How to become financially independent in six steps… wash, rinse, repeat

Becoming financially independent is a lot like washing your hair. You become conscious that you need to do something (“my hair is dirty”), reach for a proven solution (shampoo), apply that solution to your personal situation (lather up your hair with shampoo), evaluate if the solution is working (rinse), and do it again if a successful outcome is achieved (repeat). People learn to wash their hair when they are children and have done it so many times that they don’t give it much thought. Having clean hair is a part of a person’s lifestyle, it is something they value, and they routinely use proven solutions to achieve the desired result. The same is true for people who become or are on their way to becoming financially independent.

Mrs. R. and I have developed a lifestyle that has led to us becoming financially independent but we didn’t initially set out with that goal in mind. Initially we were focused on paying down debt and saving for a down payment on a house. Then when we had our first child our goals changed to include Mrs. R becoming a stay at home mom. Several years later, after the birth of our second child, our goals changed again to include earning more money. More money coming into our lives led to other goals like paying off the house, maxing out tax deferred retirement savings, increasing our other non-tax deferred investing, taking more vacations, and giving back to our local community. We have been married for almost twenty years and like all people a lot of stuff happened during that time which can make it challenging to share our experiences with other people in order to help them with their specific situation. So we have identified six steps that we have come to realize we have used and continue to use to help guide our financial life. Admittedly, “steps” is probably the wrong term because they are more like a framework or broad categories that contain within them more specific actionable solutions. Over time we will explore these areas on this site and discuss the details and our experiences. First I think it would be good to layout the six step framework for our readers.

Step 1: Wake up!

Think the Matrix, Alice in Wonderland, or the Buddhist concept of being present. Life happens fast and too often we are led by desires and emotions that are influenced by marketing messages, employer pressures, and the people around us. It is necessary to continuously wake up and be fully conscious about how we are using our money, not only when we have financial problems. “Wake up!” is something you learn to say to yourself.

Step 2: Live within your means

Living within your means does not just mean spending less than what you make, although that is probably the first and most important action to learn to do habitually. More importantly, this step is the shift in your mindset that needs to immediately follow waking up. You move out of an emotion driven state into a fully conscious state that is driven by logical thought. This is when you start asking yourself important questions about the financial decisions you are making. Does it fit into my budget? Does this match my values? How will this impact my goals? If you can’t answer these things then my question to you is do you have a budget, have you clarified your values and can articulate them, and what are your short-term and/or long-term financial goals? Simply having a budget and paying down your debts without addressing the bigger issues of values and goals will lead to a financial situation that looks a lot like yo-yo dieting. Rather than living out your values you live a cycle of debt accumulation, followed by extreme budgeting in order to pay off debt, and then relapsing into excessive spending.

Step 3. Build your value

There is a “give up factor” that many will have to confront early on in their path to financial independence. People have a tendency to get comfortable with their current reality, so anything else feels like a dream and therefore unattainable.  Some will tell themselves to accept their reality because thinking about the fact that they are not financial independence is painful and so they give up pursuing it. Humans are funny creatures. Although we have the capacity to imagine and create a different reality in our minds we also have a tendency to reject it as simply fantasy rather than approaching it as a problem or challenge to be logically worked through and solved. The cold hard truth is that building wealth is based on simple math, but many people are intimidated by the size of the numbers. Their current debt load is too big, paychecks are too small, things they want to buy are too expensive, the amount of money needed to retire is enormous, and the amount of time needed to eliminate the debt and save for retirement feels like forever. Money can become an overwhelming flurry of thoughts that leads some people to throw in the towel and stick to what they currently know even if it is unhealthy and unsustainable.

Time is our friend if we allow it to be. We have to take the big, break it into small pieces, and diligently let time work on it. When I was in my late teens my grandfather told me that from time to time he would reflect on his life and realize that a few years ago he thought he had it all figured out, but today he actually understands things better.  He was in his early seventies when he told me this and it blew me away because I did the same thing. When I was sixteen I thought I understood the world, but when I was nineteen I realized that I was an idiot at sixteen. The truth of my grandfather’s words that today’s reality is not the future applies to so many areas of life, including finances. Value comes before wealth. When we bring more value to the marketplace then we are compensated more. Also, we need to seek more value when we use our money in the marketplace to achieve a desired outcome. Those last three sentences are intentionally analytical in their wording and lacking emotion. The emotional parts of this formula are in steps one and five. In this step we need to focus on building our value over time which requires patience and discipline. If you’re struggling with this step then go back to Step 1 and wake the hell up! Proceed to Step 2 and check your current reality against your values and goals. Now you’re back at Step 3 which is the work part of the formula and it requires the mental toughness to push emotions away and use logic and reasoning to build your value. The “future you” will be more valuable in so many ways including wealth, if the “current you” will do the work.

