Financial Freedom

1. Money is freedom: Redefine your relationship with money

Money is no longer some abstract confusing thing that you want, it's something you have and know how to get.

Shift your mindset. Money isn't just about accumulating wealth; it's about buying freedom and options in life. By changing how you think about money, you can make better financial decisions and accelerate your journey to financial independence.

Adopt an enterprise mindset. Look for opportunities to make and save money in all aspects of your life. This involves:

• Maximizing your income through your job and side hustles
• Optimizing your expenses and living below your means
• Investing aggressively to grow your wealth
• Continuously learning and acquiring valuable skills

By viewing money as a tool for freedom rather than an end goal, you'll be motivated to make smarter financial choices and prioritize long-term wealth-building over short-term gratification.

2. Time is more valuable than money: Retire early and live life on your terms

The average person has approximately 25,000 days to live in their adult life.

Rethink retirement. Traditional retirement advice assumes you'll work until your 60s or 70s, but this approach wastes your most valuable years. By focusing on financial independence, you can "retire" much earlier and have the freedom to pursue your passions.

Maximize your savings rate. The key to early retirement is saving a high percentage of your income. Aim to save:

• 25% of income to retire in 32 years
• 50% of income to retire in 17 years
• 75% of income to retire in 7 years

By increasing your savings rate and investing wisely, you can dramatically reduce the time it takes to reach financial independence. This allows you to reclaim decades of your life that would otherwise be spent working in a traditional career path.

3. Calculate your "number" for financial freedom

Your number is how much money you need to reach your financial freedom.

Determine your annual expenses. Start by calculating how much you spend each year on necessities and desired lifestyle choices. This forms the basis for determining how much you need invested to generate enough passive income to cover your expenses.

Apply the 4% rule. Multiply your annual expenses by 25 to get your "number" - the amount you need invested to safely withdraw 4% each year to cover your expenses indefinitely. For example:

• $40,000 annual expenses x 25 = $1,000,000 "number"
• $60,000 annual expenses x 25 = $1,500,000 "number"
• $100,000 annual expenses x 25 = $2,500,000 "number"

Remember that your number may change over time as your lifestyle and goals evolve. Regularly reassess your expenses and adjust your target accordingly.

4. Optimize your full-time job as a launchpad to freedom

Think of your full-time job first as your foundation and then as a launching pad for making more money.

Maximize your job's benefits. Take full advantage of employer-provided perks:

• 401(k) matching contributions
• Health Savings Accounts (HSAs)
• Professional development opportunities
• Remote work options

Negotiate for higher pay. Research your market value and make a compelling case for raises and promotions. Even small increases in salary can significantly impact your long-term wealth when invested wisely.

Build valuable skills and networks. Use your job to acquire in-demand skills and build professional relationships. These assets will serve you well in future career moves and side hustles, accelerating your path to financial independence.

5. Side hustles accelerate wealth-building and provide flexibility

Side hustling is great because you can make money—sometimes a lot of money—doing pretty much anything.

Start with your skills and passions. Identify side hustle opportunities that align with your existing abilities and interests. This increases your chances of success and enjoyment.

Focus on scalable and passive income streams. Prioritize side hustles that have the potential to grow or generate income with minimal ongoing time investment. Examples include:

• Creating and selling online courses
• Building niche websites or blogs
• Developing software or mobile apps
• Real estate investing

Invest side hustle income. Avoid lifestyle inflation by investing the majority of your side hustle earnings. This accelerates your wealth-building and brings you closer to financial independence more quickly.

6. Maximize tax-advantaged accounts for long-term growth

Investment fees can have an enormous impact on how quickly your money grows, how much money you'll have within a given time frame, and how many years it will take you to reach financial independence.

Prioritize tax-advantaged accounts. Contribute to accounts in this order to minimize taxes and maximize growth:

1. 401(k) or 403(b) up to employer match
2. Health Savings Account (HSA) if eligible
3. Traditional or Roth IRA
4. Max out 401(k) or 403(b)
5. SEP IRA or Solo 401(k) for self-employed income

Understand account types. Know the differences between pre-tax (traditional) and post-tax (Roth) accounts, and choose based on your current and expected future tax situations.

Minimize fees. Select low-cost investment options within your accounts, as even small differences in fees can significantly impact long-term growth. Aim for expense ratios below 0.1% for index funds.

7. Invest simply and efficiently in low-cost index funds

Research shows that, on average, 90 percent of active investing yields a disappointing performance compared to the stock market as a whole over a fifteen-year period.

Embrace passive investing. Instead of trying to pick individual stocks or time the market, invest in low-cost index funds that track the entire stock market. This approach provides broad diversification and historically outperforms most active investment strategies.

Keep it simple. Build a portfolio with just a few core funds:

• Total US stock market index fund (e.g., VTSAX)
• International stock market index fund (optional, 5-10% of portfolio)
• Total bond market index fund (allocation based on risk tolerance)

Maintain your asset allocation. Regularly rebalance your portfolio to maintain your target allocation between stocks and bonds. This helps manage risk and ensures you're buying low and selling high over time.

Last updated: November 15, 2024