Financial Freedom: A Beginners Guide to Personal Power & Financial Independence (FI)

Screen Shot 2021-09-11 at 5.20.16 AM.png — A How-To Guide to get started on the path to Financial Independence

But first, a little bit of my financial backstory…

Fear & dread.

Avoidance.

Confusion & uncertainty.

Directionless.

Lackluster & shameful.

Shackled.

Held down & held back.

That’s how I used to think & feel about my money & personal finances. And probably even worse… those same thoughts & feelings bled into my work, career & life in general.

That state of being plagued me from the time I first left college in 2006 up until a little over two years ago.

Then, when the pain of being seriously in debt, 6-years behind on my taxes and getting beat up by all the shameful thoughts & feelings became too much to bear any longer…

I finally began to take back control & began the process of mastering the game of money. [For more on that story read this article.]

Now contrast that with my current state of being when it comes to money, personal finances, my work/career, & life in general

I am debt-free.
I live a life where I don’t worry about money AND all work is optional.
I live a life where I feel knowledgeable, confident & excited about my money-making, investing & career-building (even during the COVID-19 Pandemic).
I live a life where I only do work that really matters to me. Work that I am passionate about.
I live a life where I do work that brings LIFE to my life!!
I live a life filled with Passion & Purpose.

Can you imagine that state of being in your own life?

Infinite freedom to do the work you feel called to do & the space in your life to actually hear your calling. I’m talking freedom to work only as much as you want, or even the freedom to not work at all if that’s what you desire for the time being.

What I’m really speaking about is the freedom to truly live life on your own terms, whatever that authentically means to you. And to do that at all times of your life.

Or if that vision is too hard to conjure, imagine a life where you could confidently choose the work you want to focus on at your company and confidently say no to the work you don’t want to do because you are not worried about money.

If that is still too hard to imagine, ponder a life where you felt like no matter what happened financially you would be totally okay. That when it came down to it, even if you were fired today, furloughed or your self-employed business went under and a recession started tomorrow you would not only survive, you would thrive.

With the COVID-19 Pandemic wreaking economic havoc across the world, far too many people are already experiencing the frightful pain of financial despair. In this state, survival is the only thing on your mind.

Yet, there is a small but growing group of people who will not only weather this storm with grace but actually thrive through it. These people have developed the money mindset & habits that only grow them, their money & their life stronger over time.

This, my friends, is what Financial Independence (FI) is all about. It’s a financial framework & life philosophy that gives you massive Personal Power no matter what is happening in the world. [Read this article for reflections on my first year on the path to FI.]

At a technical level, one way FI can be defined as: “having assets that generate more than enough money to cover you and your family’s cost of living.”

At a more macro level, when you are living in the FI state you are no longer financially chained to anything in your life. The financial shackles have been shucked and your ability to move freely in all areas of life has been achieved.

This is a powerful place to be in life.

And it’s something all humans either consciously or subconsciously seek… Some people call it Liberty, others call it Freedom.

In turn, being free empowers you to do work that brings life to your life. Humans derive massive happiness from working on things they believe in and FI empowers us to ensure that we are actually working on things that deeply matter to us, versus just chasing a paycheck to pay the bills & survive.

Surviving is barely living.

Thriving is truly & fully living.

In order to thrive, we must be free. And in order to be free, we must become masters of our money or by default, we become its slave.

So pursuing Financial Independence is akin to pursuing Personal Freedom.

And even if you are just starting on the path to FI, once you embrace the steps to get there you will in short order have that precious stress-relieving buffer that will give you the mental/emotional space to proactively take on life and thrive in any economy & any work/life scenario.

To reiterate, you immediately receive mental, emotional, financial & spiritual benefits just by getting on the path to FI because you’ve already turned the table — you are proactively working toward having money working for you instead of you working for money. This in itself is a massive shift in thinking & operating.

This state of living frees your mind, heart & spirit to pursue a life truly worth living for!

I wrote out this article with the intent to encapsulate the most basic steps to begin to master the game of money, so…

Are you ready to get started on your path to FI & massive Personal Power?

If so, here are the brass tacks beginner’s steps:

Track your Money
Build the Buffer
Mind the Gap
Invest the Difference

1. Track your money

This is your number one step on the path to FI. If you don’t do this nothing else will work. For some this sounds difficult, for others it sounds scary as hell.

