My Path to Reaching Financial Independence – Part 1
Everyone who has reached financial independence has taken a different journey to get there. But there are similiarities. Looking back, I took steps toward reaching financial independence in my early years, even before I was knowingly pursuing an FI goal. Likewise, many of you are setting yourself up for achieving FI even without consciously going after it! I’m sharing the major steps I took throughout my life to achieve FI not to suggest following the same path that I took. Rather, I encourage you to examine your spending, saving, and investing habits, regardless if you are pursuing FI or not. I also share what I did right and what else I would have done if I could start over, particularly so some of you don’t make the same mistakes I have.
#1. I Learned
From a young age, I was lucky enough to be taught the value of money and how to care for it. Among my earliest memories, my parents taught me the importance of saving, even if the only bank I had was a large Tootsie roll container with a coin slot on top. When I was at the age of earning a small allowance, my parents insisted that I keep a journal in order to log every cent coming in and going out. This is where I first learned the importance of knowing how I earned, saved, and spent my money, down to the penny.
As I got a bit older, I remember going to the bank to open my first savings account with my mother. My head hardly reached the bank teller’s counter. I didn’t know what was going on, but I did remember writing my first attempt at a signature during this visit. I also remember how big the bank was. Upon returning home, Mom described interest, and how the money just grew more money by “sitting there” in the bank account.
Middle and High School
As I advanced into the middle grades and high school, when I worked part-time jobs, my parents required me to save half of everything I earned. As a selfish kid who just wanted to spend money, this was extremely painful at the time. I wasn’t making much, anyway – I’d hardly have anything left to spend! In retrospect, this was the integral financial step in my formative years. What I learned was two-fold:
- I learned the importance to save at a high rate early
- I learned the importance of living within my means
Of course, I don’t imply with the second one that I was supporting myself! Rather, I learned to take extreme care in my spending decisions, knowing that after saving I only had limited remaining money to spend.
- What I Did Right: Learned to save and account for all money at an early age. Learned to thoughtfully and deliberately make spending decisions.
- If I Could Start Over: Learn more deeply the exponential long-term benefit of saving.
#2. I Saved, and Learning Continued
Throughout high school, I continued to save at high rates. Much of this effort was to contribute to my higher education, but also some saving in order to make the money grow, like I had learned in my earlier years. In high school I started learning more about how taxes worked, largely because I was shocked at how little I had left in my paycheck from my busboy job at Steak and Ale. I vividly remember making $2.13 per hour, plus a share of tips. I did get a shiny plaque, though, when I was employee of the month.
A few accounting classes in high school helped, as well. I liked math since grade school, but I first discovered here that I actually loved working with numbers, especially when the numbers involved money. At this point, I thought I wanted to be an accountant when I grew up. I didn’t end up becoming an accountant, but I can attribute my love of personal finance mostly to my high school classes.
Brief Sidebar: From my perspective, there should be a nationwide financial literacy course requirement for all high school students. It seems that so many individuals make significant financial mistakes simply because they don’t understand basic financial principles.
I think the major accomplishment which helped me financially during my college years was working in a professional environment. After enrolling in the co-op department, interviewing, and obtaining employment, I subsequently took a few semesters off during college. I benefitted in three ways:
- First, I earned a few college hours per semester.
- Second, I earned at a much higher pay rate than I would have working in my college town. I, consequently, saved much more.
- Third, I built rapport and established connections which could contribute to future work opportunities after college graduation.
Also, I jumped into credit for the first time in college. I was approved for a Citibank Mastercard with no rewards program my freshman year. I put the majority of my spending on the credit card. Based on my parents’ guidance, I treated all spending on the card as if it was cash. I ensured I had the money already prior to spending on the card, and I paid the statement in full each month on time.
- What I Did Right: Increased my savings and learned formal accounting principles. Through my university’s co-op department, I took time off from school to work full-time.
- If I Could Start Over: Learn more about taxes and credit card rewards programs. Start a Roth IRA while in college.
#3. I Invested Early and Often
After college, I started investing for the first time. In retrospect, I could have started earlier. I’m still hard on myself for not opening a Roth IRA prior to finishing college. But I did start investing immediately upon entering my first job after college. I was earning acceptable but not eye-popping money in my first permanent job, and I was also living in a high cost of living area. I held my head high by contributing up to the matching amount in my employer-sponsored retirement plan and saving a solid amount in my then-cutting edge online savings account. Interest rates were close to 5% at that time! While I wasn’t contributing a huge percentage amount to my retirement account, I was aggressive and unwavering by consistently investing exclusively in stock funds. After all, time was on my side, so I didn’t focus on bonds at all.
Gradual Investment Improvements
At 22, I could have done more. In addition to the necessities, I was more interested in going on dates and blowing a few bucks at Tower Records than additional saving. But I saved enough to buy my first real estate, though. It was a one bed, one bath condo in a great location. I liked the simplicity and stability of a conventional, 30-year mortgage and didn’t succumb to any ARM gimmicks.
Soon after, I “finally” opened a Roth IRA. Again, I’m still annoyed at myself for not starting a Roth IRA much earlier. At any rate, my main goal was to contribute the maximum limit to my Roth IRA from that point forward. Similar to my employer-sponsored retirement plan, I was aggressive in my Roth IRA investments.
- What I Did Right: Contributed up to the matching amount with my employer-sponsored retirement plan, opened a Roth IRA. Chose aggressive investments in each.
- If I Could Start Over: Contribute much more to my employer-sponsored retirement plan at the beginning of my career.
Reaching Financial Independence – Wrapping Up For Now
My financial prosperity was moving along smoothly into my mid-20’s. I was enjoying gradual increases in saving, investing, and returns before reaching financial independence became a goal. However, a few surprises (good and bad) came my way soon after. Next time, I will share what happened, what I learned, and how I adjusted.