There’s an old game out there called “Ratrace”. It’s a (depressing) simulation of the average modern American life, attempting to climb your way to the top of the social ladder. You begin with $200, a credit card, and involvement in a working class business.
Throughout the game you’ll run your business, get an education, and climb the ladder to High Society and retiring with $100,000 (lol). Your chances aren’t great at reaching the upper rungs, and failure means declaring bankruptcy and starting once again from the bottom.
Sound a little to similar to real life? How do you win the Ratrace in today’s society? Other than being exceptionally lucky, it takes hard work and a plan. If you’re looking for a way to live a happy and successful life and achieve financial independence, you’ll have to commit to a plan that takes you in the right direction.
Achieving Financial Independence
What exactly does financial independence mean to you?
For some, that could mean serious wealth, multiple streams of income, and the ability to stop working whenever they want. For others, it might just mean the freedom to take your life wherever you want to go and not living paycheck to paycheck, setting enough aside to prepare for retirement many years from now. Most Americans have less than $1,000 in savings, meaning they are one lost job or emergency away from catastrophic disaster.
To get there, several factors that are crucial to success must be considered.
- You’ll need to control your spending habits
- You’ll have to establish and commit to a savings plan
- You’ll need to control debt
- You’ll need to invest in growth or education to increase your income
Control Your Spending Habits
Our first consideration is one of the hardest for any person to overcome. One of the most challenging aspects that families run into when they are fortunate enough to have increasing income is not increasing their expenditures. Their spending habits adjust to their new income, which means they’ve had a net growth of zero.
There is no limit for this phenomenon. Whether you go from making minimum wage to $30,000 or from $30,000 to millions per year, it’s far too easy to lose the discipline of keeping your gains. Just ask most former professional athletes.
According to a 2009 Sports Illustrated article, 78% of NFL players are bankrupt (or near so) within two years of retirement. While they represent the extreme, the principle is the same. There are few people who make so much money that they find it difficult to spend. Learn to be comfortable with delayed gratification and your future could be secure.
Commit to a Savings and Investment plan
You don’t want to start saving later; there will never seem like a “good” time to start squirreling money away. If you can’t make it happen yet, your income or your expenses need to change (or both). Even if it’s just a little, you want to establish saving as a habit.
You need to start by creating a safety net. Your safety net is the financial buffer you need to protect yourself when someone gets sick, a vehicle breaks down, or a job is lost. Since those things occasionally happen and you might need to dip into your emergency funds, you need to keep it growing consistently.
After you’ve consistently saved and you’ve got enough of a safety net to run your household for a while, it’s time to get into investing. I’m not Warren Buffet, so I’m not going to give investment advice here. However, the interest gained simply through saving money is minimal, and that money you’ve saved could be earning more money.
Get Control of Debt
Debt makes the world go round. Without the ability to borrow, many of us wouldn’t be able to buy homes, get an education, or afford a vehicle that enables us to keep our job. However, poorly managed debt can become a prison.
In considering when debt might be a necessity, consider what the true cost of going to debt will be. Credit cards especially should be used sparingly. If you’re only paying the minimum due on such debt, most of your payment is going to interest. Consider these tips from NerdWallet to get a handle on debt.
Invest in Growth or Education
Your time is a nonrenewable resource, so you want to be compensated well for it. In achieving financial independence, you not only need to learn to live below your means, you also want to earn more. Investing in learning skills or trades that increase your earning potential are one of the few areas where it’s recommended to borrow if you need to.
That doesn’t mean you need to take out six-figure student loans to get a liberal arts degree. As with any investment, you need to evaluate the potential return for your time and money.
Spending an average of $30,000 and fours years of work to earn a degree in Theater Arts might not be a wise investment. However, the equivalent of a single semester’s tuition and nine weeks of training to become a registered pediatric dental assistant would be a great way to increase your quality of life and earning potential.
~ Dr. Rhea Haugseth