Seven Secrets to Financial Independence

One could probably build a small library for the books written on the subject of financial independence. It’s a subject many of us like to fantasize about, but few of us will see materialize in our lifetimes. Why? Mostly because we allow competing priorities, egos and financial peer pressure dictate how we spend, and save, our money.

The good news is you don’t really need a book to learn about financial independence. All you need to do is remember the seven secrets below.

Secrets to Financial Independence

1. Pay off debt. Yes, even the mortgage. I can hear the mathematicians screaming now – “PAY OFF YOUR MORTGAGE?” What about the tax deduction? What about all-time low interest rates. I don’t care about either one. To reach financial independence I’m all about reducing monthly expenses. A mortgage represents the highest monthly expense in most family budgets, and ours is no exception. Knock out credit card debt, car debt, student loans and the mortgage and you’ll owe a monthly payment to no one, which puts you on the fast-track to financial independence.

2. Quit buying crap. And while you’re at it, quit signing up for crap. The other day I sat down to try to tally our monthly expenses. Seems simple enough, doesn’t it? Problem is I kept forgetting little expenses we’ve signed up for. Oops, there’s the Netflix charge; then the gym membership fee. The other day the TiVo bill hit. I enjoy all three of these examples immensely, but altogether they represent about $50 a month. Talk about being nickel and dimed! Of course, there are other things I’m forgetting to list here. You can see how challenging it is to come up with a total monthly outgo figure these days!

3. Forget about trying to impress people. Do you have any idea how much money is wasted in a lifetime trying to impress other people? Just think of the things we buy, and the options we choose, for show rather than for practicality. Flashy cars, big houses and expensive jewelry matter little to those working towards financial independence, because we recognize you’ll be paying for that stuff long after we hang up the employee badge.

4. Make savings a top priority. If I had a financial do-over, I’d start saving half of my income from the very first day I started working. I can think of no faster way to accumulate wealth, build financial discipline, and expand your creatively frugal way of thinking to make things work on a meager income. Trouble is, very few of us ever thought to do this, so right out of the gate we needed more like 90% of our income just to pay for all the goodies we accumulated. To make it happen, talk to your payroll office and elect to have 50% of your paycheck deposited in an online savings account (I’ve reviewed a few of the best online banks in the past), separate from your primary checking account. Now, live on what’s left. Every year you pull this off you are essentially buying (saving) a year of freedom from earning an income.

5. Be aggressive early on. I’m a conservative person by nature. I don’t like to take big risks – with money, or life in general. But if I could talk to my 20 year-old self now I’d tell him to live a little. Invest a little money (10% of your portfolio or less) in that stock you just know in your gut will be a winner, because you know the quality of the people in management, or you believe in their product. Don’t be afraid to invest in that “aggressive” portfolio in your twenties, and early thirties. You’ve got time for ups and downs. You’ll win some, and you’ll lose some, but at least you won’t have any regrets.

6. Be conservative as you near financial independence. As passionate as I am about taking risks when you are still young, I am equally passionate about being conservative in the last few years leading up to reaching your “number.” That’s the time to start dumping the risky stuff, and start gearing down into low-risk investments. Some of your nest egg should be in cash, a little in bonds, or if you like simplicity, maybe something like a LifeStrategy Income Fund that takes the thinking (and emotions) out of investing your nest egg, or at least a portion of it. Be sure to check recent returns on such funds, as many billed as “conservative” lost their shirts in the recent downturn. At this point in your journey to financial independence you should be fairly immune to market swings, and more concerned with protecting the principal you’ve worked to accumulate.

7. Determine your own “number.” Speaking of your “number,” don’t let some financial egghead across a desk look down his nose and tell you that you need exactly $1.4 million to “maintain your style of living in retirement.” Garbage. Most of these guys immediately follow this with a sales pitch for an annuity, or a scare tactic about clients living to 90 years-old and running out of money. If you are dedicated to living frugal, paid off all your debts (see step 1), and built a comfortable nest egg based on your individual needs, you should be just fine.

