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Pro Tips for Reaching Early Financial Independence

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Saving Now Saves Your Future Self Twice

You’ve heard before that you have to set money aside — money for emergencies, for buying a car or house, for a kid’s college education, and for retirement. This is hardly news. What you may not have heard before is that setting that money aside helps your future self twice! Below I explain how, and give some pro tips on how to free up some money to actually do this.

First Benefit of Saving Money

The first benefit is the obvious one. Big goals like a college education, retirement, or down-payment on a house aren’t something you can cover out of your regular income (if you can do this, please teach me how!). No, when we’re talking about things that cost tens or hundreds of thousands of dollars or even millions of dollars like financial independence (a.k.a. retirement), we need to save up for them. That’s why you (and I) need to set aside money regularly from our ongoing income.

Second Benefit of Saving Money

The less obvious benefit (less obvious at least until I tell you about it ????) is because we’re all human so when we have more money, we tend to spend more money. Then, we get used to spending at that new, higher level. This is why if you want to reach financially independence, especially if you want to get there before you get gray and wrinkled, you have to guard against expanding your standard of living as your income increases over time.

By saving money, you remove money from your wallet or checking account, so you can’t spend it. This means your future self will need less to retire on.

When I realized this, it spurred me to maximize how much I set aside in my 401(k) and Health Savings Account (HSA). What’s even better is that these are both tax-advantaged accounts, so the federal and state governments are actually helping me with it ????.

Quote - paid off a loan?  Keep making the same payment into your savings account.

How to Free Up Money for Savings

In his highly recommended book, “Profit First,” Mike Michalowicz offers a compelling metaphor for squeezing more profit out of any business. He points out that most of us, if we have a brand-new tube of toothpaste, will put a large dab of paste on our brush each time. However, if we’re down to the last of the toothpaste and can’t quickly get a new tube, we’ll use far less paste and make it last for days. This isn’t limited to your business — the same applies equally well to your personal budget.

With this in mind, here are some pro tips on setting money aside.

  • Impose on yourself a 3% cut on discretionary expenses (you can’t cut your rent or mortgage, but almost all of us can cut down on groceries, clothes, and eating out); then, after you’ve gotten used to this slight austerity for three months, rinse and repeat each quarter-year; by the end of a full year you will have reduced your discretionary expenses by 11%. If you’re able to keep doing it for another three years, you will have reduced it by over 38%! Say your discretionary expenses start out at $15,000/year, at the more achievable 11% reduction, you’ll have freed up $1650 for savings. Assuming a plausible 7% return on investment, 30 years later you’ll have accumulated over $167,000!
  • Next tip is advice I’ve given my kids, which has helped them set aside far more than the overwhelming majority of their Millennial peers. Each time you get a raise or bonus, immediately set aside half for savings; let yourself enjoy the other half so you don’t feel deprived and can keep doing it. This makes sure you’re not expanding your spending at the full rate your income increases. Over time, you will find that your savings rate builds up impressively. Let’s say you get an average annual raise of 5% and use half of it to increase your savings each year. Thirty years later, your savings will be more than double your initial annual income, and more than 50% of your ending annual income!
  • Once you pay off a loan, whether a car loan, a credit card balance, or a student loan, keep making the same payments into your savings or investment account. Since you weren’t spending that money anyway, saving it will be painless. If you have a five-year auto loan of $20,000 at 3% interest, your payments would be $359. Once you pay off the loan, investing the same $359/month for another five years with the above-mentioned 7% annual return will accumulate over $25,700. Keep at it for 30 years, and you’ll have nearly $438,000 set aside!

Between these three tips, you could easily turn yourself into a millionaire without ever needing to get into the ranks of “the 1%-ers” income-wise!

As a caveat, beyond the obvious fact that the above amounts are a hypothetical example, they need to be taken with another grain of salt. The reason is inflation. According to the Bureau of Labor Statistics (BLS) inflation calculator, over the past 100 years, annual inflation has averaged about 2.78%. This means that if inflation continues at a similar average rate, a million dollars 30 years from now will be worth about $439,300 in today’s dollars. That’s a lot less, but still not too shabby for something you can achieve without taking extreme measures.

How Setting Money Aside Benefits Your Present Self Too

Going beyond helping your future self, you’ll also be helping your present self by setting money aside. One of the therapists I coached recently experienced a slowdown in client traffic. While she’s perfectly aware rationally that this is just part of the normal ebb and flow of business, the loss of income made her very anxious.

I asked her to imagine how her emotions would be affected if she had $100,000 in an emergency fund. As you can imagine, she would have been far less stressed. This is why I coached her to increase how much she sets aside as soon as client traffic recovers. With this recent experience, she’s highly motivated to follow this bit of coaching ????.

What are some of your strategies for keeping your spending below your income and investing the rest for the future?

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

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