I’ve come to learn that for those that have decided to pursue financial freedom, it means something totally different for everyone. For some it means having a certain amount of money in the bank or across your investment portfolio. For some it means not trading your time for dollars. For some it means simply having options. When I think about what financial freedom means to me, it is being able to make decisions based 100% in personal desire. In other words, whatever I decide to do with my time and money it would only be called into existence because that’s what I WANT to do. At this point during my FI journey, I have to unfortunately get up every morning and go to work for an organization that has agreed to pay me a certain amount of money in exchange for my skills. This is not something I desire to do, I do it because I HAVE to right now.
I also realize that the path to financial freedom that one chooses looks different for everyone. This is what’s so fascinating about FI. I think of it as having this toolbox with many different tools in it. Each tool in the box has an unique purpose that helps you achieve an unique result. Let’s walk through the tools I’m using that are helping to design the life I want.
Paying off debt can be sexy but it depends on how you choose to look at it. This tool has been the most foundational for me. Meaning in order for me to be fully successful in leveraging other tools, I must eradicate my debt first. Minimal or no debt is the main ingredient to building wealth. Nothing else on this list makes sense to use if you still have mounds of debt surrounding you, except your mortgage which I won’t get into in this post.
For example, if you are investing your money in stocks at a return of 7% but Visa charges you 26% interest on a credit card balance carried from month-to-month – that 7% return was just eaten up by what you owe in debt. So I’ve taken the approach of before I start focusing on saving and investing, paying off my credit card and personal loan debt is going to give me the highest return on my money. Watching my credit card balances tick downward gets me really excited and motivates me to keep going but then again I’m a personal finance nerd so I might be a little biased here. Paying off your debt can be a slow process but this tool is truly the cornerstone and building block for all of the other tools you decide to employ.
Savings & Investing
The more money you’ve freed from debt payments, the more money you have now to save and invest. When you’ve tackled your debts with vicious ferocity, this is where things start to get really fun as you design your life and watch your balances increase and returns roll-in. I have a 401k with my employer with no match and am currently in the debt-payoff phase. If they offered a match, I would put only the minimum needed to get the match because I refuse to leave free money on the table. But since I’m not that lucky, I decided to put 5% into my 401k (pre-tax) and I recently started contributing 3% to my Roth 401k (after-tax). Savings and investing goals can evolve over time as you achieve other goals or your financial situation changes. Asking myself the following questions have helped me figure out what my savings and investing plans are: 1) what’s your goal for this pile of money, 2) what’s my risk tolerance, and 3) when do I plan to access the money?
My personal example:
After I payoff my debt, I will to save about $25,000 for a down payment on a rental property (goal) where my contributions are earning at least 7% (risk tolerance) and I plan to access it within the next 2-3 years (when).
Based on this, I decided to put half of the money into my Roth 401k where I have a allocation of 80% in stocks and 20% in bonds. The other half of the money I choose to keep in an online savings account as a safeguard in case the market makes a downward turn.
This is synonymous with finding areas in your life to cut back on. This is a department where I could do better, but I have cut back on eating out at restaurants, I take my lunch to work more instead of buying food everyday, and I lowered my cell phone plan. While these tactics may seem small, the savings have added up. The more you can lower your expenses the more money you are make available to do the things that are in alignment with your FI goals. I recommend taking a look at your expenses over the last 1-2 months and identify areas where you can shave some waste. Your purpose for creating a money spread might be to save for a vacation or an emergency fund.
I have a side hustle as a tax preparer that generates about $15,000 annually. Creating more income for yourself without depending on your job to give you a raise can really be a powerful tool. My side hustle combined with lifestyle deflation are both critical components to my money spread which has given me more money to put towards the debt. Also, when you treat your side hustle like a business and not a hobby, the tax benefit here is writing off your expenses to offset your W-2 income. Create multiple side hustles and have fun! And if you’re treating you side hustle like a business, I hope you are taking advantage of the tax write-offs to offset your W-2 income.
What tools are in your own toolbox that you are using to create the life you want?