Achieving financial independence is kind of like cooking. If you’re lucky enough to find a good recipe, it will be much easier. However, the stake is much higher with financial independence. A terrific meal will make you happy for a few hours, but financial independence can last a lifetime. Of course, the execution phase is much longer for financial independence. Cooking a nice meal doesn’t take that much time. Achieving financial independence can take 10, 20, 30 years, or even longer.
Today, I’d like to share the ingredients that helped me achieve financial independence. It’s the recipe for my success. But it’s not 100% like cooking. Life is different for everyone. Your experience is vastly different from mine. Some of these ingredients are unique to me, but some are universal too. Some of these are applicable to everyone. Anyway, let’s go through my list and figure out a conclusion at the end.
*Financial independence – basically you don’t have to work if you don’t want to. You can read more about what financial independence means here.
1. Some childhood adversity
My childhood was pretty good, but I experienced some adversity too. My family immigrated to the U.S. when I was 12. It was a tough few years for us. In Thailand, my dad was an entrepreneur and my mom was a professor. After we moved here, they had to work minimum wage jobs with no security and no benefits. I remember taking care of my 2 younger brothers while they worked late. Sometimes, they were both unemployed. It was a tough transition.
Once, my dad was delivering a pizza and the guy refused to pay. He hit my dad with a bat and broke his arm. Going to the hospital was expensive and my dad couldn’t work for a while. That was probably the low point in my childhood. Getting hurt is a big deal when you don’t have a safety net.
We always had enough to eat, but saving money was a struggle. (That’s the side benefit of working in the food industry in those days. The staff got free/cheap food.) Eventually, my parent purchased a small Thai restaurant and our finance improved. Entrepreneurship is the ticket out of the lower class. You can’t get far on minimum wage jobs.
Anyway, the adversity was good for me. It toughened me up to deal with the real world. My current problems pale in comparison to what my parent went through. That’s one big worry I have for our son. Life has been very cushy for him. How will he deal with adversity in the future? I guess most middle-class kids are like that. He’ll just have to toughen up on his own later.
2. No debt
It’s really sad so many young adults start their lives with such huge student loan debts today. Higher education was much more affordable in the early 90s. My parent paid for most of my college education. They were doing better financially by then. I worked part-time in college but didn’t really make that much.
Starting with no debt was really helpful. It means I could start saving right away without having to worry about debt. We plan to do the same for our son. He should work part-time to have some skin in the game, but I don’t want him to start off in a big hole. That’s why we’re investing in the 529 college savings plan. I don’t expect any inheritance from my parent and our son shouldn’t either. A good start is all a kid need.
3. Good stable income
I was an engineer at Intel for 16 years. I made a good income and my job was relatively stable. It seems like a different world now. People change job every few years and most jobs aren’t very secure anymore. Intel had a few layoffs when I was there, but I was in the core business (CPU) so I was pretty safe. The stable income enabled me to invest consistently and power through the stock market crashes. I kept investing during the bear markets and it paid off handsomely. If my job wasn’t stable, I would be a lot more hesitant to invest aggressively in my 20s and 30s.
4. Start investing early
When I started working full-time, I didn’t want to invest in my 401k. Like any young new grads, I thought retirement is 40 years away. Why save now? I lived in a cheap apartment and drove an old Toyota. I wanted to spend some money after being poor for so long. However, my dad convinced me to start investing in my retirement fund right away. He knew you need to save first before spending. The 401k deduction took the money out of my paycheck before I saw it. So I had to live with whatever was left. It was still plenty of money compare to being a poor college student. I had enough to go out and have fun.
The artificial constraint on spending was good. It helped me learn to live with less. Investing early is essential for wealth building. Compound interest is huge when you start early. Those early investments work the hardest for you. I also learned a lot from investing early. Like many people, I lost a lot of money in the dot com bubble. But it taught me to keep investing when the market is down. When the financial crisis came around in 2008, I knew I needed to invest as much as I could. You learn best from experience. Lots of young people never went through a big stock market crash. The next one is going to be rough for those folks.
5. Minimize lifestyle inflation
Start investing early really helped. It took me a few years to start maxing out my 401k. I didn’t keep good record back then so I don’t have the exact number. Let’s just look at a hypothetical new engineering grad today.
An entry level engineer can expect to make about $60,000 per year. If she maxes out her 401k contribution, then her pre-tax income would be $41,000 per year. After taxes and deduction, she probably will have about $2,400/month to spend. That’s not a lot, but it’s enough for a comfortable lifestyle.
The hard part will be minimizing lifestyle inflation. The more you make, the more you tend to spend. Even people in the FIRE community can’t escape that. For example, doctors spend quite a lot. They’ll need to save more to achieve financial independence. To many physicians, spending $100,000 is very frugal. Our new grad will have to do her best to minimize lifestyle inflation as she gets promotions and earns more money.
Lifestyle inflation is unavoidable, though. Today, I drive a nicer car (2010 Mazda5) and live in a more comfortable home (our duplex) than 20 years ago. But I think I did a pretty good job overall. Most of my friends from college drive much nicer cars and live in more expensive homes. They are still working full-time so it’s a tradeoff. The more you can minimize lifestyle inflation the easier it’ll be to achieve financial independence.
6. The right partner
This one is probably the most important ingredient. Achieving financial independence is much easier when you work as a team. I met Mrs. RB40 in college and we’ve been together for over 25 years (married for 20.) She was very frugal so we got along quite well. We’re pretty much perfect for each other. Our journey wasn’t always smooth, but when one of us was down, the other one was there to pick up the slack. Having the right partner helps tremendously.
Luck also plays a huge role. I’m a very lucky guy. My parent immigrated to the U.S. and gave me an opportunity to thrive in the best economy in the world. I graduated at the right time and was able to make a good income for many years. College wasn’t that expensive back then either. The stock market crashed when I was young, but it taught me a great lesson. I kept investing and it worked out incredibly well. Mrs. RB40 went off to Uzbekistan for Peace Corp for a few years after college, but she came back. I retired in 2012 and the stock market has been doing very well ever since. Life has been quite good to me.
It seems to me like the Millennial is having a much more difficult time. Higher education became a lot more expensive and many owe a ton of money. The job market has been fickle and it’s hard to find a stable job. The housing market is already expensive by the time they are ready to buy. It just seems like the timing wasn’t good for them. I suspect wealth building will be more difficult for my son too, but who really knows?
Cooking up financial independence
So that’s my ingredients to achieving financial independence. I know this is highly individualized. Nobody has the same experience I did. That’s what makes us human. Everyone is an individual. But some of these ingredients are quite common. You’re halfway there if you can get a stable job with a good income, start investing young, minimize lifestyle inflation, and marry the right person. The rest is execution and a little luck. I hope to pass some of these lessons on to RB40Jr. He’ll need a lot of luck in the future, but the right ingredients would help a lot.
What’s your secret ingredient to achieving financial independence? What would you teach your children?
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Image by Calum Lewis
Joe left his engineering career behind to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle. See how he generates Passive Income here.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.
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