Achieving Financial Independence is Quite Simple

Written by: Corey Janoff

One of the most common goals I hear from my clients is wanting to achieve financial independence. With Independence Day upon us, this is a good time to talk through what you may need to do to reach financial independence.

When you break it down, achieving financial independence is actually quite simple. By following a few simple rules, most people can achieve financial independence within a reasonable timeframe. Spend less than you earn. Pay yourself first by saving a portion of each paycheck for your future. Make sure your debts are in order. Insure against catastrophic risks. Pretty straightforward.

As you are probably aware, this is all easier said than done. It requires some discipline, establishing priorities, and learning how to say no to a lot of things. The key is to start early. The later you get serious about achieving financial independence, the harder it will be. Changing already established habits is extremely difficult. So please, forward this to people you know who are still in school or recently graduated. If they can get on the right track from day one, life will be much easier.

Below are 6 simple steps that will help put financial independence within reach for you.

1. Spend Less Than You Earn

Common sense and basic math would dictate that nobody should spend more than they earn. However, thanks to credit cards and relatively easy access to other loans, many people end up spending more than they bring in. Nearly a quarter of Americans report spending more than they earn. If you don’t have enough money in your bank account to pay for a purchase with cash, then don’t buy whatever it is you have your eye on.

If this is a challenge, cut up your credit cards, throw them away, and only pay with cash or a debit card. You’ll find it is pretty easy to cut back on spending if you don’t have the cash to pay for things.

2. Pay Yourself First

For those of you who read Rich Dad, Poor Dad, you probably recall the mantra he preached of paying yourself first. Make sure you set some of each paycheck aside for your future. I advocate investing at least 20% of your gross income for retirement purposes. You can read some of my other blog posts to find out why.

This is probably the single most important thing you can do to set yourself up for financial success. If you can siphon a portion of each paycheck off and set it aside for your future, everything else will take care of itself. After saving 20% of your paycheck, if you have, say, $3,000 leftover, that is how much you get to spend on everything else. Whether it be housing, food, concert tickets, charity, or gag gifts for that bachelorette party, you are good to go. You have already set aside a healthy amount for your future, so don’t feel dirty about spending the rest of your money today.

Rinse and repeat with the next paycheck. Thanks to automated savings plans, such as payroll deposits into a 401(k), or automatic bank transfers to a brokerage investment account, you can set up your long-term savings plan so you don’t even have to think about it. It will take care of itself.

If you start with all of your other expenses (housing, food, entertainment, etc), you will find it near impossible to save an adequate amount. Start with investing for retirement and then reverse solve from there. Your budget will adjust automatically.

When I was first starting my career, in my second full year I made $29,000 of gross income after business expenses (the first year is basically a throwaway year for rookie financial advisors). I invested just over $8,000 into a Roth 401(k) in that year, or about 28% of my gross income.

Some of you are probably thinking, “How in the world did you manage to invest anything if you only made $29,000!?” It’s because I made investing a priority. I had money automatically pulled from each paycheck before I even got paid. With what was left over, I figured out how to pay for everything else.

I lived with a roommate and paid $700/month, which included water & garbage. We shared the other utility bills. This was after we upgraded from the dump we lived in the previous year that cost us $700/month combined, utilities included. Both of us worked all the time, so we rarely used electricity or gas in our place. We didn’t need a nice place, since the only time spent there was sleeping. We weren’t making much money, so we couldn’t afford to go out to bars or get dinner with friends.

We would buy 25 pound bags of rice at Costco, frozen chicken, and frozen veggies and make a week’s worth of stir fry. Let me tell you, if you think you need to spend hundreds of dollars a month, or even $1,000+ on food, think again. You just haven’t discovered the gift that is rice and beans with the occasional top ramen mixed in to change things up. If I felt like splurging, it would be spaghetti with meat sauce. Always make extra so you have leftovers for the week.

