Almost daily I’ll strike up a conversation about money with a random stranger – whether in an elevator, at a bar, or at the gym.
Whenever I get this rare opportunity to do market research, I always prefer to listen more than I speak.
For one, people generally seem to be more interested in hearing themself speak than they are to listen (go figure!)
For another, I honestly love learning more about how most people think about money and wealth.
I have come to realize that I am not a completely “normal” person by all today’s standards. So it is important that I stay in tune with normal whenever possible, to make sure that what I write here stays relevant.
A common theme in the world
There is a common theme in the world about the formula for wealth.
Be borne into it, or get “lucky” and have an amazing product idea that makes millions.
And since the people I talk to claim to be “just normal” people, they say that is out of reach. They will never be wealthy.
And so they get back into their leased vehicles, drive home to their McMansion that they can barely make the minimum payments for, and go relax for several hours in front of the TV.
What is wrong with this picture!?
Once you make up your mind that you can’t achieve wealth, a flip switches in your brain.
All of a sudden, it makes no more sense to even make the effort to ATTEMPT to build your wealth.
In fact, even saving for retirement begins to seem like a futile effort, since in your mind you are not pre-destined to achieve wealth.
And in that initial mindset that you create for yourself, you are sealing your own fate. You are ensuring that you never achieve that thing that you want most.
But the good news is, it’s totally reversible, and super fun to do so.
The formula for Financial Independence
Once you have saved up 25 times your annual living expenses in your portfolio, you are financially free.
But as simple as that is, it can be incredibly hard if your mindset around money isn’t right.
Money Mindset for Success
Before you can ever hope to save up 25 times your annual expenses, you need to start looking at money differently. Or more specifically, you need to view your money habits differently.
Money is a tool that you can buy stuff with. Pretty obvious, right?
But what’s not obvious is that to use money in the best way possible, you should always be purchasing the most important thing that you are able to buy.
For example, if you are dying of thirst and you are down to your last dollar, should you buy the bottle of water, or get that fun app on your iPhone your friends told you about (before you started the whole dying thing).
Of course you would buy the bottle of water!
What is your bottle of water?
What is the most important thing in your life?
Well that usually depends on where you are on Maslow’s Hierarchy of needs.
If you are struggling to find your next meal, your most important thing would be a loaf of bread.
If you are still living in your parent’s basement, maybe it’s an apartment.
But if you are like most adults, you have a home, a stocked pantry, and an overall safe and stable existence.
So what is our “bottle of water?”
To answer that, just look at where we spend our money.
Is it on a new flat screen? A new car?
For me, unfortunately it has seemed to be a steady flow of new LEGO sets to build with my kids…
But aside from that, the most important purchase for me at all times is my FREEDOM.
Freedom from the reliance on a paycheck.
Freedom from the 11 hours per day I spend away from my family at my job.
Freedom to choose the next steps, and the steps after that.
And oh boy it comes at a steep price tag. 25x expenses.
So if you spend about $60,000 per year, you’ll need to save up the princely sum of $1.5 million to be financially free.
Which camp are you in?
Once you let that reality sink in, you will have one of two reactions.
If you are in the Financial Independence camp, you will leap at joy at having a target to shoot for. Even though it is just a guideline, it is the best threshold we currently have to claim a true “freedom number,” given you have some flexibility along the way.
If this is you, then Welcome! You are in great company! You’ll also quickly realize that in order to speed up your path to this number, you have only a few levers you can really pull:
- Earn more money
- Spend less money
- Invest money better
And while we all want to think we can be the next Warren Buffet, the sad truth is that it’s not likely. Trust me, I’ve tried.
So we can pretty much rule out the investing one and stick with index investing for the long term. Earn more, spend less, index invest the rest. Pretty simple.
Which brings us to the second camp…
For lack of a better term, let’s call the second camp, “The Others.” (Any lost fans still around?)
These are the people who hear that freedom number and immediately say, “well that’s impossible,” and move on to filling up their credit card balances because they may as well enjoy their life of debt along the process.
They set their goals week by week. Make the payments, maybe save a few hundred bucks into the 401k, and spend the rest on whatever trinkets will make you happy in the moment.
Never mind the fact that you will spend the rest of your life working in the cubicle just to afford the things you buy, and that job will actually take away any time you would have to truly enjoy those items.
It’s an ugly catch 22. I don’t want to live in the other camp.
Can you move from one camp to the other?
Absolutely. It is never to late to pack up your bags and move camps. All it takes is small, consistent efforts over time to pull the levers to financial independence.
Slowly chip away at your needless expenses until you only buy the things that are more valuable to you than your future freedom.
Once your expenses are brought under management, start looking for innovative ways to increase your earnings potential. There has never been a more exciting time to start a little side hustle like blogging, YouTubing, selling crafts on etsy.
Whatever you passion is, there is an ethical way to monetize it (…well, MOST passions have an ethical way!).
Pack your bags, it’s time to move
To me it’s a clear decision. Aside from the basic needs, nothing matters more to me than the freedom to be with my wife and kids and to give them an amazing life of love. And if that is my ultimate purchase, my spending habits today should reflect that goal.
That’s why I signed up for Personal Capital and put all my accounts under the sun into it.
After a few years of consistent effort, I finally broke through the $1 million net worth at age 30, and am right on track to be fully free in just a few short years.
If I can do it, I know you can too!
I’m curious, what splurge purchases (like my kid’s LEGO’s) do you still put ahead of your financial freedom? No shame at all, I love hearing some of the fun passions we all have! Leave a comment below!