchase something that I need to fulfill my daily duties?
• Will I attain lasting satisfaction from this purchase or will it be likely be fleeting and otherwise not contribute to a lasting memory or experience?
• Do I really need to "treat" myself right now or am I getting a little soft and looking for a pat on the back? If your looking for a "feel good" consider exercise, meditation, aromatherapy, music, or just petting the damn dog instead of attempting to buy your way to happiness. 

3. How much are you currently saving and investing? 

• Figure out exactly how much, each paycheck, you are saving down to the very last dollar.
• What account is it going into?
• What is your present net worth?
• Is your net worth as high as it should be?

4. Why are you saving and investing?

• Why is it important to me to have a high net worth?
• Would I like the option to quit my job at any time if I want?
• What does financial independence provide me that "purchases" cannot?
• What does my ideal day/life look like and am I getting closer to it financially? Some individuals will have lower annual costs than others when it comes to an ideal day/life.

Contemplate these four questions everyday and you will be amazed at how quickly you start to build financial prowess and control over your finances. As the old saying goes "you don't know what you don't know". Walking around on autopilot only knowing how much you have in a checking account to make a small purchasing decision is not the path to financial independence and strength. Take control of your financial future and break the habit of letting finances hide themselves inside of the 35,000 decisions you make everyday.

• How to Calculate Your Net Worth
• Is Your Net Worth As High As It Should Be?
• How to Increase Your Net Worth: 3 Simple Steps
• Money Management Series: 3 Parts

Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.
​

Your net worth is an excellent indicator of how well you accumulate money over your lifetime. Certainly, net worth is inclusive of more than just cash savings, as the equation indicates above.

Consider however, net worth is really an indirect (or arguably a direct) measure of your spending behaviors. If you accumulate "things" instead of "assets" in your lifetime, you likely will likely have a very poor showing when it comes to calculating your net worth.

Purchasing depreciating assets such as cars, boats, clothes, shoes, etc. contributes to a low net worth because you are spending what should instead be saved and accumulated. 

If you were to purchase a house, or securities, or any other appreciating asset, you would otherwise expect your net worth to increase.

Here is the catch... having a big house and displaying high social status by mortgaging and borrowing can give the appearance of high net worth, but actually leaves you worth next to nothing.

My favorite simple equation for determining how much you "should" be worth is based on annual income and your age. It comes directly from the book The Millionaire Next Door by Thomas Stanley.

I really like how this equation actually provides an excellent reflection of your spending vs. accumulating behavior to date.

Essentially, if you make $600,000 a year and you are 50 years old, with a present net worth of $450,000, you are actually a fairly poor accumulator of wealth. Per Stanley's equation, you should be worth $3 million! 

Why $3 million? Using Stanley's equation, Expected Net Worth = (Age x Pre-tax Annual Household Income)/10, simply plug in the theoretical numbers listed above.

• ​Expected Net Worth = (50(age) x 600,000(pre-tax income)/10 = $3 million!

If you are making this type of income and have only managed to save a small portion of it, you live a high-consumption lifestyle.

A high-consumption lifestyle is the plague of the West in the 21st century. Displaying high social status to others instead of attaining a high net worth - which typically nobody sees - is a no contest. We tend to lead a lifestyle geared more towards impressing others as opposed to improving our own character and merit. It is truly a sad state of affairs for the average American household. Is it really any great mystery why rates of divorce, unhappiness, and depression maintain such high rates? I think not.

Let's consider a more realistic scenario with more pedestrian numbers than the ones used above. Take a household earning $70,000 combined pre-tax income presently at age 35. Cut them a break right? After all, they are only 35! They aren't doing too bad.

Not so fast...
Using these numbers we figure this 35 year old couple should already be worth $245,000

• Here is the math... Expected Net Worth = (35 x 70,000)/10 = 245,000.

Consider for a moment that most people in the United States, even one's who are much older than our example couple, barely have enough savings to cover a month's worth of expenses let alone $245,000.

There is a solution however...
Start living below your means, not above them!

Best-selling author James Clear eloquently describes how certain outcomes can be a lagging measure of your habits. Poor financial habits and high spending behavior almost always equals low net worth. Frugality, savings, and investing are typically habits that yield an eventual outcome of extraordinarily high net worth's, even with very modest incomes of $70,000 or less per household!

Stanley's equation above is certainly not a perfect example because maybe you are at the very beginning of your journey. Perhaps you just paid off a significant amount of student loan debt or paid for your own wedding. Of course this equation would not capture this event in such a unique situation. I believe that this equation would be something to turn to after you finish eliminating your debt to help keep you motivated along your path.

No matter where you are now remember, net worth is timestamped and very specific to a particular point in your life. This means that you can change it, significantly. All you need are better habits.

Not sure where to start or how to improve your habits? I suggest taking a look at Clear's book Atomic Habits. He gives great insight on why goal setting is dead and achievement is largely based on relatively mundane "habit stacking". 

Let us know in the comments below what you learned when you calculated your "expected" net worth using the above equation.

​Until next time...

Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.
​

Pretty straight forward stuff here, right? 

Perhaps we should take a deeper look, just to make sure we are all on the same page.

The first step I recommend taking is to tabulate what you possess that holds financial value. These are your assets. Calculate your assets by adding up the present value of the following categories to find the present value of your assets.

• Cash Accounts
• Checking
• Savings
• CD's
• Bonds
• Securities
• IRA and Employer retirement accounts (401(k), 403(b), etc.)
• Annuities 
• Equity in Your Home and Other Residences
• Value of Land or Land Equity

Next, we need to figure out what you owe. This is also known as your liabilities. Add up the following categories to find your liabilities.

• Student Loans
• Car Loans
• Mortgage(s)
• Taxes Owed
• Money Owed to Suppliers
• Court Fees outstanding
• Other Fees outstanding

Subtract the total number found for your liabilities from your assets, to get your net worth. In other words... Net Worth = Assets (present value) - Outstanding Liabilities

In other words, it is snapshot unique to the day and time that you calculated it. It will go up and down with fluctuations in the market and differing seasons of saving and spending throughout the year. This also means that just because you got to a point where your net worth crosses a certain threshold, it may not stay there forever. The present value of your net worth is very transient. It is based on both individual behavior and market behavior. 

A word of caution: purchasing a depreciating asset (like a boat) is nearly as bad as any other liabilities.

