So, you’ve landed on this blog because you’re trying to find out if it’s possible for the average person to ever achieve financial autonomy and do whatever they want with their money. Well, I have some good news and some bad news for you. First, let’s start with the bad:
Americans have a lot of debt. And I mean A LOT of debt. Check out this data from debt.org:
- Under 35: $67,400
- 35–44: $133,100
- 45–54: $134,600
- 55–64: $108,300
- 65–74: $66,000
- 75 and up: $34,500
Now, at the same time that these people have all of this debt, Synchrony Bank says that they also don’t really have much of a retirement savings built up at all:
- Americans in their 20s: $16,000
- Americans in their 30s: $45,000
- Americans in their 40s: $63,000
- Americans in their 50s: $117,000
- Americans in their 60s: $172,000
So, hypothetically speaking, the “average” 45-year-old has $63,000 saved for retirement and they’ have more than twice that racked up in debt. So, can the average person really become financially autonomous?
No. The average person cannot become free and completely autonomous. But, can an average person change their mindset completely and break out of this endless cycle of debt that they’re in and try to become financially autonomous?
So, how do you do it? Well, it’s really a fairly simple process to follow, but don’t let that trick you into thinking that the actual process of getting there will be simple…because it won’t. It’s going to be hard. Very hard. But you have to be motivated and focused on your goal. If you’re not, you’re going to fail. But if you can stay focused and dedicated then I have great news – you’re poised for success!
Step 1 – Dream Big
DREAM BIG! In the words of Michael Scott, “you have no idea how high I can fly.” If you’re an Office fan, you’ll get that quote.
If you’re not an Office fan, just ignore it…lol.
This is by far the most important step in my opinion. You need to decide why you’re even doing this. What is causing you to want to financially overhaul your life? Is it for your family? Are you wanting to retire early? Are you just sick of constantly being stressed about money?
Regardless of your answer, it is so important for you to determine your ‘why’ when you get started on this journey of financial independence. You need to really have a crystal-clear goal so that you can take your path there and not stray in any way. I urge you to really take some time to determine your ‘why’. When the going gets tough, this is going to be what keeps you on track.
Just as with losing weight – it’s easy to fall off the wagon if you don’t have a great ‘why’. I tried probably 100+ times to lose weight but I never was able to until one day it dawned on myself that if I didn’t fix my weight, I was going to get to a point to where I wouldn’t be able to play with my kids.
I was still in college at this point and didn’t have kids, but the fear of being a father that couldn’t play with his kids devastated me, and that’s what motivated me to lose 80+ pounds in a 4 month time period. That’s what got me through it. And guess what – if you don’t have a ‘why’ that’s going to get you through these tough financial times, you won’t stick with it. So take some time and find the real reason why.
Once you have your ‘why’ decided, get even more specific.
For instance, it’s great that you want to provide a better life for your family, but what does that mean to you? Maybe you want to pay for your kids’ college, move into a bigger house, go from two jobs to one so that you can spend more time with them, stay home and home school them, anything! Maybe you just want to be able to afford nicer vacations or retire early to be around them more.
You need to figure out what’s important to you.
Plan out a priority level for things that you want to accomplish financially. Maybe it would look something along the lines of:
- Get out of debt
- Pay for Children’s college
- Retire Early
It’s important to have a pecking order so you know what to attack with any extra income before you even get in that situation. If you don’t already have a plan outlined, you’re much more likely to just blow that saved income instead of utilizing it in a more effective way.
Step 2 – You have to spend less than you earn
This sounds so incredibly simple but it’s not. If it was, then the average 45-year-old person wouldn’t have more than twice as much debt as they had saved for retirement, would they?
To make sure that you’re spending less than you’re earning you need to track all of your expenses and then apply them to a budget. There are apps that you can use if that’s your preference, but if you really learn by digging into the numbers like I do and creating your own budget, well…
I created a spreadsheet that was very simple that allowed me to track my income and my spending and allowed for me to plan for the future. Doing this not only brought awareness to my bad spending habits but also showed me where I was doing really well! It was an eye opening experience for me and really helped propel myself down my path for financial autonomy.
I know that living on a budget might not seem like fun but it can be if you make it a point to be! You can still have fun and be on budget – you just need to be willing to get creative!
Once you have fixed your spending habits and you’re consistently spending less than you’re earning, you’re off on the right path. That’s a great step, but that doesn’t mean that you can just stop now. You need to continue to monitor your spending and make sure that you’re consistently maintaining this buffer.
