The theory behind financial independence is simple. Spend less, save more, invest it into income-producing assets. The reality is complex, full of daily decisions about balancing income and spending. The Morningstar article (yes, M* is writing about early retirement too now) A Simple Plan for Financial Independence presents this simplified graphic of your “personal economy”.
Income can come from labor, capital, or land. Expenses can be put toward your past (debt), present, or future (investing in capital or land).
I’ve been thinking about this “past, present, and future” mental model for expenses, it meshes will with the simple rules that I want to teach my children: Avoid debt whenever possible, and seek out income-producing assets.
Present. There is countless advice to save money on current expenses. Call it prioritizing, call it frugality, call it whatever. These are important, but I’d rather focus on the added ideas of past and future.
Past. While debt is an important part of the economy, I hate that going into debt for non-essentials is so readily accepted in today’s society. Using home equity lines of credit for a kitchen remodels. Credit cards for vacations. The entire microloans trend where you buy a $100 pair of jeans for $10 a month times 12 months ($120) is a dangerous mind game. Debt is having compound interest work against you, and thus making someone else rich. Debt should not be normalized. Debt is an emergency!
Future. If you look at people who have really achieved financial freedom, where they truly spend the day doing whatever they want and without money worries, they have all have collected a big pile of income-producing assets. It could be rental property, commercial real estate, a laundromat/car wash/business, dividend-paying stocks, municipal bonds, a pension, Social Security or even just bank CDs if you have enough. In most cases, they collected them with purpose. They didn’t just put the minimum into their 401(k) and call it a day. They would shovel whatever extra money they had into their favorite money-making machine. When I buy more stocks, I see a future income stream:
When you buy one of these income-producing assets, it should get you excited!
I’m still not sure exactly how to create this distaste for debt and this desire for money factories, but I’m working on it. If you have these two in place, that should help with everything else – earning more income with labor, spending less on the present.
Oh, and here’s a funny-but-sad representation of the paycheck-to-paycheck lifestyle.
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I hate debt, too, but realized it was a necessary evil when I bought my first home in the late 1980’s. I requested an an amortization table with my loan, and was shocked to discover how much of my early payments went to interest At one point at work I got a $100 sales bonus and realized it would knock 5 mos. off my mortgage payment.
Well, then from then on any bonus income went towards the mortgage, and we were able to pay it off in 14 years.
Debt can be a necessary evil, but there are ways to minimize the damages.
I agree that debt can be a wise overall move in certain situations. I don’t regret my student loan debt and mortgage. However, it seems that you still had a strong distaste for debt as I did. That mindset tends to make the debt a manageable amount, taken in exchange for a good investment, and also paid off quickly. So the student loans were about 50% of my eventual income out of college, and thus paid off in a couple years. Our mortgage was under 3x income and thus paid off faster than half the original amortization as well.