• Say you purchase a speed boat for $100k and sell it down the road for $40k (if you're lucky), you have lost $60k of net worth in the process of owning that boat. What's worse, if you would have instead invested that $100k in a low cost index fund for the 10 years, instead of owning the boat, you could have $215,892 in 10 years assuming an 8% annual return (take a little more off for taxes on long-term gains of course). In reality, that makes the purchase of a boat, otherwise held for 10 years, a total cost of $175,892 - the loss of $60k in value of the boat over 10 years plus the loss of investment income of $100k invested over 10 years assuming 8% return.

My favorite simple equation for determining how much you "should" be worth is based on annual income and your age. It comes directly from the book The Millionaire Next Door by Thomas Stanley.

I really like how this equation actually provides an excellent reflection of your spending vs. accumulating behavior to date.

Essentially, if you make $600,000 a year and you are 50 years old, with a present net worth of $450,000, you are actually a fairly poor accumulator of wealth. Per Stanley's equation, you should be worth $3 million!

Tell us what you think in the comments below. Are you worth what you should be? Are you now motivated to save and invest even more than you already have?!

• Is Your Net Worth As High As It Should Be?
• Understanding Investing | The Basics
• Why You Should Calculate Your Net Worth At Least Once Per Year

Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.

If you want to a crack at the big bucks but aren't 7 feet tall with a smooth jump-shot or a square-jawed Hollywood big shot, you need to invest.

There are many different methods of investing from baseball cards to stocks, comic books to silver. Truth be told, you can invest in anything you anticipate will increase in value over time. I would estimate, however, that a great majority of investors build their life and wealth around the stock market or real estate. Entrepreneurship or small business ownership is a close third option.  

Technically, you can invest in nearly anything understanding that not all investments are not created equal. All you really need is just one person willing and able to purchase something at a higher price than you originally paid to have a positive investment. 

If you purchase something that is not reasonably expected to increase in monetary value over time, then you are probably making a poor (or negative) investment.

So where do you start? What are the very first steps of investing if you are a beginner? 
​
If you are just starting out, I suggest you begin doing some light reading in the areas of personal finance and investing. Reading this blog is a great start and take a look at some of my all-time favorites on personal money management. ducate yourself. Read, study, and immerse yourself in money management, investing, and personal finance. It is imperative to understand money

I am not saying be the next Warren Buffet and read financial statements all day for the next 80 years, but educating yourself would be a good place to start. 

The two most common investment options, both with fairly small barriers to entry, are investing in the stock market or real estate.

You actually have many options. Wall Street and the stock exchange began in 1792 under a buttonwood tree and involved actual in-person trading of securities.

Nowadays, nearly everything is done online. To open any individual retirement accounts or brokerage accounts, I like to use Fidelity or Vanguard for my account. For workplace plans, you may not have the option of either of the aforementioned so work with your HR department and a financial advisor in discovering what approved vendors you have for your 401(k)'s, 403(b)'s, and other deferred compensation or pension plans. 

The primary types of accounts to invest in stocks are:

• Retirement Plans through your employer
  • 401(k), 403(b), 457 plan, 457(b), Deferred Comp., Pension Plan, etc.
• Individual Retirement Accounts (IRA)
  • Typically a Roth or a Traditional IRA
• Brokerage Accounts
  • I like either Fidelity or Vanguard. No they are not paying me to say that....yet.

Again, for IRA's and brokerage accounts I always have used either Fidelity or Vanguard, but the choice is entirely yours to make. These two vendors give you access to some of the lowest fees and expenses available in the industry. 

My favorite funds to own for each company are listed below. Disclaimer: This is not investment advice.

• Vanguard - VTSAX (stocks), VTSMX (stocks), VBFMX (bonds)
• Fidelity - FXAIX (stocks), FSKAX (stocks), FXNAX (U.S. bonds), FUAMX (intermediate-term treasury bonds), FTBFX (total bond fund)

If you have any trouble figuring out how to purchase stocks and index funds, or how to transfer money into these accounts, call your investment company or financial advisor and ask how to get started purchasing these securities. Vanguard and Fidelity have some of the best customer service departments I have experienced yet. 

My personal preference is to "set it and forget it". I add money to my account incrementally over time and continue to purchase my favorite stocks and index funds in expectation that they will dramatically increase over time. I typically set my investment horizon for at least 20 years, especially my index funds, where I do not expect to sell or withdrawal any of these securities for 20 years or more.

A common long-term for the financial independence community is to continue the aforementioned, year after year, until you have enough money to cover your expenses My plan is to do this year after year until I am ready to start withdrawing this money which will be when I no longer need to work for money and can live off investment income.

Please, do not worry about timing the market. Do not worry about crashes. Do not worry about corrections. Just invest in low cost index funds for life and allow your money to compound over time.

Use caution when you have anybody telling you they have access to unique metrics and can protect you from market crashes. Unfortunately, actively managed portfolios rarely ever beat passively managed ones. Guess what, they don't. Their "pick of the week" and "insider information" has never historically proven to be accurate. Consider that almost every single long term investment advisor has failed to even match the returns of the S&P 500. That's why I choose to invest in index funds to allow me to match the S&P 500 thereby beating 95% of all professional investment advisors.

I have not personally began investing in real estate as of 2020, but I expect that to change over time.

One of the best real estate investment books I have read is How to Buy and Sell Real Estate for Financial Freedom by James and JW Hicks. 

The two most common real estate investment strategies are:

1. Investing in Long-Term Rentals
2. "Fix and Flip"

These two strategies oppose one another greatly. Long-term rental strategies are geared for those looking for many years of residual rental income and who do not mind either managing the properties themselves or paying somebody else to do it.

"Fix and Flip" is exactly what it sounds like. Buy a crappy place for cheap, fix it up either yourself or with low cost contractors, and sell it for a profit after factoring in expenses to fix it up.

Regardless of how you start investing, whether it be real estate, stocks, or otherwise, you need to get your money working for you as early in life as possible.

The most assured way to generate significant long-term wealth is saving and investing. Boring? Maybe. But you can laugh your way to the bank someday when you are counting all the zeros behind a big number in your investment accounts.

• How to Save and Invest in Low Cost Index Funds
• Mutual Funds vs. Index Funds - Who Wins?

Most people forget that a home is a type of purchase. When we hear the word purchase we tend to focus on small-ticket items like clothes, shoes, or groceries. Perhaps it is because we tend to associate loans and mortgages with large-ticket items, while purchases tend to be geared towards small-ticket items.

In reality, a mortgage is really just a loan to purchase your home. When deciding on this purchase and larger purchases should be given greater contemplation. Yet it seems that we spend about as much time evaluating home prices as we do shoe prices. We need to be more disciplined and cognizant when considering a home purchase, especially if this is your first one.