Step 3 – Maximize the Tools Available to You
Ok, now you have a rock-solid plan and it’s time to take some action! In the example that I listed above; your three main goals are:
- Get out of debt
- Pay for Children’s college
- Retire Early
To get out of debt, you can either do the snowball or the avalanche method. Personally, I am a huge fan of the debt avalanche method because you’re paying the highest interest first. A potential thing for you to consider is looking at debt consolidation loans if you have a lot of debt. Before you do so, find out what your interest rates are on all of your debts.
If your average interest rate on your debt is 5% and your debt consolidation offers is 7%, you obviously shouldn’t consolidate. If you only have credit card interest and your rates are 20%+, then debt consolidation likely will be a great option for you!
Getting out of debt really boils down to just spending less than you’re earning. If you can do this and use the extra income to pay off your debt, you’re going to be fine. Don’t be afraid to be extreme and cut things that might be ‘wants’ but not ‘needs’ in your life. If you can do that, you’re going to be alright.
Ok, now you want to pay for your kids’ school. Take advantage of any sort of plan that might be available to you, such as a 529 or some sort of state funded plan. One of my favorite websites for this is Saving for College, as they breakdown everything available for you depending on the state that you live in.
A lot of these programs are tax advantaged to help you pay for school.
I am a huge fan of a 529, personally. Money is taxed on the way in but grows tax free and can be taken out for any eligible purchase, which is essentially furthering education or trade schools. The beauty is that the account holder can be changed at any time, so you can put it in your name to start saving before your child is even born, then change to your child’s name, and then if you don’t use it all you can change it to your grandchildren’s name. It really is an amazing tool.
On to retiring early!
This is really the meat and bones of investing and the Financial Autonomy world. Always try to max out anywhere that you have tax advantages. That starts with a 401K if you have any sort of company match.
If you put 3% in and your company matches 3%, that’s a 100% match right off the bat. You should choose to match that 401K OVER Paying for debt. NO debt is 100% interest so always match that 401K to whatever your company will give you.
Next, max out an IRA, either Roth or Traditional. I prefer a Roth, but it just depends on your situation! The max for an individual in 2020 is $6000, or $115.38/week.
I think that maxing out an IRA is a HUGE step towards retiring early due to the amazing tax advantages and I highly recommend you look into it more.
Finally, if you have an HSA, try to max that out as well! The limit for a family in 2020 is $7100. That money goes in tax free and you can use for eligible expenses and guess what, if you don’t use it, you can just cash it out when you’re 65 without any penalties!
It’s essentially a health emergency fund but turns into a retirement account if you don’t end up using it. That’s a pretty good investing tool if you ask me!
There are many other tools that you should use as well, such as a high yield savings account for your emergency fund and potentially a brokerage account if you want to go above and beyond these tools, but Andy’s priority ranking goes:
- Max out Company match on 401K
- Build Emergency Fund to your comfort level (mine is 2 months of expenses)
- Max out IRA
- Max out HSA
- Toss up between two things depending on your goals:
- Plan for a quickly approaching purchase like a new car or home by putting money in a high yield savings account, or
- Put money in a brokerage account if no major purchases in the next 2-3 years
At the end of the day, if you’re at this step in the process, you’re doing a good job. All of these things mean that you’re spending less than you’re earning and that you’re actively thinking about investing for your future in one way or the other, so congrats – you’ve made it to a very difficult point that many don’t make it to!
Step 4 – Plan-Do-Check-Adjust
Step 4 is to consistently evaluate, post-audit yourself and your performance and to adjust to make sure that you’re continuing to work towards goals that are properly aligned with your life. For instance, maybe you’ve been putting a lot of money into a high-yield savings account because you’ve been planning to buy a new house in the near future, but you have now decided that you’re perfectly happy with your current home.
Well, stop banking all that money into a savings account and invest it into the market! You’re going to realize much better returns over the long-term and you don’t have any concerns about losing value in the immediate future because you’re not focused on short-term goals anymore.
If you’re not meeting your budget, then you will only know if you’re checking and adjusting this. You essentially have two options – earn more or spend less. But guess what, if you’re not post-auditing yourself then you’re never going to know that you’re failing at spending less than you’re making, therefore just prolonging the amount of time it will take you until you reach financial autonomy.
At the end of the day, being financial autonomous is available to anyone that’s willing to work for it. We all have different backgrounds, but we all have the ability to get a job and spend less than we make. That truly is the starting point towards any sort of financial independence journey.
Once you’re able to accomplish that, then you can move onto investing, paying down extra debt and focusing more on the future, but your immediate goal needs to be to get your budget balanced.
I hope that this article is making you very motivated, because it should! You are the only thing keeping yourself from being able to get to a point where money is no longer the thing driving your decision making. If you are willing to stay dedicated to the process, then I guarantee that you’re going to reach financial autonomy before you know it. Start small and focus on quick wins and you’ll be there before you know it – good luck!