IFB18: Your Path to Financial Freedom Explained


financial freedom

Welcome to session 18 of the Investing for Beginners podcast. Today we are going to talk about financial independence and some ideas to help you achieve that.

  • Understanding what financial freedom is
  • Finding the motivation that inspires you to achieve your goal of financial freedom
  • Creating income that you can live off of without having to dip into the nest egg
  • Setting a budget first is paramount to any success
  • Following the course and setting up automation for everything financial
  • Utilizing the tools available to you for budgeting, automation, and staying on target

Andrew: Obviously the tagline is your path to financial freedom and I think it’s important to explain what that is and obviously our podcast is focused on beginners. It is a good starting point if you can understand exactly the kinds of things financial freedom can give you. Then number one you can have the motivation to want to continue and to put in the work of establishing that base when it comes to the knowledge of how to invest.

Establishing patience, the wisdom from other successful investors that we have seen. And taking that responsibility upon ourselves instead of letting some professional manage the money for us. So if you can understand what financial freedom is then, it can help push you along the path to becoming a better investor. Honing your skills and maybe even finding a passion for it like Dave and I have.

My idea of financial freedom and what’s accepted around, if you want to call it the financial community is this idea that you save enough money where you can live off of the income from your investments without having your investments shrink.

Dave and I like to talk about dividend stocks, well maybe I am speaking for Dave when I shouldn’t. But because it is a big piece of my goal of financial freedom.

Imagine you have, and I am just going to throw out easy numbers because they are easy, it’s not necessarily going to be a relevant example. Let’s say you have a million dollars as a nest egg and you have a million dollars of stocks, bonds, whatever it may be that is your pile of cash.

If you have financial freedom that would mean that the million dollars, whatever dividends, bonds interest that is coming through the income from your investments, whatever that can fund your current lifestyle.

I’ve talked about this before in a blog post, and I apologize, but I can’t remember which series or guide I mentioned this in. You can go to the investing for beginners website, and I have a getting started for beginners link up at the top, from there one of the posts should show you some of the real beginners basic stuff when it comes to finances and investing.

What I talk about is this thing called the 25X rule. You take whatever your income is now, or whatever income you’re comfortable with, and you multiply it by 25 times. Then that’s the number that your pile of cash needs to become to be able to do exactly what we are talking about with financial freedom and being able to live off of your investments without drawing from them.

The reason why it’s 25X is that it’s the inverse of 4%, basically this idea that finding 4% yield on average for someone who is later on in life and not taking that much risk. It depends on the market conditions obviously, but it is a nice round number, and it’s a good to goal to aspire too.

At a 25X you would only need 4% yield per year from dividends stocks, bonds, or whatever your investment is. And that is going to give you the expense number that you need, and that is going to support you and allow you to do whatever you please with your life.

You will not be chained down to a cubicle, and you will not have to listen to a boss. Just pursue whatever interests, vacations, hobbies, whatever it is you desire and not have to worry about money. That is what financial freedom is, and that’s one great way to set a goal of how you can achieve it.

I talk about the whole dividends stocks thing, and the reason why I like the dividend growth stocks is that, let’s say we have a portfolio and obviously not going to be able to find a winner with every stock. It is not going to be this perfect portfolio that always does this, but we strive for something that closely resembles this and obviously the more you can get above that 25X rule the better.

The less that your investments have to perform well to continue this kind of financial freedom. Or you could hit a stock or two that gives you this surplus of cash flow, and now suddenly you don’t have to save as much, and you can get below the 25X rule. Either way, when you have a dividend growing stock what you will have is this nest egg. Let’s say you have 20 stocks and we have that one million dollar example again.

Where you’re going to be getting a dividend payment, but when these dividend paying companies to grow their dividend and these are the companies that I am always out looking for. As you look at dividend fortresses that I talk about in my Eletter, now not only are you living off of your income, living off of your nest egg but that income is growing because these stocks are growing their dividends.

Not only are you keeping up with inflation, sometimes you can beat inflation. What is great about this is it can be ideally the last indefinitely. If you have the right stocks, amount of cash, you can keep this going and if you have excess then maybe you can reinvest and keep the nest egg growing.

The compounding interest of this is so substantial that when you have a nest egg that will never shrink and only grows over time. That is the type of peace of mind where you don’t have to worry about money because you know your expenses are going to be taken care of. This thing that you have is growing over time. It is a great goal and a great thing to picture, maybe a little abstract, if you can figure out the power of dividend growing stocks, having income from your portfolio, and having compounding interest if you can reinvest any additional money.

