It’d been over a year since Nate and I made the decision to abandon our conventional lives, and we were smack in the doldrums of our three-year plan: still working, still living in the city, but resolved that this wasn’t our destiny. Our early months of extreme frugality were punctuated by the heady lust of novelty. We’d thrilled at each new dollar saved and frugal hack uncovered. But now, we’d reached what we considered our peak level of frugality with a savings rate that crested 82 percent some months, a percentage that didn’t even include our 401(k) contributions or mortgage principal. There wasn’t anything left to innovate with our savings; it was simply a matter of depositing money into our accounts every month and waiting for the totals to reach the number that would equal our financial independence.
The phrase “financial independence” is a bit problematic in its vagueness, and there are many different interpretations of what exactly it entails. I view financial independence as the point at which you no longer have to earn money in order to live. In other words, your assets are such that you can live off of them without the influx of a monthly paycheck. If you want to work you can, but you don’t have to in order to pay your bills and feed your family. You are freed from the need to earn money; ergo, you are financially independent. This is what Nate and I were working toward. We wanted to have enough money saved up such that we could choose to work if we wanted to, but wouldn’t have to work in order to survive. Nate and I determined that we’d be financially independent when a sustainable rate of withdrawal from our assets comfortably exceeded our conservative expense projections.
Once Nate and I were financially independent, our assets would comprise the following five elements:
The second reason Nate and I were such avid 401(k) proponents is that contributions to 401(k)s are made pretax, which means these contributions lower your taxable income. This is a good thing because it means you pay less in taxes now. Yes, you do have to pay taxes when you withdraw this money at age 59.5 or older, but the linchpin is that your tax rate will likely be lower at that age, because you’re likely to have stopped working. If you’re not retired at 59.5, wait until you are before you begin making withdrawals from your 401(k). By doing this, you reduce your tax burden in your highest earning years and then you pay those taxes in your lowest earning years. Tax rates are calibrated off of your income, so this works in your favor. Another advantage? Many employers offer the ability to contribute to your 401(k) directly from your paycheck, so you never even see the money or have the chance to consider spending it. It’s a great way to force/motivate yourself to save.
The reason to invest in the market, as opposed to keeping all of your money in a checking or savings account, is that investing is how you build wealth. In order for your money to make money, a certain amount of risk must be undertaken. Historically, the stock market has generated a 7 percent average annual return. And yes, the market does go up and down because that’s the very nature of the stock market. But the thing to remember is that history demonstrates that the market always eventually goes up. Even after the Great Recession, the market rebuilt itself. Not immediately, but over time. Successful investing entails the following: buying and holding diversified, low-fee stocks for decades, avoiding the temptation to time the market, not pulling money in and out of the market, and not following the market on a daily basis. Invest and hold (for years upon years) and, more likely than not, your money will make more money.
This is an oversimplification of investing, and there are other variables such a rebalancing and asset allocation, as well as decreasing your exposure to risk as you near traditional retirement age, but this is the basic gist. If you want to grow your wealth, you need to avail yourself of the stock market. Investing in low-fee index funds is as straightforward as any other facet of online banking, and you can set up an account online by yourself in minutes. You will need to select a brokerage that offers low-fee index funds, and then you will need to set up an account and transfer over some money to get started. In order to remove human error and the very human temptation to time the market, I simply invest money every month. Our account is set up to automatically invest a specified amount of money every month, so that we’re constantly adding to our investments without concerning ourselves over what the market happens to be doing at a particular moment in time. As with 401(k)s, the best time to start investing was yesterday, and the second-best time is today.
I will caution that this is a gross oversimplification of real estate investing, and I don’t recommend diving into rentals without first doing thorough research. It’s also very true that some markets are better for rentals than others. A great many factors go into whether or not a rental will be successful. I think it’s telling that, despite a capacity to own more rental properties, Nate and I choose to stick with just this one. In many cases, there’s a lot of risk and volatility involved with serving as a landlord, although it’s also true that the return can be much greater than what one would experience in the stock market. All that is to say, it’s another avenue for investing and generating passive income, but one that should be exhaustively researched.
