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The Millennial’s Six-Step Guide To Financial Independence


Millennials endure several stereotypes: We’re lazy, arrogant, distracted, and complain like no other. Just look at this recent story, which “proves” millennials have it harder than previous generations by citing high unemployment rates, while failing to mention there are currently more jobs available now in the United States than ever before, and one can just as easily see unfilled jobs and a high millennial unemployment rate as a sign of laziness.

We drift more towards complaining about our life situations and away from doing anything about it. Even worse, we’ve somehow grown accustomed to the notion that we’re entitled to higher education, good jobs, and a good income, regardless of merit or poor decisions.

I fit that model just three years ago. My wife and I were both taking out student loans, not only to pay for tuition but also to subsidize our housing costs, food costs, and more. Of course, we knew we had to pay the loans back, but we were more concerned with sustaining our current wants over our future needs.

It got to the point where I considered college an extension of high school and only attended about 10 percent of classes, mainly during midterms and finals week. The rest was spent socializing, playing video games, and spending an absurd amount of time watching Netflix. All paid for with the student loans I figured I’d take care of sometime “in the future.”

When I was five credits short from my bachelor’s degree, I got the prestigious job of assistant manager at a local Taco Bell. My wife was about to graduate, so began to work at the local office supply store. We both fumed at our situations. How could two college graduates only find work at near-minimum-wage levels? We had amassed $55,000 in student loan debt and were working at $11.50 and $9.50 hour.

Shortly thereafter, our older car started having some issues. We took it in for repairs, and when the bill was projected to be $900, said “We can’t afford that.” So we traded it in and financed a fully loaded 2012 Honda Civic for $27,000, which put us at $82,000 in debt.

We Couldn’t Dig Ourselves Out

Fast-forward a couple of years. Our debt was still hovering around $80,000 after some minimum payments that went straight to interest, and we found ourselves living paycheck to paycheck. We were two college graduates who had been working for two years and still found ourselves at pay rates of $14 and $10.50. We genuinely believed we were victims.

We had standard student loan debt and a car payment, but who else didn’t in our situation? We were working hard, and by the time our paychecks came in every other week, they went straight back out to loan payments and living expenses. We just figured it would be this way for a year or two until we got raises, at which point we could start setting money aside.

Just a few days later, I got a raise of $1 per hour. Naturally, we went out to celebrate. We finally had enough income to set some money aside in savings (after taxes, this ended up being around $30 per week). Our first fattened paycheck came in, and we had every intention of setting that money aside. But we didn’t. We went out again that week, then again the following week.

Before we knew it, our standard of living had increased proportionately to our income. Sound familiar? According to Parkinson’s Law, many Americans do the exact same thing. We crave instant gratification and rarely put the future in focus. As such, our spending rises proportionately to our income.

Everything’s Gotta Have an End

Then we started discussing having a baby. However, we wanted to be in a good financial position first. So we set out to pay off our car debt, which still hovered around $25,000. Paying the whole loan off would remove a monthly payment of $465. We started researching ways to save, when we stumbled across the early retirement blog of Mr. Money Mustache. Without knowing exactly how far we’d end up taking MMM’s radical advice, we fully revamped our spending habits to go above and beyond our goal of just paying off the car.

We upped our savings rate from 0 percent to more than 60 percent of our take-home pay (after taxes), which is now hovering above 70 percent due to a significant raise that made national headlines at my employer, Gravity Payments. We did this on a combined salary of $65,000, meaning we started to live comfortably on $21,000.

Through this, we paid off more than $80,000 in debt in 20 months, purchased a house, finished my degree, and traded in the unnecessary car for a cheaper, older, but perfectly operational model (eliminating $18,000 in debt). We’re expecting a baby girl later this year and are on track to retire at age 33. We did all this by cutting the complaints and actually acting on our goals. Realizing a lot of our perceived needs were actually wants, we eliminated those soft expenses and reduced the hard ones; before long, we had most our income available to pay off debt.

If you’re motivated, you can flip your finances from a dismal cycle of paycheck to paycheck to an impressive investment in your present and future. So we decided to write a simple guide to help others in similar situations.

Step 1: Define Your Hard and Soft Expenses

Look at your bank statements and credit card statements over the past few months and record your soft expenses versus hard expenses.

A hard expense is an expense you cannot avoid without it seriously affecting your life. A soft expense is an expense that, when removed, will not impact your life in a major way. Some hard expenses include rent/mortgage, electricity, food, transportation, a cell phone plan, insurance (debatable to some, but without it, there’s a real possibility of greatly affecting your life) and lastly, minimum loan payments (not paying these will have a major impact on your financial future). Some soft expenses include cable, coffee, gifts, eating out, and “me” or “miscellaneous spending” money.