Choose wisely when deciding how much you are going to pay for the price of your next home as purchasing too much home can have devastating long-term financial consequences. Without question, a home is certainly an investment.. You borrow money to purchase the asset (a house) that you expect to appreciate in value over time. Truth be told, I do not believe that purchasing a home is a significant wealth generator nor does it appreciate well over time. Residential real estate barely beats inflation to the tune of about 1% per year. I would hardly call that a significant wealth generator.

However, a home can be a wealth eliminator, if purchased incorrectly. Purchasing too much home will have long reaching implications that will devastate your finances. If you do not have at least 20 percent to put down on a  home, you are looking at too high of a purchase price.  

The benefits of putting at least 20 percent down on a home are:

• Smaller monthly payment
• Lower interest rates on your loan
• Less interest accumulated over the life of the loan (assuming you make the payments)
• No mortgage insurance (MI or PMI)
• Your offer will be more attractive to the seller

Be advised, the purchase of your home- especially your first home- sets off a chain reaction that may last for decades to come. Many of the successes (or failures) of your future financial journey depend on the decisions you make when you are young. If you overextend yourself on the purchase of your home you dramatically reduce the power of your savings. That should be reason enough to purchase a home well within your means.

The reality is nobody actually cares what house you are presently living in. Nobody cares how many square feet it is, how many bedrooms it has, or if it has a pool or exposed wood beams. Truth be told, the only person any of these things should ever have any meaning to (aside from yourself) is whoever you try to sell it to down the road. That's it. Technically, you will only ever need two people to "judge" the value of your home, you and whoever buys it from you.

With that out of the way, the single most repeated mistake in American society is over-mortgaging themselves on a home. This is commonly referred to as being "house-poor" or being "married to your mortgage". 

A more expensive home has implications beyond just a larger monthly mortgage payment. Consider that a higher purchase price will also have the following effects:

• Increased closing costs (when both buying and selling)
• Higher property taxes
• Higher homeowner's insurance
• Increased broker or lender fees 
• Increased commission to real estate agents (when both buying and selling)
• Mortgage insurance (if unable to make at least a 20 percent down payment)

If there is one thing that I consistently see that dramatically alters the trajectory of a financial journey, it is the purchase of your home, especially when considering a first-time purchase. If nothing else, understand that a home is a place of shelter and comfort. Truly assess whether you require such luxuries that high-priced homes afford or if you can delay those wants until you can truly afford them down the road.

Especially when you are young, the goal is to save and invest as aggressively as possible. Far to often, the roles are reversed. Mistakenly, people are doing things backwards by spending when they are young and trying to save when they are older. It should be the other way around. One of the largest impacts you can have on your savings is by diligently assessing the purchase price of your first home. Buying a house for even $5,000 over your true budget can have lasting implications that will be difficult to recover from.

Until next time...

• Enough Already! A House is Definitely an Investment.
  
• The Power of Compound Interest

Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you

Personal finance seems to be making a comeback. Books are written, podcasts recorded, and Youtube videos are increasing in abundance, all centered around the topic of financial independence. The theme continues by extending the conversation into a concept known as early retirement. Early retirement is predicated on demonstrating discipline and consistency with your finances, all in an effort to quit working as quickly as possible. Could it really be that simple? Has everybody been missing the bus on finances? Will this financial independence retire early (FIRE) movement last?

I must admit, I am fairly skeptical when it comes to large groups with common agendas (this stuff sounds cult leadership to me). Don't get me wrong, I do believe the FIRE community has produced many positive outcomes, but my concern is that there is no platform to host the individuals who failed. We only ever hear about the success stories in this community. 

Focusing on early retirement, as a sole motivator to get your financial house in order, is a rather dangerous game to play. When pursuing finances as a means to an end, one has a tendency to lose sight of the joys of life, or even stop pursuing them altogether. I am certainly not advocating for the collection of material possessions but rather restarting the search for meaning and happiness in life. There is a level of diversion that is difficult to quantify when we take a myopic view towards any one particular outcome - in this case, early retirement. 

Author Ramit Sethi encourages his readers to "automate and live outside of the spreadsheet" in his book I Will Teach You To Be Rich.

What concerns me the most about general guidelines and universal advice on finances is the notion that personal finance is inherently personal. It is unique to your own individual needs. Your path to financial freedom and financial independence does not have to be based on retiring early, although it certainly can be.

Most of us want to work. Some of us even enjoy some of our current work. Yet it is not enough to keep us from wanting something more. That something more is a definitive purpose which our day job presently interferes with.

The FIRE community tends to focus too heavily on residual income strategies, passive income development, and advanced blueprints for access to retirement funds through Roth conversion ladders. These strategies are aimed at using money as a means to an end and using money as a means to an end is a slippery slope worth investigating further. 

The fact is, money is a necessary medium of exchange for goods and services, especially in the United States. We find truth and solace in adages like "no free lunches" as most things in life are not without monetary cost. The simple truth is that the less that you have in savings and the more you have in debt, the greater difficulty you will likely have navigating through life. 

Accumulating wealth and eliminating debt will certainly open up opportunities and breathing room necessary to explore and pursue your passions. On the contrary, I am not convinced that you need as much as they say you need before pursuing your passions. Going well beyond debt elimination and attaining positive net worth of 3-5 times your annual expenses seems to provide diminishing returns and takes too long for most people to stay with. I believe that saving and investing anything beyond 5 times your annual expenses might be completely unnecessary and a source of undue stress for many of us. There is not a huge difference, in my mind, between 5x annual savings and 25x annual savings (a popular FIRE milestone) when considering your freedom to pursue alternative occupations. Most of us cannot even fully quantify what it is like to have 5 years worth of expenses saved, let alone 25 years worth. The trick is learning when enough is enough.

Consider the difference between having a financial buffer of 5 years of expenses compared to 25 years of expenses. Obviously, the answer is there is 20 years difference. However, getting to the 25 years mark still does not address the underlying problem (neither does 5 years). Your overall lack of a definitive purpose in life. 

I have little confidence that an aggressive pursuit to save 25 times your annual expenses to achieve a FIRE milestone will actually contribute in any way, shape, or form to your ability to discover meaning and purpose. Certainly you will become an excellent savor and a savvy investor along the way. But will you become a better person? Will you generate value for others along the way?

Of course you could just wait to save the requisite amount and then begin your pursuit but you need to ask yourself one serious question: Are you willing to wait that long?

The infamous post by Mr. Money Mustache suggests that finding out how many years before your can enter early retirement is much easier than you think. This is an excellent post and has been life changing for many folks. If you have not read his post, go do it now and then come right back here. If you are already familiar with it, keep reading.