I too once thought it would be too much work to track my money and I didn’t even want to look at my personal finances because I knew they were a nightmare.

I’ve since learned that the best way to overcome fear is to embrace it. To use it as a guidepost for exactly what I should be working on in my life in order to move to the next level.

When I finally did face my money fear it turned out that tracking your money is pretty damn easy this day & age thanks to technology companies like Mint & Personal Capital—these two companies have online platforms and smartphone apps that literally do all the money tracking you will ever need to do. They are easy to use & quite intelligent. All you have to do is spend about 15-30 minutes making sure all your banking & investing accounts are set up for online access and then link those to Mint or Personal Capital. And you only need to use one of them. I predominantly use Personal Capital, but many of my FI friends prefer Mint for their own personal reasons. Either one will work for you so just pick one and get started!

Once everything is linked up you will see how much money you spend each month and how much money you earn each month. It will also show you in detail what you are spending your money on and even automatically organize your spending into categories for you.

Person Capital conveniently & intelligently tracks all your finances across devices. [FYI: sample account, aka not my numbers.] — *Person Capital* *conveniently & intelligently tracks all your finances across devices. [FYI: sample account, aka not my numbers.]*

Having this visibility into your actual personal finances is crucial. Business management luminary Peter Drucker said, “What gets measured, gets managed.” This is so fundamentally true when it comes to personal finance that if you don’t start with this step, then pretty much everything else you do with your personal finances will be a waste of your time.

Special side note to those who do everything in cash: Put your cash in a bank account and use your bank card like a credit card so everything automatically gets tracked. If you want to use cold hard cash for everything it is going to take a whole lot more time & energy to track your money versus syncing your accounts with Mint or Personal Capital, but it’s totally possible. Just write every expense down in your smartphone or notebook and at the end of the month you can add it all up. [This is actually part of the program from the life-changing book “Your Money or Your Life”—a great read for anyone looking to transform their relationship with money.]

For the first few months just track your money. Watch & witness how you spend and what you spend on. When I first started doing this I would just open the app on my smartphone and spend a few minutes reviewing it. As you get comfortable with this begin to make sure that Mint or Personal Capital are appropriately categorizing your expenses & manually categorize any expenses that are inappropriately tracked.

Advanced step: clearly outline and identify your basic monthly expenses & their current cost (i.e. rent/mortgage, food, gas, insurance, cellphone, subscriptions, entertainment, etc.). Once you’ve outlined what these are you can begin to see where you can reduce or even eliminate some of them. This will help you with the next step.

Once you have begun the money tracking habit you can work on the next step: building the buffer.

2. Build the buffer

The buffer is your emergency fund, your safety fund, your life’s little surprises fund or whatever name you want to call it. I’m talking about a bill you forgot about, a mechanical breakdown in your car, an unforeseen house repair you must make, a surprise health-related incident that costs money, etc.

Life is so full of seemingly unforeseen & unplanned events that it is truly ridiculous not to just plan for them.

They happen to all of us. There are no exceptions. Even the uber-rich have these unexpected problems happen to them with the same irregular regularity that the rest of us experience them.

The difference between the wealthy and those living paycheck to paycheck is that they have a massive buffer so they are unphased by life’s little surprises.

The financially struggling get the shit kicked out of their life & personal happiness when these “surprises” happen.

And again, they always happen eventually…

If you have no buffer begin with the goal of saving $1,000. Place this in an account that is not mixed up with your other accounts and never touch it unless you absolutely have an emergency that it must be used for. It is not for spending on entertainment, eating out, taking a vacation, new clothes or anything else non-essential.

Once you reach $1,000 then work to increase this to 3-months of basic living expenses.

This then becomes your fuck I got fired and now I have 3-months to figure out the next game-plan. Or your car dies and you have to purchase a new-to-you used car. Or some other larger emergency happens and money is the only way to solve it.

If there is any other way to solve the problem that doesn’t cost money or costs less money, then go that route. You want to protect your buffer at all times and rebuild it ASAP as soon as you tap into it.

Depending on your life circumstances you can build up your buffer to whatever level gives you peace of mind. That’s my personal philosophy when it comes to the buffer. This can be radically different from person to person based on personal risk tolerance, job security, whether or not you have a family relying on you to be the breadwinner, etc..

Now that you are tracking your expenses and have an initial buffer built it is time for some optimization.