Step 2: Eliminate Soft Expenses, Reduce Hard Expenses

If you have consumer debt, it’s an emergency. You are not a free person. As with any emergency, you need to do whatever you can to get yourself out of the situation. If you owe someone money, you should not be regularly sipping Starbucks lattes. The occasional treat is understandable, as that has a low cost in the grand scheme of things. But any recurring expense like this is unnecessary and needs to be addressed.

Once you have eliminated your soft expenses, take a critical look at your hard expenses.

Consider this: Let’s say you purchase a cup of coffee on your way to work each day (Monday-Friday) at $4 a cup. If you were to instead put that $4 or $20 per week into investments at a reasonable rate of return of 7 percent annually, it would grow to more than $15,000 within 10 years.

To stretch that even further, let’s say you started doing this at age 20 all the way until standard retirement at 65. That $15,000 would grow to more than $300,000. If you average $40,000 in salary through this time, that one daily drink of coffee will make you work for another seven to eight years. Is it really worth it? Does Starbucks provide you with enough happiness to keep you working for an additional seven years? If so, great. But if not, think about how much it would save to just switch to a home brew.

Once you have eliminated your soft expenses, take a critical look at your hard expenses. My wife and I were paying more $100 combined on our two cell phone bills. The average cell phone bill eclipses $110 per month, according to a 2014 survey released by research firm Cowen and Company. Switching to a company like Republic Wireless and their $25 plan would save you around $80 per month after taxes. Of course, you may have to deal with early termination fees and the initial hardware costs, but $80 in monthly savings is more than $900 annually. Examine your contract terms and price out other competitors to see what makes the most sense for the most savings. If you have debt, you should be looking at every recurring line item on your bank statement to see what you can reduce for future payments.

Through our overhaul, we reduced our rent bill, changed phone providers, eliminated our cable bill, and reduced our grocery bill 75 percent by planning our meals and cooking them at home instead of swinging by Taco Bell (which is significantly more expensive over eating at home).

Eating Well on the Cheap

For example, two pounds of Costco frozen chicken breasts ($4.40), one pack of fettuccine noodles ($1), one jar of Alfredo sauce ($3), and one loaf of French bread ($1.50) costs less than $11 after tax for two dinners for two adults. Getting five combined items off a fast-food dollar menu each night for two nights leaves you unsatisfied, feeling sluggish, and costs more than chicken Alfredo, as the dollar menu items are now $1.19 or $1.29.

We often think ourselves to be in a much worse situation than we really are.

I started getting my haircuts at home, we reduced our electricity usage, changed insurance providers, and didn’t buy gifts for family (except for Christmas) during our debt payoff spree. This last part was crucial for us, as we both come from very generous families that tend to splurge on gifts, but they understood.

All in all, we often think ourselves to be in a much worse situation than we really are. If you look at your recurring expenses, you’ll see there’s often room for adjustment if you clear a path straight through your complaints to real solutions.

Step 3: Draft a Debt Repayment Plan

Once you’ve drastically reduced your monthly expenses beyond your rent/mortgage payment, you’ll notice that the monster expenses now become your loan payments. When we started this process, we had more than $1,635 in monthly minimum payments. At that point, our other expenses were roughly equal to our minimum loan payments.

In addition to your monthly income surplus, any windfalls should go straight towards debt repayment.

Once you have your expenses in order, add them up and compare them to your income. Take that positive balance and start throwing it at your debt. Logically, you should tackle the highest-interest loans first, but we started with our smaller loans, as the psychological benefits of paying off an entire loan kept us going through the whole repayment process (Dave Ramsey advocates this in his “debt snowball”).

In addition to your monthly income surplus, any windfalls should go straight towards debt repayment. This might be a difficult stretch, but seeing those balances drop like rocks makes time go by fast.

When math is fun: Even if you can only contribute $300 per month towards repayment, as soon as you pay off a loan that has a monthly minimum payment of, say, $200, suddenly you’re rewarded with $500 per month to throw at the rest of your debt. Paying off debt isn’t like dieting, when weight drops off fast at the beginning and then keeps slowing down. The rate of your debt payoff actually accelerates over time, and that’s why it gets easier and easier, instead of more frustrating.

Lastly, take any extra work opportunities as you can (on-call pay, overtime, etc.) to leverage your income in your battle against debt.

Step 4: Pay Off Debt

Once you’ve hit the final loan payoff button, rejoice. Have a celebration, and maybe slightly loosen those expenses. Once we hit the debt freedom mark, we decided we’d get cable just during football season and reinstituted our gift giving. But only increase or revive expenses that genuinely make you happy and that you truly believe are worth it.

Keeping that Starbucks habit at bay after debt payoff is still wise.

Keeping that Starbucks habit at bay after debt payoff is still wise, though. Why? Because this isn’t the end of the guide, not for the ambitious. If you want to continue, you can turn your newfound habits into true financial independence through early retirement.