I do not want to ruin the moment for anyone but after assessing the numbers highlighted in table and graphical format on his pillar post, I could not help but wonder if everybody is willing and able to wait that long. For example, consider that it still takes 17 years to achieve early retirement by saving 50% of your take-home pay. That's a long time. If you can bump your savings rate up to 65%, you can do achieve FIRE at just over 10 years. 

The math above assumes a starting point of zero net worth. Many are already ahead of that and many are well below zero, in the negative net worth category. If you are close to early retirement, already have a significant positive net worth with no debt, by all means finish your pursuit of FIRE. For those of you who are much further away (most of you are), I urge you to consider much more attainable and realistic milestones for your medium to long-term goals.

Debt elimination is huge. If you are not there yet, this is one of the best places to start.

If you have finally broke even and said goodbye to toxic debt like car loans and student loans, it is time to start building a positive net worth. I don't know about you but starting at zero and saving 50% of my take-home pay for 17 consecutive years (204 months) seems like a very long way off and would be nearly impossible to stay motivated for.

Contemplate some important questions when considering if 25x annual expenses is really worthwhile:

• Could you begin your quest for purpose and meaning much sooner than waiting for 25x annual expenses?
• How much more comfortable would you really feel saving 25x annual expenses vs. 5x annual expenses? I suggest the difference is much less thank you think.
• Would you not be satisfied knowing that all expenses, bills and obligations, would be covered for 5 full years without you bringing in a dime?  

My concern with the FIRE movement is that it causes a lot of individuals unnecessary levels of suffering along the journey. Sure, we hear about all the folks whose lives were "changed" the moment they reached the coveted quarter century savings mark. How many are we not hearing about that this advice caused obsessive or pathological levels of focus around money and savings? The truth is, I was one of them.

When I first began learning about personal finance and discovering the concept of early retirement, I was all in. Along the way I listened to the ChooseFI podcast, read many personal finance books, and listened to the latest advice from "influencers" about how to attain financial freedom. It was great, while it lasted.

Then I started accumulating a positive net worth. Six figures. A quarter of a million. $400k. My wife and I kept hitting these milestones but, admittedly, felt diminishing returns and satisfaction along the way. We had to stop and take a moment to consider whether we needed to keep pursuing the 25 times annual expenses mark, or whether we actually already had enough.

Forgive me but I am just not convinced that we truly need much more than a few years worth of expenses saved up before we can take a giant leap of progress towards pursuing our passions in life. 

Early retirement does not seem to encourage the pursuit of purpose in life, until after you reach early retirement. What if that is not soon enough for most people? What if we are only really hearing about the success stories, and there are many more failures that go unknown? We all need purpose. Dr. Viktor Frankl famously discussed the importance of purpose in his personal memoir about surviving the holocaust, Man's Search for Meaning.

The FIRE movement is centered on the concept of achieving your number, the target net worth and savings so that you can have "F-you" money and walk away from your present job. I agree, having F-you money is very valuable in life. But the real value is in attaining that number so that you can do the things you really want to do in life. Does it really need to be a full 25 times your annual expenses? For some it might. For many others, we can get to work on pursuing our passions on much less.

Trust me, as badly as you think you want to, you may not really be seeking to retire. You may be convinced this is the solution to your problems but I would suggest that your lack of definitive purpose is the real tragedy at work here.

Remember, retirement means doing nothing for work. Consider the Oxford definition of retirement quoted below:

Now that we know the true definition of retirement, is that really what you are looking for? I enjoy working when the tasks I do are meaningful, purposeful, and impactful to others or myself. I like the notion that somebody else is willing to pay me for my time. Are you really hoping for that to end completely? Or do you just want to be paid for your time to do something else? Perhaps something you enjoy much more that provides much greater purpose and service to your community.  

Using money as a means to an end is the enemy of happiness. Really, using anything as a means to an end is the enemy of happiness. Do the things you do in life because you want to, not because you expect something in return. This concept is hashed out in best-selling author Mark Manson's work Everything is F*cked: A Book About Hope. If you are the type of person who would not do the current job you are doing if it did not pay, then I encourage you to get your financial house in order so that you can pursue something else.

What society certainly does not need is a bunch of retired 30 and 40 year-olds not contributing positively to society and the workforce. Society does need more people pursuing purposeful work.

Reaching financial independence, for me, is about permitting myself to do the type of work and choosing my own suffering in exchange for long-term benefit. In his book, Manson introduces the concept of choosing your own suffering as a form of "self-limitation". The example he provides to the reader is that the ability to choose your pain in life is the real magic. Take physical exercise for example. You choose to suffer through the short-term pain of exercise in exchange for the long-term benefits of greater strength, endurance, mobility and improved health. That is the power of choosing your own suffering in life.

We are setting ourselves up to choose our own suffering. Picking our pain in life, not trying to avoid it. Life will be filled with pain and suffering regardless of whether we try to avoid it, therefore quit trying to avoid it. Rather, set yourself up so that you can choose your pain points in life such as physical exercise, financial planning, sauna bathing, cold showers, proper nutrition, meditation, and whatever other hormetic stressors you can devise that will benefit you in the long-term.

When you are paycheck to paycheck, saddled with debt, you are not in a position to choose your suffering. You need your current job with the long hours, arbitrary rules, and tedious demands that come along with it. You rarely can afford to step away and fully pursue your passion. You're stuck. Many of us are there. Many of us have been there for decades. Even I was there. It wasn't pretty.

"25x annual expenses"
"4% withdrawal rates"
"Geo-arbitrage"
"Passive income strategies"
The above are all common terminology of FIRE community. You may certainly use some, or all of them as you so choose, but make sure you are using them for the right reasons. Make sure you have assessed whether you really need a full 25x annual expenses, or whether you can take a leap of faith much sooner in life. An emerging, and increasingly popular, pivot on FIRE is instead referring to attaining a "work optional" status. When you hit work optional, you have many months, and hopefully years, worth of savings and investing accumulated so your reliance on your present job is minimal.

I encourage you to separate the "FI" from "FIRE". Focus solely on financial independence (FI) aspect and move towards a position of financial strength to allow yourself to pursue your passions in life sooner rather than later. Financial Independence permits many opportunities for you to no longer be beholden to your present job, especially if you dislike it greatly and do not find purpose in your work.

The biggest problem in the FIRE community is the underlying concept that we should eventually be able to attain a life with freedom to recline in a hammock everyday if we so choose. The major flaw of this underlying ideology is that there will always be a part of your life that will suck. Always. Therefore trying to avoid it altogether is a fruitless endeavor. 