3. MIND THE GAP

After you’ve got the hang of the first two steps, the next step is to get more focused on reducing your expenses and increasing your income. This increases the Gap; or the total amount you can save each month.

As you become well-versed in tracking your money you will naturally begin to lower your expenses and if you are at all entrepreneurial you will begin to find new ways to increase your income—whether this is increasing your W2 income through raises, commissions, bonuses, a new higher paying job or starting a side hustle or two to make extra income every month. As I’ve stated in other blog posts, energy flows where focus goes.

If I could only choose to work on one I’d first focus on reducing expenses. Here’s why:

No matter what earning level you are at, EVERYONE can work to reduce their expenses. There is almost always financial fat to cut. In my own experience & from anecdotes from others, by going through the process of cutting expenses you actually learn at a deeper level what you truly value (this in itself is great for overall life satisfaction).
The lower your monthly expenses the less you need to live on. This means your buffer needs to be less and/or it will go farther for you when you need to tap it. It also means you will be able to save more each month as you continue to earn more and keep your expenses down.
Unfortunately, most people focus on earning more and not only skip the step of reducing expenses but actually constantly increase their expenses with each bump in annual earning. This is called lifestyle inflation. AKA the more you earn the more you spend. This is why most people in the US save less than 5% of their money. This is why there are tons of people who make hundreds of thousands of dollars a year and are still one paycheck away from financial ruin. And this is why it is so important to get your expenses under control first then work on increasing your income.

To be clear I am not saying that you shouldn’t work on making more money. What I am saying is that to be a Badass Money Alchemist you have to work on both. It’s the two sides to the same equation and you have to do both to reach FI. And the fastest way to FI is to overly focus on the expense side in the beginning and then once that is firmly under control do whatever you can as often as you can to increase your income.

As you reduce your expenses you suddenly have more money left over every month and with your buffer already full the next important step comes into a clear view.

4. Invest the difference

Now that you’ve got the money tracking down, have a solid buffer, and are working diligently each month to reduce your expenses and increase your earning a surplus will begin to accumulate. This is where the real work & real magic of the path to FI begins—building assets that generate income.

Arguably the simplest & easiest way to build income-generating assets is through investing in Index Funds. Index Funds are an index that tracks & invests in a group of individual stocks or bonds. For example, the S&P 500 Index Fund tracks the 500 largest publicly traded companies in the US.

Next, let explain why Index Fund investing is likely the best route for most, myself included. Though there are many other ways to build income-generating assets (i.e. real estate, building a business, etc) most people should start with Index Fund investing because if you are employed and have a 401K plan (or other employee retirement plan) then you can get this set up so it’s done for you automatically every month. Your work 401K plan will automatically invest for you each & every paycheck once it’s set up. This is called paying yourself first.

Investing in Index Funds & other income generating assets is like planting & growing Money Trees. With time, sunshine & regular water they will grow so big that eventually you can live off just the fruit they naturally throw off each yea… — Investing in Index Funds & other income generating assets is like planting & growing Money Trees. With time, sunshine & regular water they will grow so big that eventually you can live off just the fruit they naturally throw off each year.

What’s even more awesome is that many companies offer an employee match where they actually match a percentage of what you put in. This is literally free money that no one should be throwing away!

What’s equally awesome is 401K money is not taxed upfront and it reduces your annual income which means you pay less taxes every year you add to your 401K.

If you’re in a low tax bracket it may make more sense to put your money in a Roth, which is a post-tax contribution. 401K is a pre-tax contribution but it gets taxed when you take it out in retirement (but by then you will likely be in a lower tax bracket) while a Roth is taxed upfront but doesn’t get taxed when you take it out later.

If you don’t have this setup already contact your HR department and enroll in your 401k (or equivalent plan) ASAP! This is the easiest way to build up a stash that will grow tax-free until you start to use it.

If you are already set up with a 401K (or once you do get it set up) the next two steps are:

Get the full company 401k contribution match & then once that is achieved…
Max out your 401K every year.

If you just max out your 401K (2020 annual contribution allowance is $19.5K) and that’s all you ever do when it comes to building income-generating assets you will be a millionaire within 23 years*!!

Obviously we want to get there much faster, but pretty fucking awesome that you can just have money automatically taken out of your paycheck each month, get extra free money through a company match, reduce your taxes & become a millionaire in a little over two decades.

