The secret to reaching the state of financial freedom is looking at your savings rate. Your savings rate is going to be your best indicator of when can you retire. Do other factors go into it? Absolutely. However, you can be the best investor but if you don’t save enough it won’t matter. On the other hand you can save a lot of money but if you don’t know how to invest. If you are to conservative investing then inflation will eat up your money. If you don’t factor in the power of compounding costs of investing. The power of combining savings and investing is key!
It doesn’t have to be that complicated as seen in The shockingly simple math behind early retirement.
Our first jobs out of college we both started putting away 5% of our income into our 401k. We were saving another 5-10% into our credit union account as well. In the first couple years out of college between the two of us a new car was bought, we got married, took our honeymoon, and bought a house. We knew the importance of saving but knew little on how to get our money working the best for us.
Importance of Education
A few months after we bought our house we started to attend financial literacy classes. These were open to the public and held on the University of Northern Iowa campus. They now are open to anyone who wants to educate themselves by clicking on the link above. Going to these classes opened up our minds to new ways of thinking about money and ultimately life. It goes way beyond just accumulating money for money’s sake and is more about how having enough money can open up doors of opportunities. That may include staying at your same job if your truly like it or taking that leap into something that you have always wanted to do. Maybe its being able to spend more time with your family. Ultimately, with having enough the possibilities are endless!
In addition, to going to classes we started tracking our spending using excel or you can use mint, reading a lot of books, and reading various blogs. In essence, we took charge of our situation and started educating ourselves. We had a financial plan done for us and now I help others to do the same. We almost made the mistake of going with a fee-based financial advisor instead of fee-only.
By tracking our spending we were able to see areas where we were spending more than we realized and more than we wanted. We saw areas that were high like eating out and groceries. We cut back how much we eat out per week and we started doing most of our shopping at Aldi’s instead of Hy-vee. In addition we don’t have cable, we switched to Total Wireless for cell phones, and we took our savings at the credit union and got rid of paying PMI by putting 20% down on our house.
By doing these really simple things we were able to increase her 401k savings to 18%. Within a few months and maxing out both of our Roth IRAs every year. Those seemingly small things will pay big dividends to us over the long-term from the power of compounding. Start early to get that “power” on your side. Investing in no-load index mutual funds at the lowest possible cost will only help in the power of compounding.
Keep striving forward!
So we started out investing only 5% of our incomes to less than a year investing 20% of our gross income. As time went on we were able to increase our savings from continuously tracking our spending and seeing if it truly reflects our values. Most importantly every time we received a raise we increased our investing rate. Essentially, we kept the same standard of living and every time we received a raise we took that and put it towards investing more. Out of sight, out of mind. Now we are saving 50% of our gross income and well on our way to financial freedom.
This doesn’t mean that there won’t or hasn’t been bumps in the road for us. We are constantly evaluating what we most value in our lives. This journey has helped us get away from being materialistic and thinking that buying more stuff is going to make us “happy”. By knowing that only we control our own happiness and not the superficial stuff that society wants us to believe will make us “happy”. It is not about how much “stuff” we accumulate that will ultimately add meaning to our lives. Instead it is about how much we can help out each other and society to leave this world a better place then when we entered it.
What Does Financial Freedom Mean To Us
Reaching financial freedom doesn’t mean that we will just up and quit our jobs and sit on the couch. No what it means is we have the freedom to choose what we want to do and that is powerful! We can work for money or we can do things for free. Pursue whatever we want to because we no longer have to work for earning a paycheck and paying the bills sake. We can have the opportunity to travel, spend more time with family, and anything else that we would like.