Financial independence doesn’t have to be a mythical place we only visit in our day dreams. There are enough people out there living it, writing about it, and experiencing the joys of being free from the requirement to earn an income to survive. Learn from them. Model your behaviors after them. But be careful who you follow.

As author Thomas Stanley proved in his book, The Millionaire Next Door, most self-made millionaires look a lot different than the Paris Hiltons of the world. They probably drive a two year-old car (or older), shop where you shop, and live in a modest home. They don’t wear flashy jewelry, have a string of letters after their name earned from a decade of schooling in the Ivy League, and their idea of a fun family vacation probably looks like a week-long trip Disney World, not Paris or the Mediterranean.

The real secret to financial independence is to start living your life with that goal at the forefront of all your financial decisions. The longer you put it off, the worse your chances of ever succeeding will be. But for those who start early, and stay passionate about their dream, the payoff at the end is one of the more freeing experiences we can ever enjoy.

Comments

  1. I like your seven secrets, Frugal Dad. They all make sense. But I have personally not followed the one saying to be conservative when you near your goal. I’ll try to explain the case for playing it the way that I played it.

    I don’t believe that there is only one level of financial independence. There are many. There is an FI where you have all you need to pay the bills without working for money. But there is also an FI where you can do the same with many more luxuries. And there is an FI where you can not only live in luxury without having to work for money but can also give to charities or your heirs or build new businesses or be more creative.

    As we become a richer society, it becomes easier to hit the basic level of FI. I think it is part of human nature always to aim higher. I think that as more people learn (from blogs like this) how to achieve FI early in life, more are going to want a more fulfilling and rewarding FI. I think that’s good. I think life can become boring and even depressing if we do not develop new goals to strive for as me move farther up the chain.

    So I advise people to set their sights on new and higher levels of FI as they progress toward achievement of their Life Goals. If you never really get to the end point, you never really can afford a conservative “hold the ball” strategy. You don’t want to be careless with your FI stash, obviously. But I think it makes sense to continue taking some calculated risks until the day you die. It keeps the blood flowing. It keeps you young. Something inside us dies when we become adverse to all risk.

    Rob

  2. @prufock

    Why would you want to give a potential mate the impression that you are a spendthrift when really you are frugal with life goals? That is just a recipe for disaster.

    Most marriages break up because of money issues, particularly when a spendthrift marries a tightwad. That complication can be headed off at the pass, as it were, by weeding out people who do not hold the same values and financial style. Much as you wouldn’t bother to date someone who held beliefs that you found abhorent, you shouldn’t date someone who spends money or expects you to spend money frivolously if that is not your life style.

    Amy Daczyzyn talks about this idea in detail in her Complete Tightwad Gazette.

  3. I agree with buying less crap but I think that is more with impulse buys. Having things like Netflix, DVR, and gym membership are part of your daily life and if you use them think they are very worth the money per month. I got netflix cause going to blockbuster was getting expensive, and I watch enough DVD’s per month to warrant the expense. I got to the gym 4-5 days a week and use the DVR all the time. For me those are worth spending money on.

  4. If you plan to draw out only 4% (a relatively conservative number) from your portfolio, $1.4 million may not be enough in 30 years. That would equate to only $56,000 per years and you’ll be paying taxes on that. Social Security may be there, may not, or it may be in a completely different format. With only 3% inflation, that $56,000 will be about $23,000 in 30 years before taxes. Can you live on that?

    It all depends on how you want to live in retirement. That’s why it makes sense to be frugal TODAY.

  5. I liked #3 the most, but maybe that’s because of the situation I’m in now! My wife and I went to a big event for a fundraiser we’re associated with this weekend and honestly we were outclassed. We didn’t try to impress anyone (because honestly we couldn’t have) and just tried to make it work without spending extra money. And you know what? It wasn’t too bad.

    Thanks for that advice!

  6. Good post FD. Financial independence doesn’t have to be complicated. But it can be hard for many people.

    Agree with paying off mortgage if you can. Why pay a dollar in interest to get back 15 to 25 cents in tax savings.

    Also like #3. People who are only impressed by what you have probably aren’t worth impressing anyway. Your friends will like you no matter what you have.