If you start maxing out your 401K at age 22 (average post-college career starting age) you will be a millionaire by age 45 only using this strategy.

“But what do I invest in Mr. Money Alchemist?!**” I hear you saying. Just put your money in an S&P 500 Index Fund or a Total Stock Market Fund like Vanguard’s VTSAX. If you want to dive deeper into this read the incredible Stock Series Blog by JL Collins—he breaks it down in a fun & easy way to understand. Or if you prefer reading books just read his book “The Simple Path to Wealth.” You can also listen to the Audiobook version (JL has an epic voice).

Just about every single 401K plan has some version of an S&P500 Index Fund or a Total Stock Market Index Fund. Just put your money there and stop thinking so hard.

“But what if the stock market goes down and I lose a bunch of money, MMA?!” I hear you say next. To this I answer, “Don’t sell or you will lock in the losses. Instead, just hold on and the market will recover.” The stock market, like the economy and all businesses (and life), is cyclical. There will be good times and downtimes, but over a lifetime the general trend will be a significant increase unless the US economy completely fails. And if that actually happens you and I will be much more concerned with bigger problems. Again, read JL Collins Stock Series or his book “The Simple Path To Wealth”—he makes a more detailed case.

Some thought like, “Shouldn’t I wait until the market calms down? This coronavirus is so scary! I’ll just wait to invest until everything calms down…” is probably also coming up for many of you as well…

During the last recession that started in 2008 a lot of people waited until well after 2012 to invest. In other words, they stood on the sidelines. The smart people kept investing in low fee index funds essentially getting stocks on sale. Then when the market recovered their upswing was massive because the number of total shares they had kept growing the whole time.

Most people try to time the market. Wise investors know that it’s TIME IN THE MARKET that counts. That’s how you take advantage of compound interest, the 8th wonder of the world according to Einstein.

So invest early & invest often. And don’t sell. Just keep on holding your Index Funds.

The really neat thing about Index Funds is that they are self-cleansing & they won’t ever die. This is the other big reason this type of investing is for most of us. Case in point—if you own the S&P 500 index fund you essentially own shares in the top 500 largest US companies. If one of them dies and goes under it doesn’t suddenly become the S&P 499. Instead, the next largest company in the US gets added into the Index and it’s still the S&P 500. This process has been going on since the inception of the S&P 500 index fund. Companies get added & subtracted as they vie to be one of the top 500 largest companies and the S&P 500 keeps up its self-cleansing & just keeps chugging along no matter what happens to any individual company within the Index Fund.

Contrast this with owning stock in a single company. Back in the day, Enron was a powerhouse and no one could ever imagine that company ever going under. But guess what? It did. It completely died and everyone who owned that stock lost ALL of their money invested in that particular company. Tons of people lost entire fortunes when Enron went under.

This is the risk you take investing in individual stocks. You can lose all of your money. You mitigate this risk by instead investing in Index Funds which is just a bunch of individual stocks that track some sort of Index (all US companies, largest 500 US companies, largest international companies, etc.)

Below is a chart that shows the stock market over the last 105 years. Even after the great depression (1929-1933, the biggest dip on the chart below) if you had just held onto your Index Fund you would be kicking serious wealth-building ass today.

Chart showing DJIA April 1915 to January 2020. The Dow Jones Industrial Average (DJIA) is the longest running stock market proxy. The S&P 500 wasn’t officially created until 1957 & VTSAX didn’t get its start until 1992.

If you are self-employed and have your own business with no employees you can still set up a tax-advantaged retirement account that provides even greater tax saving & wealth-building opportunities.

Also if you have a side hustle in addition to your regular W2 job you can have another tax-advantaged retirement account outside of your W2 sponsored 401K—this can act like a Bonus 401K that empowers you to tax shelter even more of your income. Diving into self-employed retirement accounts is beyond the scope of this blog post but here is a great article by the Financial Panther covering everything you need to know about this if you are in this situation.

Once you are maxing out your 401K the next step is to keep doubling down on asset-building and open up a regular taxed investment account and keep dumping money into broad-based Index Funds.

I personally use Vanguard for most of my investments (as do a majority of the FI community), but realistically you can do this with most brokerages. The key is to make sure that you are choosing one that has super low fees. Vanguard almost always has the lowest fees and has a super long track record of being incredibly trustworthy.

