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The No. 1 Tip to Accelerate Your Financial Independence Day
What’s that tip? Treat every penny you earn as if it were a critical part of your financial plan. By making everyday financial priority calls with that perspective in mind, you can build a plan that accelerates the arrival of your financial independence day.
Time is money Think of your spending in terms of buckets of time Past – Debts on stuff you no longer have or use Present – Current living expenses Future – Financial goals Stuff happens – Emergency and other unexpected spending Within each time bucket, rank your priorities Must have – Absolutely critical for sustaining your life Like to have – Things that make your life worth living Can live without – Everything else you’re spending money on
Where do your expenses fit? Every expense fits somewhere in this grid Key to speeding your journey to financial independence: Figure out how to use less of your money on the red ends of those arrows, so more can go towards the green ends
Getting there faster: Cut the tail Red: “Low Hanging Fruit” – easy choice to stop spending here Orange: “Already Committed” – renegotiate terms, accelerate payback if appropriate, and stop making new commitments that create spending here Purple: “Your Money or Your Time” – Life is too short to not have any fun, but understand that the money you spend here isn’t going towards your “must haves” Green: “Clear Priorities” – Spend here, but consider how to keep costs down
Fewer buckets: More money for the important ones Eliminate your “Can Live Without” spending – why spend money on things that aren’t important to you? As you pay down debt on past expenses and stop taking on new debts, you should eventually get to the point where you’re no longer spending money on your past.
Financial independence: Easy as A-B-C You reach financial independence when: The money generated by your investments in bucket “A” Covers all your expenses in bucket “B”, and Gives you a little extra to put towards refilling bucket “C” when you have to drain that bucket to cover emergencies
Is that all there is to it? By your priority calls, each expense you have other than those in buckets A, B, and C is either an optional one or one that’s paying down a debt on something you no longer have or use. If you want more out of life, you can save/invest more to fund the purple buckets, but that’s your choice, not your obligation.
The most critical part – controlling your costs Understand what’s really important – keep your costs low By the “4% Rule”, you need 300 times your average monthly expenses invested in your nest egg for it to reliably throw off enough to cover your costs. Each $1 you can cut from your daily expenses represents about $9,000 you don’t need to have in your nest egg Know what expenses stop – and what replaces them Your mortgage, the costs of raising your kids, and the costs of working typically will stop at some point. As you age, however, your health care costs typically increase, and you’ll likely find yourself needing to hire out services you may once have been able to perform on your own.
Why this matters to you Life is too short to spend your time on things that are not important to you. The stronger your financial focus on the things that matter to you, the smaller the portion of your time that ultimately gets obligated to cover the expenses of the things that don’t. The sooner you reach financial independence, the sooner you gain the ability to focus more of your incredibly precious and limited time on the things that really matter to you.
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