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Pathways to Financial Freedom

Live below your means and invest what you save


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Our most valuable asset, by far, is time. Money, though less important, gives us the freedom to spend our time the way we want and to give our lives meaning.

How can you achieve financial freedom? A new book, My Money Journey, edited by Jonathan Clements, founder of the financial website Humble Dollar, describes how 30 people are pursuing or achieved financial freedom. I personally could relate to many of these journeys and offer my own advice for you to be financially free.

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While the paths are different, every one includes two basic ingredients — living below your means and investing the savings well. So here are my thoughts on the specifics of each as well as my advice on how you, too, can achieve the independence to do what you want with your life.

Living below your means

Many people think that being a great investor is the key to being wealthy. Yet the ability to save is the more important ingredient. You could be a better investor than Warren Buffet but, if you can’t save, you’ll likely never reach financial independence.

I’ve found that some people inherently are frugal while others are spendthrifts. It’s actually very hard to change one’s behavior on either extreme. People can and do change, however, and there are many stories of those starting later in life and then completing the journey. Five key steps are:​

1. Keep your fixed costs low. You can decide how much to spend on a vacation or how often to eat out. But other costs are fixed, such as rent or mortgage payments, property taxes, insurance and utilities. The 1996 best-selling book The Millionaire Next Door revealed that the wealthy don’t typically live in the largest houses in the most prestigious neighborhoods.

2. Determine what expenditures bring happiness. Take a look at your expenditures over the past couple of years. Reviewing your credit card bills and checking accounts — typically easy to do online — will suffice. You don’t need to track every penny. Look at each transaction or each category and then stroll down memory lane. Did thinking of the expenditure make you smile? Did you not even remember what some of the items were? Spending on experiences generally brings more happiness than buying stuff.

3. Shop and try to get a killer deal. While I’m frugal to the core, I feel such enjoyment when I get a bargain. The internet makes shopping so much easier. I always learn from AARP’s “99 Ways to Save” and the May AARP Bulletin article “The Brave New World of Shopping.”​

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4. Automate. If you are still working, have a fixed amount of your paycheck taken monthly from your checking account automatically to go to a retirement account. If you’ve maxed that out, then have an amount taken from your checking account to go a taxable investment account.

5. Convert money to time. Though a nice new car is certainly tempting, do a simple calculation on how much longer you’d have to work if you bought it. Ask yourself: Is it really worth working another year?

Invest well

You’ve probably have heard stories of people who bought Bitcoin a dozen years ago or Apple shortly after it went public. Sure, these stories are exciting and sexy and some may actually be true, but, in reality, investing is very simple. Keep costs and emotions low, and diversification and discipline high. Then let the power of compounding take over.

With a total U.S. and total international stock index fund, you can own over 10,000 companies across the planet. While many companies such as (the original) General Motors, Kodak and individual banks will go into bankruptcy, global capitalism is far more likely to survive. Though my index fund owned those stocks, it also owned Zoom Media before I even knew what Zoom was. Nobel laureate William Sharpe shows the arithmetic of why these broad low-cost index funds must beat most money invested.

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Complement your stock index funds with high-quality and low-cost bonds. Examples include bond index funds, Treasury bonds or I bonds. Even though 2022 was the worst year in the history of the bond market, bond index funds still lost less than stocks have lost in one day.

Then have the discipline to stick with your plan. When stocks plunge, rebalance by selling fixed income and buying stock index funds; when stocks surge, do the opposite. I can’t predict financial markets, but people tend to be predictably irrational buying high and selling low. Avoid these emotional mistakes.​

Putting it all together​

The two things for certain are that no path is the same nor very straight. Jobs come and go, divorce is common, supporting other family members may be necessary, bear markets will happen, and you will make mistakes. I certainly have. The key is getting back on track.

Yet financial wealth should not be measured in dollars, it should be measured in time. Look at how much time you have earned. I would argue someone with a $10 million net worth who needs $5 million a year to live on is pretty poor with only two years of financial freedom. On the other hand, the median net worth of those between the ages of 65 and 74 is $266,400, according to the Federal Reserve Board. So if one can be happy living on $10,000 a year plus Social Security, they are quite wealthy with 26.6 years of financial freedom.

Experiences bring happiness and don’t have to be expensive. Jonathan Clements recently told me, “Financial freedom means not having to regularly worry about money. If your wants and needs can be comfortably met without extravagant expenditures then you are far more likely to have a happy life.” I couldn’t agree more!

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