I continued to exercise regularly so I could fit into the same clothes I wore in college. For my birthday and holidays, I would ask for dress shirts and slacks so I would have clothes to wear to work, (thanks Mom and Dad!), but made sure to point out the ones on big sales at Costco, Men’s Warehouse, Joseph A. Banks, etc. so I could get quantity over quality.

The point being, if you want to reach your goals, you must make some sacrifices. As my income has risen, I continue to make sure I set at least 20% aside for retirement. What is leftover is what we have to live the rest of our life with. Makes things pretty simple.

3. The Sooner You Start, the Better Off You Will Be

For those of you who read my post about the power of compound interest, you will understand the importance of this. If you didn’t read it, please click the link in the previous sentence and do so.

In the example about Paula and Pete, you may recall the money invested in the first decade of your life will grow to a larger sum than the money invested in the next two decades combined, all else being equal.

In fact, if you change the numbers around a little bit and assume Paula starts investing a decade earlier and invests $20,000/year from age 25-35 and then stops, she will have $2.9 million in her account at age 65.

If we have Pete invest $20,000/year from age 35-65, he will have $2.265 million at age 65.

So really, the money you invest in your first decade will grow to a larger sum than the money invested over the next 3 decades combined! All else being equal.

In reality, you will probably see pay raises over time and have the ability to invest a larger sum as your career progresses. However, don’t forget the importance of starting early. If you can start with your first paycheck and establish that savings habit from day one, your future self will thank you.

4. Make Sure Your Debts are in Order

Some would argue that you should target your debts before you start saving for retirement. In some cases, I agree. Such as when one has a balance on a high interest rate credit card. But generally, I like to see people get on track with their long-term savings before aggressively paying down debts with reasonable or low interest rates.

So, when I say, make sure your debts are in order, attack high interest rate debts aggressively (those with interest rates above 8%). After that, make sure your long-term savings plan is on track and then come up with a debt elimination plan that suits your goals.

Now, one other thought on debt. If you are borrowing money to get an education, make sure your expected starting salary will be greater than your total student loan balance. If not, you really need to think long and hard about whether or not this is the right career path for you.

If your debt balance will be significantly larger than your starting salary once you enter your career, consider joining the military or working in a non-profit setting to pursue public service loan forgiveness. If your student loan debt balance is larger than your income, and you have to pay it off yourself, it will be an uphill battle to live the life you want to live. If your student debt balance is 2-3 times your income, you are going to have to make some real financial sacrifices for the majority of your career until that debt balance is eliminated.

5. Insure Against Catastrophes

Once you have your retirement savings plan on autopilot and your debts under control, the rest of your life is easy. The only thing that could screw it up (financially at least), is an unexpected event, such as a natural disaster, major health expense, disability, or even death.

It’s important to purchase insurance against low-probability, high-cost events, so you and your family are protected in case something like that does happen. You don’t need insurance for everything. Just the big stuff. Anytime you are faced with an insurance purchasing decision, ask yourself, “If this event happens, could it potentially ruin me or my family?” If the answer is yes, then buy the insurance.

6. Learn to Say No

Family, friends, and societal pressures will entice you to spend money on things you don’t need. If you are going to reach financial independence, it means you will have to say no occasionally. When your coworkers ask you to join them at dinner, then a concert, you might have to turn them down. You may not be able to take that vacation you always wanted to (at least not this year). It might mean buying a smaller house than your friends purchased. Driving that car for a few more years. Not upgrading your cell phone. Eloping instead of going into debt for the fairytale wedding.

What are your priorities? If achieving financial independence is at the top of the list, structure your life around that. That doesn’t mean you can’t have fun. It just means your financial health takes priority.

Once you are investing at least 20% of your income, go nuts with the rest! Go out to dinner. Go to the concert. Take the vacation. If you have enough for the bigger house, go for it! Buy the new car. Upgrade the cell phone. You deserve it because you have made enough sacrifices to set yourself up for future success.