  7. Does number 3 apply to dating? As a single guy, every time you pick up the tab for a lunch or drink or movie you’re trying to impress someone. #3 might work for a frugal dad, but not so much a frugal bachelor.

  8. I’m 21 years old so your #5 advice is important to me. I have a friend I often discuss investing with, and we were talking about a few stock trades we totally botched (stocks that tripled or quadrupled over the past 6 months – year). We knew they would pan out, but we didn’t pull the trigger.

    Now we are still in college, so we don’t have a lot to invest, but I hope that when I do have a “real job” in the next few years I will listen to your advice (and in my gut what I know is right). But this is where #3 comes into play – as young 20somethings we all want to impress. We want to make as much money as fast as possible and show people that we make money. It’s really dumb in the long scheme of things (I’m sure a lot of 40 and 50 year olds look back and realize how pointless it was) but it’s probably the hardest thing to overcome for us.

  9. @Penny,
    Whoa whoa whoa, I didn’t say anything about marriage! In the long term, I agree, it would be important. However, I’m just talking about the short term – I’m thinking more along the “having a good time, wink wink” lines than marriage.

    I suppose it’s all a matter of balancing priorities. That’s usually what it comes down to.

  10. @Prufock: As a recovering spendthrift who still remembers trying to impress his wife in college, I understand what you are saying. However, if you are of a frugal mindset now, I’d encourage you to seek out someone who enjoys the quality of your dates together. There are plenty of things to do that don’t cost a lot of money. Personally, I’ve found things that are most expensive are the least intimate (eating out at expensive restaurants, going to movies, etc.).

    Short of that, just budget a few “nice dates” for your special someone and be sure to pay cash for the bill – that should impress more than a platinum card!

  11. I love the tips listed here, especially the one about spending money to impress others. I’ve been working towards being debt free for about 9 years, and have about 2 1/2 years to go.

    I work in an office, and have to dress appropriately, and buy most of my clothes at Goodwill, and regularly scour the clearance racks at local stores. At Goodwill, I can get dressy shirts for as little as 99 cents when they have sales.

    I too love Netflix, and haven’t been out to a movie in years. One month’s Netflix subscription is less than one night out at the movies!

    I’m glad I found your website & read it several times a week. Keep up the good, encouraging work!

  12. Agree with Craig. It’s about usage.

    We use netflix a lot, by ourselves and when we have friends over for a “movie” nite.

    Where we live, the theater is $12.50 per ticket. Transportation to/from the theater: $5 minimum.

    That’s $17.50 per person for one night!

    For 9.79 a month with netflix, we watch something like 8 to 12 movies. (It’s our way of relaxing.)

    it’s a fun way to entertain and when friends bring their kids, we can let them watch something approved and available.

    We don’t consider this a waste. If anything, it saves us a ton of money a year, and time.

    We work hard, read AND watch TV. I’m not going to feel bad about it. Our friends have little time to socialize as do we, so this and reading are our forms of “on-demand” entertainment.

    As for reading, going to the library is expensive too. People overlook the cost of transportation $5 roundtrip per visit) so we try hard not to go more than once or twice a month. Because there are cutbacks in library system and new rules, far fewer books we want are available, longer waits and shorter amount of time to keep them out.

    It makes a major difference. As for reading magazines at the library? Forget about it. They are usually lost, stolen, or pages ripped out. So we still spring for discounted subs (if you have patience you can find good deals on almost everything.)

    Value is a key consideration, not just the total $ spent.

    FYI: You suggest not spending to impress folks. But what we’ve seen (in ourselves and others) is that people buy for themselves. It’s got nothing to do with anyone else.

    Whether it’s small (books, CDs, DVDs, cosmetics) or large (clothing, etc.)

    The exception: Dressing for work, which, for us, still requires an investment in suits and “dress” clothes. (And though it costs money, I still like it. I don’t want to work in an office where people dress like they are at the beach. Ugh.)

    The real issue as always is not being in debt and spending money wisely so you have maximum options and choices…about how you work, and how you live.

    Although these days, few people have any choices left. If you’re lucky enough to have a job with any kind of benefits, nobody leaves. They just stay and everyone is miserable together.