And just maintaining a portfolio a lot of money and having to not. The standard path of retirement is that you save a bunch of money, then at the end of it, you are drawing from it every single year. You might have a million dollars, but you have to spend $50,000 a year, and over time your portfolio is shrinking, and now it’s not that you have compound interest working against you, but you’re income your receiving becomes smaller and smaller. You’re taking out more and more and eventually you are going to run out.

Obviously, we can’t guarantee anything; nobody can guarantee how long they are going to live. I think you need to have a balance and enjoy life now as you can, and financial freedom is a nice thing to look at as a goal. So you want to have this balance and enjoy your life now, but it’s always also nice to have this goal and this idea, and something to strive for.

That really, as I said before can inspire you to better yourself and pursue superior results in the market. Pursue this skillset that can not only make you a lot of money in the market but can also paint this picture and give you something to strive for. You can go online, and there are communities like FIRE, they stand for financial independence, retire early. They like to focus on hitting that financial freedom point sooner.

I don’t necessarily care too much about retiring at 50 versus 65; I just look at personally this kind of financial freedom when it comes it comes, but I am going to strive for it as soon as I can. Obviously, it is a personal decision for everybody; everybody is going to have their numbers.

If you can lock down on your expenses, then that can make that 25X goal a lot smaller than if you were to live some extravagant lifestyle. It is a personal decision for everybody and maybe Dave you can talk about some basic strategies you can take to pursue financial freedom in the best way. But again it is going to be personal, and the numbers are going to be different for everybody but if we can paint this picture of financial freedom and figure out what means that for you.


Dave: Ok, that sounds great, and yes I do like to talk about dividends as much as you do. I think they are fantastic investment vehicle and a fantastic way to build your wealth. We’ve talked many times about compounding, and Albert Einstein, very smart guy considered it the eighth wonder of the world. I just wish they taught the importance of compounding in school, I wish I had learned it as a younger man, it would have greatly impacted my life up until this point. I learned it much later in life, which is unfortunate but I am still trying to capture some of the benefits and the greatness of how awesome that interest can be.

And I agree with what you were saying about the investing for early retirement; I am not so much interested in that. I think about this a little bit like when you work out. When people are exercising, and they have a goal of losing weight, and you set a goal, and you decide you want to lose 20, 30 or 50 pounds, whatever that may be. I had a trainer at the Y quite a few years ago, I was killing myself I was living off of rice and chicken, and that was all I was eating. Eating once a day and working out twice a day, running 10 miles a day and I was in great shape and lost a ton of weight, but after about six months I was burnt out, completely sick of it.

I was complaining to my trainer about it, and he said to take a day and eat some pizza, it’s not going to kill you. It’s ok to have a donut once in a while; it’s not going to hurt you. What hurts you is if you eat them every day, but once in a while will not hurt you. I guess the same applies to your saving for retirement, is I have a goal and a set discipline of how much I am going to set aside each month, but I am not going to kill myself to get to that goal. And be miserable for 30 to 40 years, I kind of fall into what Andrew was talking about and I want to enjoy my life while I can.

I have a number I am looking for, when you are looking at trying to save money it comes down to setting a budget, that is the first thing that you have to do when you are starting this. You have to sit down and figure out how much can I afford, what can I afford to set aside to start saving so I can start investing.

Everybody is going to be different, even people that make a lot of money, working in the bank I have seen people that are making six figures who are broke all the time. They are in debt up to their eyeballs, and they can’t see a way out. They have to borrow money to send their kids to school, and you would think to make that much money between the two of them they would be sitting pretty. Not necessarily, it is critical for everyone to set a budget whether you are making $20,000 a year or $200,000 a year it is critical to start with that first step.

You have to sit down and look at how much you make, and these are the bills that I have and what do I have leftover? And what am I going to do with that money? One of the things that I try to do in my budgeting is I try to take that money out as one of my first bills. Obviously, I have to pay for my mortgage, insurance, and other necessities but I make sure that paying myself first is one of my priorities. That is one of the things that I do to try to help my financial independence.

My goal is to try to live off of my retirement, and I don’t mean by having to live off of the dividends like Andrew was saying. I want to live off the income that my investing has created for me so that I can enjoy what I want to do.

