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Financial freedom

2021-07-23, Michael Thompson

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Financial freedom

This article explains a path to financial freedom that doesn't require extraordinary skill or effort. This is mostly based on a book entitled "Set for Life" by Scott Trench. Starting in your low or mid-20s, with an average job, reasonable debt and willpower, you can reach financial freedom before you’re 50. However, you have to be very attentive to your finances and avoid waste. We’ll explain what financial freedom is, and then list out the steps to achieving it.

What is financial freedom?

Someone is financially free if they can do what’s most important to them, without being constrained by finances. For many people, this is the freedom to retire. For others, it’s the freedom to work on whatever they want, regardless of salary. Others may want the freedom to travel wherever and whenever they want. Financial freedom, and the amount of money required to achieve it, are therefore personal—they depend on what you want.

Seven steps to financial freedom

  1. Minimize expenses. Live frugally until you have a very high salary (this does NOT mean live unhappily). Key things to consider include (1) find a roommate to share rent, (2) avoid expensive apartments/housing, (3) live close to work (many people underestimate the costs associated with driving), (4) avoid expensive cars, (5) eat out less often (bring your lunch to work), (6) pay off high interest debts. Studies show that expensive cars and housing do not add significantly to your happiness long term (they usually just feel good the first few weeks). Studies also indicate that living alone can be bad for morale and health (in addition to being more expensive). Most experts would not recommend cutting experiences like going out with friends (trying to sit in your room all weekend to save money will likely affect your happiness and can lead to depression or other mental problems that could prevent you from reaching financial independence). You can live very happily on a small budget.
  2. Look for future roles. As soon as you start your career, pay attention to the businesses your employer interacts with, consultants they bring in, and/or what they deliver to their customers. Within a few years, you should identify opportunities for yourself beyond your employer as a consultant or entrepreneur (something that will bring you pay that’s based on your performance). Even with excellent performance, staying in the same job working for a large employer will almost never lead to financial independence quickly. The difference in raises between the lowest and highest performers is small in most companies (and the determination is very subjective). Hard work alone normally won’t get you to financial independence quickly.
  3. Continuously improve. Regardless of your path in life, continuous improvement is something great to strive for. Even if you want to stay in your same job and don’t care about salary, it’s believed that the feeling of progress is one of the happiest and most healthy feelings there is (more important than money). For early financial freedom, you’ll want to work towards the opportunities you identified in the previous step. Learn as much about them as you can and develop the skills to be your best in them. Make use of your local library. Make contacts (join professional groups) and discuss with them. Take classes where appropriate (but don’t take classes just to be taking classes).
  4. Purchase real estate you can live in and rent out. When you live in the property you are renting, you can more efficiently fix problems and handle your tenants. As soon as you’ve saved up enough money for a down payment (and an excess emergency fund), purchase real estate that can serve the dual use of housing you and a tenant. Complete a self-study before doing this (you can start with websites like this).
  5. At this point, your monthly cash flow should be improved significantly thanks to your rental income and probably a salary increase in your day job. You should be saving more money each month. You’re also building equity in a home that is hopefully appreciating over time. This will eventually facilitate the next step.
  6. Take the plunge. Once you’ve adequately researched your target opportunity (step 2 above) and saved enough money to realize it (steps 1 and 4), go for it. This is a hard step for many people, as it usually entails quitting your job. The timing of this step is highly dependent on your situation. Warnings: (1) trying to keep your job and pursue this on nights and weekends may be feasible, but more often doesn’t work; (2) many people wait too long for a "perfect" opportunity to do this, which never comes.
  7. Acquire assets that will enable financial freedom. As your income far exceeds $100,000 per year, you should begin investing wisely (the rest of this website can inform you further about this). Once you reach a critical mass of assets (normally about 17 times the amount of money you want to spend per year), the interest on these assets could provide you with financial freedom.

Planning for financial freedom

The seven steps outlined above should get you into a great financial situation. However, it may be difficult to determine where you stand today and if you need to save more. For this reason, it’s good to have a game plan. The first step here is to be clear about your goals, including how much money you’ll need and when you’ll need it. Studies show that people who are clear about their goals are more likely to achieve them. Don’t forget to include inflation—the price of goods/services will likely increase 2-3% per year.

Once you’re clear on how much you need and when you need it, you can work back to your current situation. (If you’re not comfortable doing the math here, you may want to consult a financial advisor who can estimate how much you need to save to reach your goals.) You (or your advisor) will have to make some assumptions, e.g. that your investments will return about 6% per year, your salary will increase at 4% per year, .... Hence, if you have 100K USD invested now, then after 10 years you can expect that to grow to 100K*(1.06)^10, or 179K USD after 10 years. You can add this to the amount you save (plus interest) each year to see where you stand.

When doing this, it may also be good to set some goal posts. For example, look at where you need to be in 2 years, 4 years, …. Write these intermediate goals down, save them, and check yourself against them periodically. If you don’t measure your progress, you’re less likely to achieve your goal. Again, you’ll need to do some careful math and may want to consult an advisor for help.

Some comments from the wise

  • Enjoy the journey. Don’t make yourself miserable now to attain future happiness.
  • Don't assume money or financial freedom will buy happiness. Many people are less happy once they reach financial freedom because they stop working, lose a sense of purpose, and/or stop self-progressing.
  • Building on the previous point, find a purpose after financial freedom. For most people, the best part of financial freedom is the ability to choose what they work on. Find something that you want to do, something you think is good for the world, and work on that. “Playing” all day every day might be fun for a month or two, but for many adults it won’t last.
  • The above comments may raise the following question. Why aim for early financial freedom if achieving it just leads to more work or unhappiness? Maybe you shouldn’t. If you have a job you love and believe you’ll continually love until retirement, then maybe there’s no reason to bother with the steps above. If you just want to drive a Corvette (or otherwise not live frugally) in your 20s, and that’s your goal, then of course following the steps above wouldn’t make sense. To me, the best reason to achieve financial freedom early in life is the freedom to work on what you want and not feel obligated to work on specific things to maintain your finances.
  • Luck will play a role. Unfortunately, we can’t entirely control all results we achieve. Despite your best research, it’s possible you could buy a home or invest in an asset that suddenly loses significant value. You could start a business that suddenly becomes obsolete by a disruptive technology. Many otherwise smart people will react in ways that kill their path to financial freedom (e.g. give up or self-sabotage themselves). It’s good to reflect on how this misfortune occurred (particularly anything you could improve from), but keep your head up and keep aiming for your goals. Most “successful” people have been through these things—they are successful because they didn’t give up. They updated their plan and powered through the storm.

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