Even if the fees at your preferred brokerage seem low, take a moment to benchmark them against Vangaurd’s VTSAX fee of 0.04% (four basis points). Even a small increase in basis points can add up to hundreds of thousands (or millions) of dollars lost over the course of a lifetime so this is super important! [BTW: Personal Capital has a free “fee analyzer” tool that will look at all of your investments and let you know if you are overpaying on fees.]

Please note that it always makes the most sense to first max out your employer or self-employed 401K then begin adding to your other taxed investment accounts. Getting free money from your company with a match should never be passed up—it’s freaking FREE MONEY! And lowering your taxes will almost always be a faster path to FI. And though you aren’t supposed to be able to access your tax-advantaged retirement accounts before the age of 59.5 without paying a 10% penalty there are some neat FI tricks to get around this if you do indeed need it earlier. [Here’s a great article from the Mad Fientist on exactly how to access retirement accounts early].

Advanced: Calculate your savings rate

In a sense, this isn’t really advanced, but it will require you to calculate some simple numbers each month (versus just tracking your finances, maximizing savings, and investing the difference).

Here’s how you calculate it:

Your Savings Rate is:

(Take Home Pay* - Expenses) / Take Home Pay

*Take home pay includes any pre-tax savings (i.e. 401K contributions).

For example, if someone makes $5K after taxes are taken out each month, spends $2.5K on housing, food, car & all of life’s other expenses and saves the rest each month then their savings rate would be 50% [(5K-2.5K)/5K] for that month.

The reason this is such a powerful advanced technique is that once you calculate this number you will get a strong understanding of just how many more years of mandatory work you will have before you hit Financial Independence and all work becomes optional—aka you are free to do whatever the heck you want whenever the heck you want!

Chart reproduced from the blog article “The Shockingly Simple Math Behind Early Retirement” by Mr. Money Mustache—this one article fundamentally changed my entire financial trajectory & money mindset.

The pictured chart shows the working years until FI based on one’s saving’s rate (assuming you start from Zero savings):

As you can see, if you can get your savings rate to 50% you basically have a 17-year mandatory working career. If you can bump that up to 75% you have a 7-year mandatory working career. If you can get it up to 85% you can achieve a 4-year mandatory working career.

F-O-U-R fucking years! The same amount of time on average it takes to graduate from an average college. I wish I’d read an article like this, understood it & began working on implementing it during college or shortly thereafter. That’s one of the reasons I’m writing this—in hopes that a recent college grad will read this, it will click, and he or she will shave decades off their path to Financial Freedom.

Now you may be thinking these saving rates are ludicrous and unattainable but the truth is that there are hundreds of thousands if not millions of people in the FI community saving well over 50% of their money every month. And these people have all sorts of jobs (including low-income jobs), different levels of formal education, live all over the US & world, and have all types of family sizes.

So if they can do it, you can do it too!. The key is starting with the steps in this article and sticking with them and before you know it you will be saving & investing like a money-making machine!

In closing, I will end with a parable about planting a tree. The best time to plant a tree is 20 years ago. The next best time is today. So whether you’re in debt, just starting your working career, or never looked at your personal finances in detail…

TODAY is the day to get started!!! Start working on your personal finances and developing your Money Muscles today. The only way to get ahead is to get started. The Money Muscle requires weekly workouts over long periods of time to become strong and stay strong. And really it’s something you will have to continuously build over your entire life just like a tree requires water and sunshine to grow and your body requires consistent nutrition & exercise to grow & stay strong over time. So bring the light to personal finances, water your money tree, properly feed & exercise your Money Muscles and continuously grow your Money Roots deep and strong!

Your Money Alchemist,

Justin David Carl

END NOTES(*):

This math is based on maxing out your 401K annually with a $19.5K investment with an average of 7% returns compounded annually for 23 years resulting in an end sum of $1,042,005!
Title Photo of the Statue of Liberty by Ferdinand Stöhr. Money Tree photo by Micheile Henderson. Tree with sunlight by Jeremy Bishop.
Mr. Money Alchemist is my self-given nickname for my money personality/aspect. It’s in homage to the FI Blogger Mr. Money Mustache who got me started on this path & radically changed my life for the better! Check him out at www.mrmoneymustache.com!

DISCLAIMER: The material contained within this blog & website are for entertainment purposes only and should not be misconstrued as professional advice, legal advice, or medical advice. Use the information, material, & ideas at your own risk.