One common problem people run into during their path to Financial Independence is a lack of direction. Some don’t know where to start, others feel as if they’ve reached a plateau and are looking for a breakthrough.
When I was a teenager, my brother often talked about three steps for financial success, so when these feelings show up, this is how I regain focus an get back on the right track. These steps will work for everyone. They are broad and extremely actionable.
1 – Live Below Your Means
2 – Save and Invest the Difference
3 – Improve on Steps 1 and 2
Do you think these steps are too simple to be beneficial to you? Keep reading!
Step #1 – Live Below Your Means
Low living expenses is a staple for most people in the FI community. If you’re just starting to optimize your spending, focusing on your housing and groceries can go a long ways. If you don’t use a budget, it would be very beneficial in helping you better understand where your money is going. Many people fail to realize how much money they spend going out to eat or on expensive entertainment. Utilizing a zero based budget has been fantastic for my family in lowering our cost of living.
If you feel like you’ve hit a wall decreasing your expenses, there’s good news! Cutting your expenses isn’t the only way to live below your means. You can also work on a side hustle or focus on your career in order to increase your income. Not only does this give you momentum towards your financial goals, but it can also be very rewarding. If you’re unsure of what side hustle is for you, there are plenty of resources for finding a side hustle that suits your lifestyle and are easy to start.
Step #2 – Save and Invest the Difference
Once you’ve made some traction and created a gap between your income and living expenses, it’s time to start investing. I prefer to invest in Vanguard index and mutual funds, but there is a plethora of options for investing. There are so many options that it may feel overwhelming. Just keep in mind that what’s truly important is that you ARE investing. I don’t want to give precise investing advice as I am not a financial advisor, but it should be noted that if your employer offers a tax advantage retirement plan, you should take full advantage of any match available to you.
That’s it right? Save a little, invest a little, and your dreams will come true. Not quite, but you’re almost there!
Step #3 – Improve on Steps 1 and 2
This is where the FI community shines. We don’t settle for investing the money that’s left at the end of the month. We invest first, pay our bills, and then invest even more! When we see that our current savings rate isn’t going to allow us retire early, we work to improve steps 1 and 2. We lower our expenses, raise our income, and invest even more.
This is where I start getting pumped up for FIRE. This is where it gets exciting! Why?
Your FI number, or how much money you need invested in order to retire, is based on your expected living expenses. When you really start working to improve step 1, you’ll find yourself lowering your living expenses drastically. You’ll look to lower your housing expense, your grocery bill, pay off your car, you’ll cut the cord, and pay off all of your consumer debt. Now that’s a big deal.
Common calculations say that for every $1,000 of annual living expenses you have, you’ll need $25,000 invested in order to retire. This is called the 4% rule. What if you could cut your living expenses by $1,000 per MONTH? That’s $12,000 of annual expenses, or $300,000 less that you’ll need in order to retire. If you haven’t started budgeting or taking a hard look at your expenses, it should be a breeze to cut $1,000 from your monthly budget.
Even More Reason to Cut Your Expenses!
Now that you’ve cut your expenses, you’re fighting with a double-edged sword. Every dollar that you cut from your expenditures is an extra dollar you can invest. Gaining some momentum? Start working on your side hustle and increase your income. Keep your expenses low and invest all of your additional income. Soon your investments will grow and every dollar will be working harder for you than you are working at your day job.
If you find yourself looking for direction in your journey for FI or you feel like you’re in a rut, I encourage you to take a look at these three steps. Remember that reaching FI is like climbing a mountain. You reach your goal by putting one foot in front of the other. If you simply live below your means, save and invest the difference, and work to improve those steps, you will make it to the top of the mountain before you know it.
PS: I’ve started an Instagram for the site. If you’re interested in receiving some additional content and motivation, look me up at @FourWallsofFire