Then, donors allocate grants to nonprofits of their choice at any time they wish. DAFs are invested in the stock market, which means they grow tax-free, thus augmenting your overall base of philanthropic support. Thanks to this, DAFs are a wonderful way to ensure that Nate and I will be able to support charities for decades to come while avoiding capital gains taxes. I firmly believe that Nate and I are exceedingly fortunate and the beneficiaries of a great deal of privilege; hence, it’s important to us that we give back. Supporting charities is an element of our financial plan that we wanted to enshrine in a formalized way. A DAF can be an excellent vehicle for strategically planning out your philanthropy for a lifetime.
If you’re just starting out on your financial independence journey, one of the very first steps is to build up an emergency fund of cash. There’s no substitute for this, and there’s no way around it—you need to have readily available cash to serve as your buffer against calamity. A car, a house (even one that’s paid off), or a set of expensive china does not count as emergency funds. Neither do stocks. Neither does real estate. In order to be financially sound, you must have at least three to six months’ worth of living expenses saved up in a savings or checking account.
While this is the portfolio of assets that Nate and I have, your portfolio might be quite different, which is totally fine. There’s no one right way to achieve financial stability and, eventually, financial independence. Here is a step-by-step plan that can serve as your guide for getting started:
If you can’t save enough, even with a regimen of true extreme frugality, then you probably need to look for ways to earn more, either through finding a new job or adding on a second job or side hustle.
There are a number of different formulas that people use to determine how much money they’ll need in order to reach financial independence, but at the most basic level, it’s a question of how much money you need to live on every year. In light of that, there are actually only three variables in the financial independence equation: income, expenses, and time. The less you spend, the more you save, the faster you save it, and the less money you need overall. Considered in this context, frugality is a compounding proposition and one of the fastest ways to reach financial independence. A high salary alone is meaningless if you don’t save any of it. The more distance you can put between your earnings and your expenses, the faster you’ll reach any financial goal you set. While there are other factors that also must be considered, such as your personal tolerance for risk, dependents, and health care, a very basic definition of financial independence is as follows: when a sustainable level of withdrawals from your assets is more than your ongoing expenses.
Well that all sounds as good as a box of cupcakes. But the crucial third variable in achieving financial independence—time—became a sharp thorn stuck inside my left sock as we rounded our first year of goal pursuit. I need to be active, proactive, and busy. Waiting is not high on my list of preferred activities. My kindergarten report card said that I “demonstrated impatience.” Mrs. Baumgartner was spot-on.
When Nate drives and I’m in the passenger seat, I clip my fingernails or work on my computer or write out a grocery list. Wasted time is anathema to me. Knowing I had to slog through another two years in a job I’d lost passion for, and a city I didn’t want to live in, and a life I was done with, weighed me down. As I walked into work one morning, I felt like the walls in the hallway leading to my cubicle were narrowing. Still wearing my winter coat, which I’d found in a trash pile and then washed at a laundromat, I was overheated and already pressed down by the day, which had barely begun. My days felt like a Styrofoam of emotion: devoid of color and flavor, imprinted with the day that’d come before, promising me I’d be left disappointed. I longed for something vibrant to jolt me into consciousness.
In the past when Nate and I were ready for a change, we acted on it in a matter of months, if not weeks. But this plan, this unconventional idea to quit our jobs and start a homestead in Vermont, necessitated we wait for years. We could’ve packed our bags and moved immediately, but that would’ve entailed far less certainty, something in gross contradiction with our cautious, deliberative personalities. Nate and I are not spontaneous. Or reckless. Even though I knew we were taking the strategic route, one that would ensure we wouldn’t end up penniless and living in a tent in the middle of someone’s field, I hated that I was wishing my time away. I wanted the years to elapse so that we could get to our dream. I wasn’t living, I was marking off days. It wasn’t the frugality that bothered me; it was the waiting. It never crossed my mind to give up on our aspirations, even though going to work every day felt like wearing shoes that were too tight. For one thing, I was confident we were right about not wanting to spend the rest of our adult lives confined to offices, with no agency over our daily schedules. In fact, going to work every day served to further cement my conviction that this was the right choice for us. Perhaps even more crucially, we were actually enjoying the process of extreme frugality. Like, a lot.