Assuming that we can eliminate hardship and suffering in life is completely impractical and ironically tends to lead to greater suffering and unhappiness.

The real power is when you are in control of choosing your suffering. As mentioned above, physical exercise is a great example of choosing your suffering. The short-term costs are certainly worth the long-term benefits. Me sitting down and writing this post when I would rather do just about anything else, is another example of choosing your suffering. I am choosing to do this, rather than something else, with the concept that there will be some future return.

I encourage you to move forward and pursue your passions as quickly as possible. Plan, save, and invest along the way and assure your financial house is in order before doing so. Eliminate your debt and attain a positive net worth and then quickly move onto more meaningful aspects of life, such as defining your purpose.

As always, leave your comment below on how you felt about today's article. Love it or hate it, life is not about retiring. Going through your entire life with one goal, to retire, seems like just about the worst form of hell on earth. I challenge you to look further and realize that your problem is not that you are not retired, your problem is that you just haven't yet found out why you are important to the world, however big or small that importance may be.

I am not referring specifically to college education either. I am referring to "getting to know money".

​You see, most wealthy people (people with a high net worth) seem to know money pretty well. They know where and how to save it. They certainly know how to make more of it. Perhaps most importantly, they know how to invest it. There are very few millionaires who do not have an excellent education on "how money works" as a medium of exchange.

There are some popular exceptions to this rule such as professional athletes, divorcees, trust-fund babies, and celebrities. Consider how many stories of celebrities and athletes going bankrupt or having significant amounts of debt that we are aware of. It seems that the only difference between those who have received a windfall due to celebrity status or otherwise, and those who remain millionaires for decades, is the level of education they have about their money. 

Most of the wealthy got their status because of their desire to study riches. Take some of the wealthiest investors in America as an example:

• Warren Buffet is a renowned value investor and business builder; net worth: $80 billion
• Carl Icahn is the founder of Icahn Capital management; net worth: $21.5 billion
• Ray Dalio is the founder and Co-chief investor of Bridgewater Associates; net worth: $15.3 billion

What all these men have in common is they have dedicated their lives to learning about money!

Buffet is said to read some 500 pages of financial statements per day. This is taking learning about money to a new extreme. Any coincidence that his passion and desire for learning about money and value has led him to be one of the richest men in America? I think not.

Icahn is a ruthless investor and seeks undervalued assets to turn a profit. He has developed an incredible ability to remain patient and concentrate his bets and investments in definitive assets. He has consistently beaten the returns on Buffet by nearly 10% over the last 30 years. How could he possibly have developed these skills? He learned about money and value investing by educating himself on how to read and interpret financial statements.

For Dalio, it has long been said that he had an innate ability to find a way to learn from anyone who had something to teach. He is reported to have even listed to his barber or somebody that he caddied for to pick up valuable long-term investing tips. This should all come as no surprise that he made his money by learning about money.

These are some extreme examples of how learning about money typically leads to generation of assets and accumulation of net worth. However, it can be true for all of us as well.

Same answer as before: improving your education and understanding of money.

For example, try to predict whether learning about any of the following would increase or decrease your net worth"

• Tax efficiency/planning 
  • Reducing taxable income 
  • Paying less taxes (legally)
  • Maximizing contributions to accounts that receive preferential tax treatment
  • Calculating and understanding appropriate paycheck withholding
• Investing
  • How to open an account
  • Where to open an account 
  • How to deposit money
  • Learning about all the different types of investment accounts (401(k), 403(b), 457(b), IRA, brokerage accounts, 529 plans, UGMA/UTMA accounts, etc.)
  • Understanding long-term implications of compound interest
• Frugality
  • Saving money and cutting costs
  • Reducing bills
  • Understanding the value of your time and your money
• Tracking/budgeting your finances
  • Understanding where your money goes
  • Improving your awareness of the total amount of money that actually comes into, and goes out of, your life (often much more than you think!)
  • Calculating your net worth
  • Understanding, and less importantly calculating, your "savings rate"
• Business building or starting a side hustle
  • Learning how to start a website
  • Learning how to create a legal entity through sites like Legal Zoom
  • Monetizing your skills 
    • Handy? Start a business on the side installing sinks, doorknobs, lightbulbs, etc.
    • Crafty? Sell your creations at a local market or fair for some extra dough
    • Thrifty? Sell on Craigslist or Letgo items that you picked up for little to no cost. This is also known as product "flipping".
    • Check out sites like Fiver or Upwork for freelance skills (often computer-related skills)
• Time/resource management
  • How to decrease time spent on nonproductive habits (watching TV, playing video games, any form of "screwing around")
  • Replacing nonproductive habits with productive habits (reading, learning, exercising, cooking, etc.)
  • Funding or paying for related healthcare costs through an HSA instead of your pocket

My guess would be that your net worth would increase if you learned any, or all, of the above! What do you think?

Picking one of the items listed above and searching the library or the internet for reputable sources would be a great place to start. Your goal should be to learn slowly and consistently over time. This information and knowledge will not be an overnight success, but I think you will be surprised at how quickly you see measurable differences when you start teaching yourself about money management. 

I have a resource page on this site that lists my favorite and most highly recommended books that I have read which have made profound improvements on my understanding of money management and contributed to substantial improvements in my net worth. 

Over time, you will develop the skills necessary to be a dependable money manager which is the most reliable method to increasing your wealth.

Please comment below which area of money you plan to learn about first.

These steps are for anyone interested in increasing net worth and savings. 

Whether helping you get started with saving your first dollar, or guiding you to remain motivated as you cross another financial milestone, these 3 steps are the building blocks of increasing your overall net worth.

My advice: revisit these 3 step early and often.

Saving money does not have to be a difficult endeavor. Yet for many of us, we find it nearly impossible. Most of us suffer from "too much month at the end of the money" which essentially means the average American is living paycheck-to-paycheck.

In the United States, it is a sad state of affairs when examining our average net worth by age.

The chart below highlights, by age, the average net worth inclusive vs. exclusive of the equity in their own home:

Average Net Worth in the United States by Age:​

• Less than 35 years: $6,676
• 35 to 44 years: $35,000
• 45 to 54 years: $84,542
• 55 to 64 years: $143,964
• 65 years and over: $170,516
  • 65 to 69 years: $194,226
  • 70 to 74 years: $181,078
  • 75 and over: $155,714

 Reference

Average Net Worth in the United States by Age minus Personal Home Equity:​

• Less than 35 years: $4,151
• 35 to 44 years: $14,226
• 45 to 54 years: $25,006
• 55 to 64 years: $45,447
• 65 years and over: $27,322
  • 65 to 69 years: $43,921
  • 70 to 74 years: $31,823
  • 75 and over: $20,366

​Reference

As you can see, the average American under the age of 35 is only worth less than $7,000. You would hope that by the age of 50, that number would go up dramatically.