I don’t have any grand goals of buying a yacht and sail the world. I would like to go to every baseball stadium in the US, but I am the modest guy and have modest things I want to do in retirement before I kick the bucket.

I think the first thing again to reiterate is to sit down and set a budget. The best way to that with pen and paper, if you’re like Andrew and an Excel spreadsheet nut then do that. But it takes a little bit of discipline to do it, and I think that is where people struggle. It is just like everything else, you’ve got to have a plan and then work the plan.

There is not set right way to do a budget; there is a million different tools and apps you can use. You can use pen and paper, Excel spreadsheets, apps, whatever works for you. I went through a phase myself where I found about 75 different iphone apps that you can use for budgeting. Your bank will also have different options for you as well; there are lots of great tools to help with setting and keeping to your budget. I think that is the first step and most important thing you need to do start yourself down the path towards financial freedom.

Andrew: I totally agree, and you covered it perfectly. I don’t have too much to add but I will just say that I like to do lately is to automate almost everything. And when it comes to bills I have that spreadsheet like you said, as I have spreadsheets for a lot of things. I will shout out to Matt Becker, who I interviewed years ago, he made a great point in that you want to automate things as best as you can. And that frees up your time to focus on other things once you have that setup. You can do this with money your saving for retirement for investing as well. You can automatically set up a transfer to go into the account, and you’re paying yourself first. And you won’t get to that point where you are running out of money and don’t have anything left for stocks.

I also do that, and I do it with the eLetter, you are starting to see a theme here. I like to do what I talk about, and it works well for me, and I like it. I think it’s a personal thing and whatever you want to do. It is very important to have a budget, some budget where you understand where your expenses are going and that’s really how you’re going to make a difference.

A book that I enjoyed was “the Millionaire Next Door, ” and it talked about how Dave was saying. A lot of people will make these six-figure incomes, but they don’t figure out exactly how finances work. There are people that make far less than these six figure doctors, lawyers, all the people you see driving the BMWs, Audis, and your stereotypical mansions.

And in all actuality, the people that are making half of that but are financially savvy ended up being millionaires. He did a study and him interviewed a lot of people, it was quite interesting. It comes down to what we are talking about here. First, make sure you set a budget and make sure you have positive cash flow every week. And then from there if you want to be a little bit more aggressive than being conservative then listen to our podcast.

If you want to try to get even better results, then pick up that skillset to learn about this crazy thing called value investing. To get that nice synergy of value investing and dividend growing stocks. Investing in stocks that have a margin of safety that are lower risk. That they have that margin of safety with the emphasis on safety.

And obviously everything we talked about on previous episodes where you want to make sure you are dollar-cost averaging, putting money into the market every single month. That way you are not constrained to trying to jump into and out of the market as it goes up and down.

Your just like that tortoise, just plodding along. It doesn’t have to be much, in the eLetter portfolio we only do $150 a month. Sure enough, over time, we can see it growing, and when you are starting, and you see this compound interest curve if there are any math geeks out there. You will notice that it starts out real slow, then it starts to creep up and then it shoots up there at the end.

We can see it, I have been running the eLetter since 2014 and if you were to graph out how the money is accumulating compared to how it would accumulate with not interest sitting under a pillow. You can see it start to diverge already in such a short amount of time. Just understand those basic things, get the budget down, do dollar-cost averaging which is honestly the next step, and that’s why we talk about your path to financial freedom.

Because just like Dave said there are all these different tools and you can make it is as complicated or simple as you want. You can go to the extreme; you can check out the communities that embrace frugality, whatever makes sense to you. That is your first step, that’s number one. Then the second step is making sure you are doing the dollar-cost averaging and setting aside enough money and putting it into the stock market over time. Then that third final step is pretty much everything else that we cover on the podcast. And that’s figuring out how much of a responsibility and how much of active management you want to maintain your portfolio.

Understanding what the different strategies are, which ones you can choose to use to pick different stocks as we have discussed on previous episodes. And from there figuring out what’s the best strategy for us, as people who want lower risk, higher returns, and those who can understand the logic of investing.

Understanding that the market is filled with all kinds of very emotional people and who will overprice, and be overly optimistic during a bull market and they will be underpriced and be very pessimistic during a bear market. And trying to take these basic concepts and buy them as we pick stocks. That takes you on this journey of trying to find financial freedom.

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