We are all on a journey in life. Many of us don’t think about money unless there is not a lot of it left at the end of the month. This article is an attempt to give a bit of information to anyone needing some direction on financial matters.
The parable of the Monk and the Minister: Two boyhood friends go off their separate ways and reunite as adults. One is a humble monk, while the other a rich and powerful minister to the king. The minister in his fine robes, taking pity on his old friend says “If you could learn to cater to the king, you wouldn’t have to live on rice and beans.” To which the monk replies “If you could learn to live on rice and beans**, you wouldn’t have to cater to the king.“
**Side note: Rice and beans together provide all essential amino acids and are an excellent source of protein**
Find your way around:
What is more valuable to you? Money, or freedom?
Money is just a tool, though we often don’t give it the respect it deserves. I struggled with money for many years, not having been taught how to handle it either in school or by my family. One day I got tired of there being “too much month at the end of the money,” so I started searching for tips on how to better handle money. That one decision has led me on a journey I am still on today.
This provides a framework for us to think about money. How much of it do we need, both in the present and in the future? While researching how to have better money habits, I came across the idea of Financial Independence Retire Early (FIRE). This is the concept of saving 25x your annual expenses, and then living off of 4% of your portfolio assuming an average of 7% return each year.
Sounds easy right?
The truth is the math is easy, however the application in real life can be much harder. If you cut back on things that you don’t care about, and spend on things that bring you happiness, you will already be ahead of the vast majority of Americans.
For us, we are striving for FI, rather than RE. Retirement according to Websters dictionary is “the cessation of work.” This sounds very boring to me. I enjoy work, both paid and unpaid. However, I realize that having financial independence gives you your freedom. You do not have to work just to make money, but instead can work for the enjoyment and fulfillment it brings.
But won’t the Economy will collapse if we don’t work!?!?
Before the economists come for me with the pitchforks yelling angrily about Gross Domestic Product (GDP), growth, etc. Let’s break it down a bit:
GDP of the US economy has risen about 2% per year. Wages however have stagnated:
Productivity has grown by more than 6x the amount that wages have grown since 1979. The above is a good example of how the economy is not completely dependent on consumer spending.
Find more statistics at Statista
It is true that a portion of the GDP is based on consumer spending. However the economy as a whole will continue to march forward even if you start scaling back on unnecessary spending, and instead start saving more each month. If you save more than the paltry 7.6% average for 2019, then you are off to a better start than most.
But what if I’m older and far along in life???
This sounds like something only young people can accomplish.
Rubbish. FI can be achieved by older individuals as well. It’s like the saying goes: When is the best time to plant a tree? 10 years ago… When is the second best time to plant a tree, TODAY! Now is a great time to start and once you have reached FI, you can choose to work or not to work.
Where can I start?
Tracking:
A simple first step is to use a online budgeting tool like Mint.com for an entire month (a site we used when first getting financially organized), just to get an idea of where all your money is going. While it does take some time to load in all your bank accounts (credit cards and loans if you have them), it is great to be able to see all your earnings and purchases in one place.
Once you have that, you can take a look at all the categories you spend money on and at the end of the month you can decide whether those purchases were still worth it. This will help you trim the fat from your monthly spending.
Goal setting for the Short Term:
While your starting to track your finances, Mint also has a feature that allows you to set goals. Whether doing this solo or as a couple, having a goal like paying of a credit card/loans, saving for or your next trip, or a large purchase you have wanted to make, is a great way to keep focused. A goal can give you something to look forward to and will help you to limit those unnecessary purchases.
Saving for the Long Term:
Take whatever you are earning, and save as much as your new trimmer budget will allow. An easy way is to increase your savings by 1% per month. Whether that is in your 401k, IRA, or emergency fund, this will help you increase your savings rate over time, and I promise you won’t really feel the pinch.
Financial Independence is an achievable goal
Like anything else in life it takes work and discipline to realize the goal. Small steps such as signing up for Mint and increasing your savings rate by 1% per month will really go a long way into helping you have a more financially secure future! Money is a tool and if used wisely will enrich ones life.
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Resources:
BEA
MINT
Wage Tracker
JL Collins
Personal Savings Rate Pay Gap
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