Well, guess what, it doesn't. According to the chart, by 50 years old, you can expect a net worth of less than $90,000. By the age of 65, Americans are only worth about $170,000.

That means that after 30 plus years, the average American only increases their net worth by $160,000.

Sound like a lot? It isn't! So how can we kick these savings into overdrive and take advantage of the power of compound interest?

​1. Learn about money

Seems simple right? This one seems straightforward but many readers ask why this is important. 

Think about it this way: you would not perform heart surgery without going through undergraduate studies, med school, fellowships and residency training first. That's a lot of preparation.

So why would preparing to increase your net worth be any different. You need to learn about it. What is the primary driver of net worth... money!

Here is a list of the most meaningful books that I read when I first started my financial independence journey. 



​2. Track your money

I don't really care how you do this but it is unavoidable. You do not need a full blown budget but you do need to be aware of where your money is going. If you have no idea where an entire months worth of earnings or paychecks are going, you have very little chance of increasing your overall net worth.

If this intimidates you, take this on incrementally. For example, if last year you had an extra $200 every month in your checking account after expenses, and now you only have $50, investigate where that extra $150 went. 

This is a great place to start. This is where you can identify extra savings very quickly.

Some ideas and quick tips for where to look for extra money each month:

• Subscription services - consider cancelling them altogether or at least eliminating the ones that are not improving your net worth
• Examine insurance premiums - take a look at your home and auto premium. Now might be the time to gather some quotes from other companies to compare if you can instantly save hundreds per year by switching to...
• Reducing take-out food and restaurant visits - Going twice per week? Start going once. Thinking about cooking more at home? Great. This will save you money and typically make you much healthier! This is a great area to save some serious cash each month.
• Pay for items in store with cash instead of credit - it is much harder to let go of cash than it is to swipe a card. Besides, if you only take $80 to the grocery store with you, it makes sure you do not overspend if the bill comes out to be $110 instead.
• Be wary of fees - take a look at bank fees. Too high? Then switch banks or even look into moving your money to an account with your same bank that has little to no fees (if available). Energy bill or utility bill going up every month? See if there is another distributor of power, gas, etc. in your area that offers a lower rate

3. 'Automate' or 'Normalize' your savings

I purposefully used BOTH automate and normalize for #3. Why? The fear factor associated with "automation".

Some of you are going to be scared off by the "automate" verbiage. You do not like the rules of needing to link accounts and automate savings in regular intervals directly to your 401k, 403(b), 457 (b), etc. I am certainly aware that this is very common advice in the common wisdom of pay yourself first. 

The problem with automation is that it becomes another point of friction, or sticking point. Many of us do not like the rigidity of automatic deposits.

For others, automation is great advice. If your company gives you a "match" into your retirement account, you need to take advantage of this up to the maximum amount they will match. Otherwise, this is free money being left on the table each month.

To get started with automation, simply set up an automatic deposit on a weekly, bi-weekly, or monthly basis. Direct it to your 401k, 403(b), 457 (b), IRA, brokerage, etc.

I personally prefer sending it to a taxable brokerage account or IRA which gives me access to low cost index funds (although volatile, over a 210 year history they typically yield an 8% return, give or take). Please consider the fees of your retirement accounts. Make sure to ask for all types of fees. Be sure to ask about:

• Expenses and expense ratios
• Administrative fees
• Account fees
• Advisor fees
• Trading or transaction costs
• Service charges or "other" fees

If you need a little extra motivation, consider that Tony Robbins - in his book Unshakeable - tells a story of what happens if the government imposes a tax on you.

To paraphrase Tony: if you had a tax imposed on you suddenly, you would initially complain and kick dirt, but you would still eventually pay it. Think of your automated savings like a self-imposed tax. You might complain about saving a pre-determined percentage of your pay initially, but eventually you would find a way to "pay it". Consider the added benefit, in this case, that this self-imposed tax is actually just you "paying" yourself.

If you still cannot get over the idea and rigidity behind automation, do not give up. I believe there is an alternative option.

It is something that I personally do. It typically is not as consistent and it does require some discipline.

I call it normalization of savings. 

What I mean by normalization of savings is find a way to make savings a normal part of your life and money management.

How would you do this? With repetition and practice.

For example, if you never saved before and you anticipated finally starting to save, that first $100 deposit is going to seem monumental. While it certainly is monumental, it only is so because you have never done it before.

Over time, as you continue to deposit $100, month after month, year after year, each individual deposit will not have the same psychological impact as the very first $100.

​This habituation effect is actually what we are looking for! ​It is the normalization of savings. 

If a deposit into your accounts seems like a big deal, it is probably because you have never done it before (or at least not in that amount). This psychological "wow factor" adds yet another layer of friction which will prevent you from saving it in the first place. 

Put your money where your mouth is.

Write these 3 steps on a whiteboard, paint them on the wall, whatever. I do not care how you do it, just remember to revisit these 3 steps no matter where you are on your path to financial independence.

They can serve as a great motivator for beginners or a "back to basics" course for those well seasoned pros already along the journey.

Be sure to leave us a comment below on how these strategies gave you a kick in the ass to get started or helped orient you somewhere down the road...

References

1. United States Census. “Wealth, Asset Ownerships, and Debt of Households Detailed Tables: 2011,” https://www.census.gov/data/tables/2011/demo/wealth/wealth-asset-ownership.html; Accessed April 6, 2020

Disclosure: This post may contain affiliate links wherein I get a commission if you decide to make a purchase through these links, at no additional cost to you.

Debt payoff typically isn't easy. Many times, the first step is to take a cold hard look at your financial situation which is more than most can tolerate. In the end, however, you will be glad that you did.  

Debt payoff is often a thankless endeavor because it mostly revolves around undoing a mistake. Being in debt means that the money was already spent. The bad decision was already made.

Contemporary American culture informs us that we all should strive for the "American Dream". Yet most of our understanding of the American dream is violated by the pervasive images of cars, clothes, and material possessions from films and TV shows. Folks, this is not reality.

America is about freedom. Freedom cannot possibly be pursued to its' fullest if you are under a mountain of debt and financial obligations. Debt keeps you in jobs you hate. Debt is one of the leading causes of stress. Debt breaks up families and creates marital divide. 