  13. A lot of these are easier said than done! Tackling all seven of them at once is like going on an extreme diet – you can only sustain a new dramatic new lifestyle for so long.

    I recommend picking one of these suggestions at a time and trying to incorporate them into your life. It’s better to do a little than get overwhelmed by the enormity of all of them and not do anything.

  14. @prufrock:

    Heh heh heh…

    You want to really impress a lady? Make her value and respect you. Here’s how.

    Make the first date something really casual. Just hang out. Say you’ll be at such and such a location, and if she wants to join you, you can each get lunch or coffee. Make it clear it’s a “no pressure” date and that you’re not trying to push her into doing anything, so you’ll pay your way and she can pay hers. If she likes you, she’ll show up. This is far less stressful for the woman because she’s not going to worry about whether you’re using the fact you paid for dinner to manipulate her into “something” at the end of the date. You have also now set a precedent of hanging out. This can continue until you determine whether you want to actively court her, or whether you want to just be friends. (This, by the way, is how you get female friends).

    There’s a freakish thing about female psychology. Women are less disposed to value what’s cheap, free, and easy if a more expensive or difficult option exists. The more resources a woman sinks into something or someone, the more she values what she’s investing in even if it’s objectively not much higher quality compared to the next option. Nothing else explains Manolo Blahnik shoes. (Or Maserati cars… maybe this phenomenon isn’t unique to women!)

    Once you decide to court someone, the person who asks for the first date does the treating. But if that’s you, make sure you only treat the first time. If the lady wants to see you again, tell her to set something up and invite you. If she likes you and knows she has to reciprocate in order to keep you, she will. It may not be a treat with the same dollar value, but the important thing is not what she spends, it’s the fact she got off her duff and made a tangible show of interest. After that point, you should alternate treats. It doesn’t mean you never split the bill again and it doesn’t mean you don’t hang out. You can do that at any time. Just don’t treat twice in a row unless there’s an unusual circumstance like a birthday or a cancellation, or unless you’re seeing non-date reciprocity such as homemade cookies or a hand-knit sweater. What you’re looking for is mutual investment in each other. A partner who doesn’t know how to give or share is just arm candy, not a candidate for a ring or a shared life together.

    If you don’t see reciprocity by the second date, or in extreme cases by the third, you never will. Likewise, if you’ve been going out with someone a while and the reciprocity has tapered off to the point where you’re doing all the work, there’s something wrong.

    This three date policy weeds out gold diggers, game players, dates who are more interested in the date activity than in you, and dates who are just using you. If someone challenges you on this policy, just admit that you’ve become hard to get because of all the competition for your attention.

  15. @ Kevin

    That is so true. The things my husband and I enjoy doing cost little to nothing, such as gardening, fishing or canning. I find that being productive and satisfaction with a job well done is often entertainment enough.

    My friends think we are drudges, but then they come to help us can and enjoy the commaraderie and laughter. I’d venture to say my husband and I have far more hours of meaningful conversations than most couples. Maybe there would be less divorces if everyone tried therapy through working as a team! Pickles as couple’s therapy… I can see it now.

  16. Enjoying yourself along the way is also critical. If you don’t enjoy your life it’ll start to seem like drudgery, raising the risk of returning to counterproductive habits, like over spending.

    If you’re trying to move toward financial independence, you can always try to redirect yourself into low and no cost ways to enjoy your life. Most of the time we think we have to spend a lot of money to do that, but it just isn’t true.

  17. Have been really trying to get my finances in order since reading Financial Purity by Jessica V. Psalidas. I Love the great tips you have brought up, however I too am going to have to agree with Craig- I use the gym on 4-5 weeks and we are lucky enough that our gym also offers a swimming pool for the kids, so for about $40/month I get to work out and the kids get free entertainment. So to me this is something that I will not give up. I do have to agree with you on the other stuff though. Thanks for the great tips!

  18. I agree with nearly everything in the article, except the DisneyWorld vacation. With a few kids, that can be a very expensive trip, indeed.

    Concerning vacations, I would recommend following regularly websites like Travelzoo or something similar to find spectacularly priced packages that can save you a bundle.

