There is one main principal to follow if you want to become financially independent, spend less than you earn and invest the rest. The amount of money that you invest, or save, is called your savings rate, and it’s usually tracked as a percentage of your overall income. You can find many different philosophies on how best to increase your savings rate, but in the end it boils down to one of two approaches, make more or spend less.
I’m a fan of taking a hard look at your expenses, especially recurring monthly expenses, and then killing or downsizing anything that doesn’t provide significant value. If you haven’t done this, you will likely be surprised at how much money flows out of your accounts on frivolous or outdated services that you won’t really miss if you cancel them.
Once you have gone through this exercise, it does pay to do a quick check again every couple of months, but for the most part it’s done because there is a limit to how much you can save. Extra time spent here is unlikely to bear much more fruit
Now, the income side of the equation is a completely different ballgame. In theory, the amount of money you can make is limitless, in reality there may be a reasonable limit, but a 100% increase is not an unrealistic goal, especially for someone who is making an average or below average salary.
This is why I highly recommend you point the majority of your FI energy in this direction. Yes, it requires more effort than optimizing your spending, but the payoff can be extremely rewarding.
We saved almost 40% of our income last year, and we are tracking closer to 50% this year. We have reduced our spending by a few hundred dollars a month over the last couple of years by ditching the following recurring fees, cable ($100), bringing my lunch to work 3-4 days a week ($200), and getting rid of pet insurance ($175). This was extremely easy and ended up giving us an additional $6000 for investing every year. Huge impact for minimum effort, but the impact it has pales in comparison to what I achieved on the other side of the equation.
Consider this, the first full year after I graduated college with my Bachelor’s Degree I earned a grand total of…wait for it…$3,486. It didn’t get a whole heck of a lot better for quite a while, my earning total for the next ten years combined was $250,000, or an average of $25,000 a year! Even when adjusted for inflation, to give a clearer picture of what those numbers would look like today, we’re only looking at $5,900 and $374,000 respectively.
That’s a bit embarrassing, but at least I can take solace in the fact that I (somehow) landed a fantastic, beautiful wife and pulled off 500+ days of snowboarding some of the best mountains in the world during that same time period.
It took me seven years to realize that this path was not going to lead to long term financial success, so I bit the bullet and went back to school. I was closing in on $40,000 a year at the time. For the next two and half years I worked a full time job and took almost a full college course load. I don’t think I ever truly relaxed during that time or the eighteen months that followed.
There was always a backlog at work looming, a paper to write, a school project to finish, another book to read, a cover letter to write, a recruiter to network with, and so on. Not to mention a relationship with that fantastic wife to nourish and a new puppy to train, walk, and bond with. Snowboarding…not so much anymore.
When I reentered college, I was in my early thirties, surrounded by kids ten years my junior, going to night classes. They nursed hangovers, slept in, and ate breakfast around noon, while I was working a full time job to make my mortgage payments. I ate Taco Bell twice a week for dinner as I rushed from work to class, so at least we had that in common.
I graduated with a two year degree in a tech field at the height of the .com bust. There were thousands of people recently laid off in my field competing for jobs. Many of them were younger and more experienced than I was. The people my age, were usually much more experienced than I was. I’m pretty sure I had more than one interview with a hiring manager who was younger than me. I didn’t do so well, it was a long, slow grind, but I never gave up.
After graduation it took me eighteen months of searching for 20+ hours a week, outside of my full time job, to land an offer. It did not come with the title that I wanted. It did not come from a company that I really wanted to work for. It did not come with the salary that I wanted.
What it did come with was more important than any of that. An escape hatch out of a dead end job and into a world full of potential growth was so much more valuable than I even imagined.
Eleven years after graduating from college I accepted an entry level job at an obscure company after negotiating a $37,000 a year salary. I took a 10% pay cut when I accepted that offer.
In the subsequent twelve years, my income has risen 700%, and assuming I don’t get laid off, I will be at almost 1000% growth by 2019.
If I had stayed in my previous industry I’d be lucky to have seen 100% income growth by now, the company that I was working for folded, and the industry went into a steady, permanent decline. There were also serious permanent health risks associated with the work that I was doing. Looking back, it was an absolute, drop dead, no brainer to get out.
Now, I’m not the smartest or the hardest working person you’ve ever run across, but I was smart enough to recognize the need for change, competent enough to put a plan together, and motivated enough to see it through to the end. While the numbers may not be on the same trajectory for everyone, the general path is achievable for people who are motivated and have the drive to follow through.
While I am obviously a big fan of going back to school, or retraining yourself with the skills to move into a more lucrative industry, these are not the only paths available.
I know people who have moved within their current company into other divisions that have more potential career growth. Sometime this can even come with a promotion, but often it may require a lateral or even downward move. Taking a pay cut to make a downward move in title and level may seem counter intuitive, but it can be a shrewd move that sets you up for prolonged success later on.
If you work in a position that pays an hourly wage, overtime shifts can provide immediate tangible returns. If you are already making a decent wage, this can be a great way to bank a large sum of money in a short amount of time. However, this approach does have limited upside, unless it also provides a path to future promotions with increased wages. Working nights and weekends isn’t always a great long term plan.
I feel that I should pause here and acknowledge that I have been very fortunate throughout my life. I came from a decent, loving family that valued education and responsibility and taught me how to work fairly hard. I was never abused as a child. I’ve never had to deal with a serious illness or disability that affected myself or anyone in my immediate family. I didn’t make catastrophically bad decisions early in life that made my path impossible. Overall I had a fairly average american life, which makes me luckier than a lot of people in this world.
If you have a similar background, the only thing stopping you from progressing is yourself.
How about it? I’d love to hear your success stories or answer any questions that you might have.