For Millennials, student loans are the spearhead of our credit crisis. Unaffordable rates for college tuition is readily subsidized by eager lenders preying on the young and innocent. Millennials were led to believe that the only way to "succeed" was by going to school. How well is that paying off for us?

We are left to watch those who have elected to go into trades and forego college beginning their lives with significantly higher levels of financial strength. They start families much earlier than college-goers. With a smart first time home purchase, they are able to avoid debt to an extent most academically-inclined students will never know. Those who avoid student loan debt have essentially given themselves many advantages that otherwise are unattainable for those who have received higher education.

Don't get me wrong, college education typically equates to higher salary and lifetime earnings (provided you find a job). But it is about what you trade in your 20's and 30's that is not easy to recover. If you spend most of your 20's and 30's paying off student loan debt-which is what most people are doing-you will have little energy and capital to allocate elsewhere. 

Student loans are a difficult situation that is wreaking havoc on Millennials, as well as younger generations. This crisis can be averted however, even if you already have accrued a significant amount of debt. I must admit, it will take tremendous discipline and consistency to get yourself out from under your student loans. 

​The three biggest tips I followed for six-figure debt payoff: 

Be creative with housing:
The way I was able to avoid housing payments is I stayed with my parents for 2 of the 3 years in graduate school. In the third year of PT school, I moved into an apartment where I negotiated an agreement to trade labor/maintenance on the building itself as a rent payment. 

• Move back home. Get a roommate. Negotiate a bartering agreement. Airbnb. 

Limit transportation expenses:
The way I avoided toxic car debt was I drove a '96 Toyota Camry with 200,000 miles that I paid for in cash. Get a grip. Unless you have extreme concerns about safety ratings for a family of 5, swallow your pride and drive a cheap used car. Period.

• If you already have a new car or car payments, call the dealer immediately and see what you can get for it. Decide if the amount you get offered is worth cutting bait and getting out of that monthly payment to free up that extra 200, 300, or even $400 plus per month to hurl into that debt. 

Keep recurring costs low and aggressively use the savings for debt payoff:
I took a look at all my bills like cable/internet, utilities, and insurances. I called each of the companies or researched competitive quotes to cut recurring costs. Each dollar I saved went into aggressively paying the debt. 

• Note: Some have recommended bill negotiation services such as BillFixers to lower your recurring monthly bills. I have yet to personally try them but figured they are worth a mention here. 

Focus on earning more through increased skills (or increased hours):
I quickly stepped into a lucrative field, but also maintained a part-time job in the evenings during my three year debt payoff period. It felt arduous at times, but in the end, it was well worth it. I also took some time to learn some management lingo by reading business journals and was able to land a management job at a private outpatient practice which is quite rare for my field. 

If you have a significant amount of debt, especially student loan debt, I suggest you get serious about it and turn it into somewhat of a "game" because there will likely be a significant amount of strategy involved. You will need to get focused. Do the math. Find out where your money is going. Calculate your life energy and where it all goes.

If you want a very detailed, impossible to beat formula for how to calculate your real hourly wage, you need to read Your Money or Your Life immediately! This will help put your hours and dollars into perspective. 

MANY have had success eliminating debt by following Dave Ramsey's Total Money Makeover book (myself included). 

After reading this book I understood how to become focused on the objective. The only thing that mattered was freeing up as much money as possible so that it could all be used to aggressively pay down debt. Every extra dollar, whether it be cost cutting or selling shoes on Craigslist, needs to be contributed to getting this toxic debt out of your life once and for all.

Share your story in the comments below. What are your tips for aggressive debt payoff for our community?

Until next time...

Most of the folks of the FI and FIRE community have very good intentions. As with any group, there are certainly some outliers.  In my reading and research over the years, I have found some common myths that often dishearten the community and the people of the financial independence community.

Let us outline 3 common myths I see continuously emerge and break the spirits of our community members.

1. Financial independence is as easy as increasing your savings rate and investing
This is only partially true for some of us. 

However, don't be discouraged if you find yourself saying "maybe for them" or "well that's not for me". Everyone has a different starting point. Even siblings can have different degrees of support. These are just the facts of life.

Your friend who retired at 30 because they hit it big on cryptocurrency or another couple who moved their family to the woods after starting a blog, I guarantee they had a different starting point than you did! If you press them on it, I am sure they will admit it. I wouldn't expect that you guys become friends afterwards however. Finances are one of the greatest fight promoters known to mankind.

Perhaps any one of the following is true about your current situation:

• You have student loan debt or you are paying/paid it off by yourself
• You have car debt or paid for a car independently
• You had to save, without a great deal of assistance, a down payment for housing or you pay your own rent
• You have revolving credit card debt
• You have children or obligations to a family member financially
• You didn't have a "wedding gift" in the sum of X amount of dollars from your parents or grandparents for your first house, move, school, etc.
• You paid for your own wedding, in full
• You purchased wedding or engagement rings
• You donate regularly to a charity
• etc... you get the point

Your situation is unique to you. There are many things that will affect your so called "savings rate" and all you can do is strive to improve your situation relative to you. That's it. This is not a competition unless you want it to be and you enjoy competition, in a healthy manner of course. 

Besides, maybe your version of "financial independence" is being debt-free and living paycheck to paycheck. If that's your goal and you are fully aware of the risks of living that close to the edge and are content with it, then who cares about a savings rate!


2. Everyone will understand why you practice frugality and will support you in your goals
Mostly false and very, very rarely true. 

Most people do not even have an idea of what frugality even is. You will often be called "cheap", albeit mistakenly. You may even have one of the following condemnations thrown your way:

• You only live once
• You could die tomorrow
• You could be diagnosed with X, Y, Z and have 3 months to live
• Money isn't everything
• You work hard, you deserve to buy yourself something nice

The list goes on...
All of these are aimed at indicating that you should just spend more money. Basically, all of these condemnations are aimed at why you shouldn't be frugal. 

This is utter nonsense. Again, frugality - to most of us who practice it- adds tremendous value and meaning to our lives. We actually like being frugal (some of us). 

A word of caution: try not to spend too much time, or any at all, explaining frugality and your purpose to somebody who is clearly unwilling or unable to understand this way of life. Just nod, smile, and purchase more shares of your favorite index fund with your savings. 


3. Real Estate is the quickest path to F.I.
Depends. I mean really, truly, depends. 

Transaction costs are typically very, very high when it comes to real estate. Obtaining financing, costs of upkeep, finding tenants, drafting leases, commissions to realtors. Please be sure that you are able to calculate your real rate of return in real estate. Check out road #9 in Ken Fisher's book The Ten Roads to Riches to find out the hard truth of real estate investing, and learn how to do it right.