    Best wishes

  19. Your point to “be aggressive early on” I couldn’t agree more with. I would also add that taking a little bit more of an aggressive approach early on in areas other than just investing can be very smart as well. Maybe it is starting a side business, or gunning hard for a sales bonus or promotion, etc. but taking calculated risks like those and working aggressively to see them through to completion is a great thing to do especially early in life.

  20. How do you manage the ratio between savings and paying off debt?

    I have a hard time denoting much of my budget to savings when I know that I have a set of sizeable student loans that need to be paid back.

  21. I am in agreement with you. We should pay off our debt and stop purchasing things that are not necessary. Once we start to practice this then we will be able to save more and then we will have the money for the good retirement. Getting rid of the unnecessary credit cards and using cash to purchase our necessities is another way forward as well.

  22. In regards to not impressing other people…I think Tony Robbins says it best that your ego doesn’t care if you get out of your life what you want(FI in this case); your ego simply wants to appear to other people as if you have. “Keeping up with the Jones’” is nothing more than someone’s ego taking control of their decisions.

  23. Well, we were hit during the last little recession, (right after September 11th) luckily we were young and dumb and very scared, and on top of that, we were not willing to fight, we thought we couldn’t. We were debt free in less than 3 years after that and learned our lessons obviously before it was too late (the experience still haunts me). When they are knocking at your door, ready to take away everything you have, what do you do? Sit tight, lock doors, do not answer the phone, file for bankruptcy? No, this is what two idiots in their late 20s did, AFTER going way over their heads (and they knew it too!) WE SOLD EVERYTHING. No kidding, the house, the cars, the furniture, the jewelry, everything gone. With 800 bucks in cash we then relocated (job related, money has to come from somewhere), but the big advantage was, we were debt free and started over with very little (basically three suitcases full of clothes and a few essential pieces of furniture and cook ware) and this time HAD TO make it on that and work on our savings. It paid off. Only 5 years have passed since, and our new (very small) house is the only debt we have, we own two cars again (paid cash) and we have everything we need and a little more. We are now in the early to mid 30s and are working on our mortgage and retirement (for me, not him, he is done), but everything else, like rainy day funds is taken care of. It feels great and look who is impressed now. (the others *dirtylaugh*)

  24. To gain FI you need to be “financially educated”, 1st & foremost. Most people have little to average knowledge of financial investments. Of course, people take the help of financial planners – but nothing like taking matters into your own hand. I am sure there’re sites dedicated to this. Check out http://www.RichDadCoaching.com. Robert Kiyosaki is a great exponent on FI. You must read his books on FI & the deficiencies the middle-class has in their attitude towards money.

    More importantly, you should also look beyond these traditional investment schemes & savings[TISS] for opportunities to achieve financial freedom[FF]. Here are a few examples on these opportunities:

    1) Affiliate programs on the Net.

    2) Google’s Adsense/AdWords.

    3) Other Net-based income-generating schemes.
    You’ve do some research to check things out. And if you think they’re scams, my reactions would be, “Not all of them are.”. Again, you’ve to do a bit of research to find things out.

    4) Join a MLM business – esp. those that’re good for part-timers.
    MLM’s are the kings of all home-based business. More importantly, MLM’s usually do not’ve any financial risks attached to it – unlike TISS.

  25. These rules still apply in late 2012, but if you truly do want to reach financial independence it is about much more than just following simple rules. You need a complete change in mind-set which is only developed following extensive reading, mentorship and investment experience.

    Like with everything though, if you do want financial independence today is the time to start, as you point in your article, the younger you start the better!

    I note your suggestion of reading your money or your life- I agree, this is indeed a good book. The one issue I have with it though, is it is all about living frugally…I don’t think you can truly classify yourself as financially independent unless you have passive income which enables you to live the life you dream of, not just a frugal life covered by your mediocre passive income. But hey, that’s just my opinion.

    I also note your rule of being prudent with investments when close to reaching independence…in the current climate, what is prudent?! Government bonds are certainly not a sensible investment at the moment!

    Thanks for the article.

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