If you find yourself frustrated on your path to F.I., remember the 3 common myths of Financial Independence
Finding motivation on the path to F.I.
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, gabbing 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...
There are two exceptions to this rule:
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.
Keep track of your net worth
You can do this on Personal Capital or use an Excel sheet. Totally up to you.
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.
Evaluate if you need to give yourself a break
I do not recommend this one lightly. However, if you have had great stress becoming frugal, tracking your net worth, assessing your real hourly wage, etc., do not be afraid to plan some period of time taking a break from the number crunching.
Take a little time to spend more freely. Take a few weeks off from tracking your net worth. Do not open the budget sheet for a little while. See how it feels to spend more on things. If you happen to like spending more, then maybe you need to redefine what financial independence means to you.
If the thought of this one causes you too much anxiety, then skip it. If you believe you are having classic 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.).
Remind yourself why you joined this community
Don't like your current job? Most people don't. Most people are also not doing a damn thing 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.
So how do I remain motivated for the long-term?
Stay the course.
Value compound interest and time.
Most importantly, continue to assess your current streams of income. Consider most millionaires have multiple sources of income. See if you can diversify. Consider a yard sale. 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.
Find a way to get an extra $20 a month, invest it in an index fund, rinse and repeat for 25 years and presto... you could have $17,543 assuming an 8% annual return in the market.
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. Be consistent. Along the way, look for things that can upgrade your experience. More pay. Less stress. More time off. Family growth. Improving your homestead. Find both tangible and intangible ways to improve your life along the ride.
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.
Before we begin, this is absolutely not investment advice and I am certainly not a financial professional. Please understand this is entirely for informational purposes only and in no way are we making any claims about this style of investing. Use your head people, this is a blog, not a financial consultation.
So you want to be an investor?
First, you need to attain a savings rate. Without a savings rate, or positive margin above spending, you will lack the most sufficient tool required for investing, spare change.
Yes, I know many of you will protest and say but you could use OPM (other people's money) or perform marginal trading, etc.
For those of you that might say that, please do not continue reading the blog. We are not firm believers in gut-wrenching borrowing on margins or owing money to anyone. We are the type that pays off the full credit card bill - or at least the full statement balance - every month! That's what brings us security.
Deciding where to save it
Once you've broken free from spending every single dollar you earn, you have some choices.
Where do you want to put all these newfound savings (hopefully they need a dumptruck to transport it)...
Here are some of the primary investment vehicles where you can save your money and have access to investing in "the market" (not supposed to be an exhaustive list, just the most common):
I just happen to use Fidelity and Vanguard because I have found they offer the lowest account fees and best customer support around. I have tried MANY other investment companies for various accounts without much success. They will remain nameless.
To open an account in order to begin investing, just visit the company site or call the company directly, and seek advisement for how to open any of the following accounts - or even ask about one's I haven't listed such as a 457 plan, etc.
I do not use a financial professional and choose to pick the funds myself. I do this for the lowest possible cost and the greatest potential return. Read the two books below if you think that you cannot do it yourself when it comes to investing.
How to invest it once you've saved it...
The simplest way is low cost index funds.
If you need more confidence in investing in index funds but are concerned about stock volatility, here are two must-read books for you:
How do you do it?
Sometimes it depends on what platform you are using.
From looking around the community, if you choose Vanguard, folk's love their VTSAX (Vanguard Total Stock Market Index Fund) fund as an example of a low cost index fund that tracks the total returns of the stock market.
For those Fidelity users, FXAIX seeks to match the performance of the S&P 500.
In the end, it does not matter what platform you use. I primarily use Fidelity and Vanguard due to the low cost nature of their funds, and their accounts.
When considering index fund investing, here is primarily what you are looking for:
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A term often used synonymous with being "cheap".
Is that a completely fair comparison? We think not!
Here is why.
What is frugality to the "frugalist"?
The frugalist's version of frugality is encompassed and embodied by studying value.
Valuing your time. Valuing your life energy. Valuing your savings rate. Valuing your net worth. Valuing compound interest.
Frugality is also the act of becoming conscious.
Conscious of your spending habits. Conscious about what reliably makes you happy. Conscious about where you are directing a majority of your time and energy (don't worry, I am not big on traditional goal setting).
Finally, frugality is about freedom.
Financial independence and frugality are not necessarily the same thing.
Although they often are recited as part of a FIRE or F.I. war cry, they are not mutually inclusive.
Frugality is merely a tool that you can use to decrease the time it takes to attain financial independence. The concept is that by practicing frugality, monetarily speaking, you are able to widen the gap between income and expenses.
Obviously there are two variables that can be manipulated in this equation.
Income - Expenses = Margin of Potential
What do I mean by "Margin of Potential"?
Everyone has a "Margin of Potential" equation. If you make literally $0 annually, or if you make $100,000 per day, this equation applies to you.
For a vast majority of folks, it ends right there however. That is why I call it "Margin of Potential".
You can choose for this potential to land you in great deal of debt. In this case, the potential energy of your money is negative, especially if it has an interest rate associated with it. Think credit cards, car payments, couch payments, dog payments (yes, this is now a real thing). Financing of depreciating assets is one of the more dangerous things one can do.
I can already hear the arguments this one sounding something like, "But if I avoid paying for these in cash, I can invest the difference".
This brings me to my next point. Defining my version of margin. The "Margin of Potential" is yours in my example, not theirs. In other words, you own the margin - not the creditor.
This is where I hope that you decide to invest your "margin" and allow your dollars to go to work for you.
We will be discussing items such as investing, spending, saving, and more in future posts.
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Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.