Sure you can have investors or use other people's money. Leverage is your friend. Be a friend of borrowing to rapidly increase your wealth. Whatever.

Honestly, most of us are coming from significant financial burden and debt. The last thing most of us want is more debt and more borrowing. Perhaps someday I can be convinced otherwise but real estate is not a great investment. 

Consider that according to data collected by Jorda et. al. (2019) from the time period of 1870 to 2015, over a century's worth of data, equities beat real estate returns 8.46 to 6.10% respectively after being adjusted for inflation. Although the figure 6.10% does include home capital appreciation--which lowers the total yield of housing return since capital appreciation is less than 1% annually when adjusted for inflation--residential real estate is not the blow-out winning investment it is often claimed to be.

Be wary about real estate. Costs of home ownership are very variable and it's hard to give a true estimate as to your expected rate of return due to the extreme variability in the cost of ownership.

Leave us a comment below on how you feel about the 3 common myths of financial independence.

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If you find yourself frustrated on your path to F.I., remember the 3 common myths of Financial Independence​

Many of the authors and content creators I follow in the financial independence space have transitioned their content to an interesting phase. Often I hear them, at their present net worth, going on and on about how great financial independence is. 

Undoubtedly, I am truly happy for them. But how does this affect those of us in pursuit? How does it affect the person who is still 5, 10, or 20 plus years away from financial independence?

For many readers and community members, it can be frustrating. It is hard not to compare yourself to another when it comes to finances. The number one thing that knocks people off track and destroys their motivation is comparison. Comparison to others. Comparison to where you thought you'd be at 30. at 40. at 50, and beyond.

First things first, we should strive to eliminate our comparisons.

There are two exceptions worth mentioning regarding eliminating comparison behavior:

1. If you are comparing your current net worth to your previous net worth - in this instance you are only worrying about yourself
2. You absolutely thrive on competition with others and you cannot live without it - Beware of this one. Your friends probably don't love you bringing up finances and net worth at every dinner conversation. This is not an ideal way to win friends. Consider yourself warned.

That said, comparisons are the enemy of happiness in most cases. It can often lead to a path of envy and resentment. Further, it typically only serves negative energy. You will not find a more competitive person on the planet than myself, but even I have had to step away from this one.

This is your path. Not anyone else's. 

You can do this on high-end software such as Personal Capital, or use a simple Excel sheet. Totally up to you (I prefer to use an Excel sheet).

This can be a great way to remain focused on your individual situation. It also motivates you to keep track of your income and expenses because your savings rate ultimately helps determine how quickly your net worth can grow. It is often said that the only way to improve something is to measure it. 

This needs to be earned however. Take inventory of where you are by assessing your progress thus far and assess whether you need to allow yourself an increased budget for a few months prior to returning to a more aggressive approach. I would put a definitive end date on this inflated spending, however. 

If pursuing financial independence has given you a great deal of stress and you find it difficult to consistently maintain this furious pace, consider having planned periods off from this extreme frugality behavior. Perhaps take two weeks to spend as much money as you want. Try on an inflated lifestyle if you are so brave (just be ready to hate it). See how it feels to let the dollars slip away from you a little more freely. Hey, who knows, you might actually enjoy debt and keeping up with the Joneses. If you do, quit reading now because this is probably not your type of community (you are welcome back anytime however). 

If you are worried about FOMO (fear of missing out), try "test-driving" a few atypical spending habits to see if the consumer culture life actually is your calling. If you take this route, I just suggest finding out what the return policy is for whatever you are purchasing.

If you choose to take a break, definitely have an exit plan for when you aim to jump back into frugality or the pursuit of financial independence. This obviously includes not making any purchasing decisions that indefinitely ruin your net worth and personal finances, especially if the cost is high and recurring (think boats, cars, couch payments, etc.).

Don't like your current job? Most people don't and yet do nothing about it. But you are!

Love your job but want more free time? I am happy for you as this is a good problem to have. Your time is more precious than anything. Loving your job and what you do for 40 plus hours per week is a rare bird. If you have it, consider the strategies you learn in this community to negotiate more PTO, remote work, atypical schedules, 4 day work weeks, transitioning to part time, etc.

Do you resent debt and do not like to be a slave to the lender? I can certainly relate to this one. Eliminating debt is often an excellent way to remove your burden to work or at least eliminate your need to be a prisoner to a higher paycheck. Eliminating most debt from your life often allows you to choose work you love and enjoy since the pay rate is less meaningful.

Do you just want to be part of a frugality movement as a sure way to be a millionaire someday? Do not be ashamed. As the late Jim Rohn would say, think of what you will become in the process of becoming a millionaire. Unfortunately, money is one of life's greatest motivators for many of us. Admittedly, most of us are driven by attaining a large net worth (or at least the appearance of high net worth). Saving and investing is one of the most tried and true ways to become a millionaire, as long as you remain invested for the long term and practice a fair bit of industriousness and frugality. 

I remind myself the importance of stay the course. Being consistent and displaying discipline. I look forward to learning more, saving more, investing more. I have learned to truly value the ultimate commodity in life, time. 

I continue to assess my current income streams. This helps keep me motivated to make them bigger or add one or two more along the way. Consider most millionaires have multiple sources of income. When assessing your income streams, I like to try and diversify.

• Consider a yard sale.
  
• Sell stuff on Offerup or Facebook Marketplace
• Pick up an extra shift.
  
• Search online for gigs helping people move, decorate, clean up, landscape, etc.

The concept is to save as much money as possible as early as possible, regardless of when and where you start. Remember, your situation is unique and all you are looking to do is improve upon your current situation. 

Consider that if you find a way to earn an extra $20 a month every month for 25 years, and invest it in an index fund you could wind up with $17,543 (assuming an 8% annual return).

An extra $50 a month invested over 25 years could be $43,863.

$100 extra a month, could turn into $87,727 after 25 years.

$1,000 extra a month, in 25 years, could be worth $877,271.

Start small, aim high, and be consistent and disciplined along your path. Consider searching along the way for things that can upgrade your present level of happiness. Things to aim for over time that typically are correlated with increased happiness are:

• ​Less stress - consider meditation and deep breathing
  
• More time off or a shift to a part-time schedule
  
• Growth of your family
• Exercise
• Improved nutritional habits
• Better sleep

And yes, enjoy the ride. This is not about a life of deprivation. It is about a life packed with value.

Remember to celebrate victories along the way. Celebrate paying off a car or student loan. Hit a certain number for your net worth, do something you enjoy, even if it costs money. Do not be ashamed to celebrate.