Retire early? Retirement has different definitions. I define it as the point at which you no longer need to work for a living. This doesn’t mean I’ll stop working. In fact, I couldn’t see myself not doing anything once I hit 33. One of my favorite Mr. Money Mustache quotes is the following: “When you get a windfall, it goes straight to your highest-interest debt, or your mortgage, or to buy your next chunk of index funds or your next rental house. Why would you inflate your lifestyle, when you haven’t even bought your freedom yet? Windfalls should be viewed as giant Groupon discounts on Freedom itself.”

He may lead a more extreme lifestyle of frugality than we do, but his equation between freedom and not having to work for a living are spot-on. Independence from the paycheck is when you’ve truly purchased your freedom. At this point, you can continue working, start a business, volunteer, travel the world, whatever the heck you want.

Step 5: Draft a Retirement Plan

To get to this point, you need to invest 25 times your annual spending. If you spend $20,000, that’s $500,000. If you spend $40,000 annually, that’s $1 million. If this sounds like a lot, consider how much of an income over expense surplus you have once you’ve eliminated your debt and reduced your expenses. If it’s $2,000 a month, through compounding at a 7 percent annual return, to get to $500,000 would take less than 14 years. Of course, you can always offset this with part-time work, but the 25 times your annual spending figure comes from standard investment returns. We get to this number through the Safe Withdrawal Rate.

Most people who lose money in the stock market lose it because they try to predict the market.

Before we get into the math, however, let’s discuss the stock market. Those two words can terrify the average person who hasn’t yet dipped his toes into investment. However, several things can help ease this fear, including the Trinity Study and index funds.

Most people who lose money in the stock market lose it because they try to predict the market. The traditional goal is obviously to buy shares and sell them at a higher evaluation, a.k.a. buy low and sell high. But with all the different “experts” out there, the attempt to buy low and sell high tends to lose people money, as the market is nearly impossible to predict, not to mention the incredibly high fees mutual fund companies charge for their attempts. So what’s the solution? Ignore it.

Yes, ignore it. Instead, focus on index funds. Index funds, or more specifically the VTSAX or Vanguard Total Stock Market Index Fund, are basically like owning a piece of every publicly traded business in the United States. By nature, it’s self-cleansing. The companies that fail fall away, and those who succeed continue to grow.

Also, because you’re not paying for someone to pick winners and losers like you would in a mutual fund, its expense ratios are very low. That means you don’t have to pay a large chunk of your investments to a fund manager. Now that you know why index funds are always the best bet, the next point shows how early retirement is achievable and sustainable.

Throughout 95 percent of the terms, the retiree never ran out of funds if he took only 4 percent out annually.

The Trinity Study used actual market numbers for 30-year terms starting in 1925 and generated a portfolio consisting of safe asset allocations of 50 percent stocks and 50 percent bonds. They then designated a hypothetical person for each of these 30-year terms (1925-1955, 1926-1956, etc.) who would be forced to withdraw a percentage of his portfolio annually. The point of this is to see if this hypothetical person would eventually empty out his portfolio.

They discovered that for some 30-year periods the hypothetical person could withdraw more than 8 percent of his portfolio annually and after the 30 years were up his portfolio would still be intact. Of course, in some years withdrawing 8 percent annually would bankrupt you (i.e., withdrawals beginning in 1929 would bankrupt you). Throughout 95 percent of the terms, however, the retiree never ran out of funds if he took only 4 percent out annually.

More than this, after the 30-year period was up, the funds lasted through an infinite year period at that rate. Meaning, since 1925, a 4 percent withdrawal rate is a worst-case number, and this is without considering any additional income you’d make after early retirement.

What does all this mean? It means you don’t have to worry about buying low and selling high. Just start putting your excess income into investments, via 401(k) investments, IRA investments, and index funds and let them build (concerned about not being able to withdraw your 401(k) or IRA investments before age 59.5? See the wonderful world of the Roth Conversion Ladder).

When you have 25 times your annual spending in investments, you can then take out 4 percent annually and see the 4 percent return to you the next year, where you will then take it out again. Of course, the stock market isn’t predictable. One year, you might see only 3 percent. Another year, you might see 9 percent. Sometimes you might have to take a bit out of your nest egg. But for the most part, the starting balance when you retire should remain roughly the same indefinitely. This will allow you to live off passive income and provide you the freedom to do whatever you please after retirement, without need for a paycheck.

So get to work building up 25 times your annual spending in investments. If you’re disciplined, you’ll be able to retire long before your back gives out or your hair turns grey.

Step 6: Retire

Be free and live a full life. You’re welcome for the head start.

*I don’t include mortgages as debt, as they can be an investment. Equity tends to increase with time and although there’s the occasional crash, for the most part, your net worth won’t be decreased with a mortgage, as your property value will be at or above your mortgage.

*These are opinions of my own, based off my own experiences and research. You are solely responsible for your own choices.

*There’s always the off-chance that a major illness or unexpected life event can render the above advice or action steps obsolete. This article is intended for those looking to make a change, not for those still anchored to inaction by their complaints or paralyzed by fear of the unknown.