Step 4: Save a truckload

A friend of mine was telling me about how he had a truckload of crushed stone aggregate delivered to level a section of his yard where he wanted to put his kids’ trampoline. I know how big a trampoline is, but I have no idea what size the truck was that made the delivery. A truckload is one of those ambiguous amounts that seems like a lot. When Mrs. R and I started on our path to financial independence our truckload was $25,000. That’s what we were trying to save in order to pay off student loans and in our minds it was a big number! After we achieved that goal then it wasn’t such a big deal to save the money needed for a down payment for a small home. If you have read our about page you already know that we went from being DINKs (double income no kids) to Mrs. R becoming a stay at home mom and our total annual income dropping from around $75,000 to $50,000. We made a game out of saving money and set a goal of saving $20,000 per year in addition to the minimum contribution to my retirement account at work in order to get the full

employer match. $20,000 per year became our new truckload. A few years later when I made a career change and started earning more money, the truckload changed to maxing the IRS 401k and Roth IRA contribution limits (these can change from year to year) and saving $50,000 per year. Today our truckload definition is a six figure number. You need to start saving your truckload, whatever that definition is for you. I understand the approach of choosing a percentage of income as a savings goal and it is a good approach as long as you push the number way up. For Mrs. R and me it has become a game, we like to pick a big round number and watch the dollars pile up in an online account. Saving a truckload is something you have to work on everyday and over time the size of your truck will change as you build your value.

Step 5: Enjoy a little

“All work and no play makes Jack a dull boy” is what Jack Nicholson’s famous character typed over and over before he went crazy in Stanley Kubrick’s classic movie The Shining. When we’ve worked hard and earned some money, we deserve to reward ourselves and enjoy the fruits of our labor. Most people will burnout and fall off the wagon if all they do is work, buy the minimum necessities, and save the rest. The constant bombardment of consumer advertising and societal pressures from peers and family pushes many people toward lifestyle inflation. The typical path is for people go to school to build their value, get a job to earn some money, and then buy starter stuff on credit. As their value as an employee increases they are able to earn more money, so they buy bigger better upgraded stuff on credit. So while you are trying to follow the path to financial independence, you are surrounded by peers and family members who listened to the marketing messages and are enjoying an inflated lifestyle. Soon you start to feel a little like Jack.

Marcel Oosterwijk from Amsterdam, The Netherlands, All work and no play makes Jack a dull boy (The Shining) (7957738500), CC BY-SA 2.0

Once again it is important to have a logical plan in place before the emotions kick in so hard that you make purchases that do not align with your values and hurt your ability to achieve your goals. For example, we value time with family, creating memories, traveling, and experiencing new things. We also have clearly defined financial goals. One way that we enjoy a little is by planning two to three family vacations per year and setting a budget for them. Most years we budget around $6,000 total and then decide how many trips we will take based on what we want to do. There have been several times when we piled up a lot of money in the bank and were tempted to buy a big house in the “best neighborhood”. Having a pre-set plan to enjoy a little of our money via family vacations helped us to not buy a new house that didn’t match our values and future financial goals. Early in our marriage we did not have enough money to take family vacations so we rewarded ourselves in other ways, like taking the kids to the movies, children’s museum, or zoo. You need to find ways to enjoy a little of your money that match your phase of life, align with your values, and help keep you on the path toward your financial goals.

Step 6: Repeat

The Beatles wrote a song called “Helter Skelter”, which is about a tall spiraling slide around a tower at a fair and has nothing to do with violence and evil. The song rocks! If you don’t know it, click here and then come back and finish reading. The first part of the song goes:

    When I get to the bottom I go back to the top of the slide

    Where I stop and I turn and I go for a ride

    Till I get to the bottom and I see you again.

Dave Catchpole, Helter skelter, CC BY 2.0

The path to financial independence is full of twists, turns, ups and downs. Hopefully you have people in your life that you love and with whom you can share the journey. Mrs. R and I firmly believe that the key to achieving financial independence is a result of developing a lifestyle and mindset that leads to financial habits that when repeated over time add up. Which means you have to keep going back to the top and Wake Up! Then you stop and turn and go for a ride.