Financial Freedom

 

What’s In It for Me?

In 2010, 24-year-old Grant Sabatier was living with his parents and had $2.26 in his bank account.  Fast forward five years later, and Grant had a net worth of over $1.25 million.  By the age of 30 he had reached financial independence.  In Financial Freedom, Grant shares all his knowledge about how he achieved financial independence, and in the process uncovers why the accepted wisdom about money, work, and retirement is either incorrect or obsolete.  If you want a step-by-step process to make more money in less time and not be forced to work until age 65 or beyond, this book is for you.

The Big Idea

While much of the advice in the financial independence community is centered on minimizing expenses, Financial Freedom highlights the importance of trying to improve your earnings potential, whether it be in the form of knowing how to ask for a raise or pursing various side hustle projects.  The benefit of having multiple semi-passive income streams, whether it be rental income from real estate or an online business, is that you can ideally cover your living expenses and thus delay withdrawing from your retirement accounts which will benefit from years of compounding.  Borrowing from the concepts in Your Money or Your Life, Grant challenges readers to think about how much their time is worth as a motivation tool to reconsider unnecessary purchases and increase savings rates to speed up the path to financial independence.  There are no short-cuts to financial freedom, but Grant lays out the blueprint to realistically achieve this goal far before the traditional retirement age.

Key Concept #1

Time Is More Valuable Than Money

“..I didn’t want to spend the best years of my life working in a poorly lit cubicle at a stressful job I didn’t particularly enjoy.” Financial Freedom p.35

If you had the option to trade places with a 90 year old with $50 million, would you do it?  Of course not!  Clearly time is more valuable than money.  The average person has approximately 25,000 days to live in their adult life.  Most people on the planet need to trade their time in order to live a safe, happy, and healthy life.  No one cares about your time as much as you do, so Financial Freedom is designed to help you make the most of your time, and use money as your tool to help you buy time.  Even if you love your job now, that could change in the future, and the reality is the vast majority or people would prefer to spend their most active healthy days of their lives living life on their own terms.  The book offers advice on how you can retire as early as possible, not so that you will never work again, but so that you will have enough money so that you will never have to work again.

Traditional retirement advance has three major problems:

1. It doesn’t work for most people
2. You end up spending the most valuable years of your life working for money
3. It’s not designed to help you retire as quickly as possible

The key to fast-tracking your financial freedom is making and investing as much money as early and often as you can to benefit from compound interest.  This illustrates the important concept that the relationship between time and money is not strictly linear (i.e. if you want to make more money, you don’t necessarily need to sacrifice more time to do so.)

Before we dive in to the strategies to accomplish financial freedom, it’s helpful to first know what goal you are working towards.  The book has an entire chapter called “what is your number?” That helps address this important question.  At a high level, the most direct answer is simply to figure out what your annual expenses are (or what they will be for your desired lifestyle) and multiple that number by 25.  This general guideline is based off of research around the 4% rule, which states that most people can safely withdraw 4% of their portfolio each year, adjusted for inflation, and have enough money to last the rest of their life.  The author argues this rule is actually conservative for people who retire early because they have a longer time horizon to continue to have their investments reap the benefits of compound interest.

Key Concept #2

How to Build Wealth Quickly

While there are many ways to build wealth, they all rely on three basic levers:

1. Income: How much money you are making
2. Savings: How much money you are saving/investing
3. Expenses: How much money you are spending

Financial Freedom (p.93)

This is clearly not rocket science, as the more you increase savings and reduce expenses, the sooner you will reach financial freedom.  In order to build wealth quickly, you need to focus on all three levers.  When Grant did the math for his own situation, he determined that if he saved 50% of an annual salary of $50,000 and compounded it at 7 percent per year, it would take him at least 25 years to save $1.25m, and even then that would likely not be enough given the impacts of inflation.  The point is unless you are making a very high salary, it will be difficult to reach financial freedom through saving alone.

Therefore, it is imperative to focus on earning more money.  The book suggests adopting the “enterprise mindset” to help accomplish this.  There are four general ways to make more money:

1. Full-time employment: working for someone else
2. Side hustling: making money on the side
3. Entrepreneurship: scaling your side hustle and making it your full-time job
4. Investing: growing your money in the market

Financial Freedom (p.104)

Even if you like your full-time job, the biggest disadvantage is your time is not your own, and the higher your salary gets, the more your employer expects from you to justify that salary. However, continuing to work your full time job on your path to financial freedom is often essential since it provides security and benefits not possible to get through side hustling or entrepreneurship.  The author suggests “hacking” your full-time job by taking advantage of the opportunity to learn new skills you may be able to use in a side hustle or taking advantage of networking opportunities.  But perhaps the biggest advantage of working a full-time job is the potential to work remotely.  The book describes the story of a full-time network administrator making $100k per year and working remotely.  Since the job only takes him 20 hours a week to complete, he spend the rest of his time on his side hustle consulting company, making an additional $150k per year.  While this might be an extreme example, it illustrates how valuable it can be to work remotely.

Key Concept #3

Side Hustle

Grant credits a key component of going from essentially broke to financial freedom in 5 years was his ability to earn income outside of his day job (i.e. side hustle).  If you want to make a lot of money quickly, you need to diversify your income streams through side hustling.  To be clear, this is not easy money.  In fact, in addition to having a full time job, Grant spent about 40 additional hours a week working on his side hustles, which included:

*Building website for law firms

*Flipping domain names

*Running digital marketing campaigns for law firms and real estate agents

*Doing search engine optimization projects

*Flipping vintage mopeds and VW campers

The above list may seem a bit random, but Grant leveraged the skills he developed at his W-2 job at a digital marketing agency to focus on side hustle ventures.  If you want to make money side hustling, you need to evaluate how much time you are realistically willing to commit to it, because that determines the types of side hustles you can launch.  If you are thinking you don’t have time to start a side hustle, first ask yourself how much time you are spending watching TV per week.

Another benefit of side hustling is you can deduct many of the expenses from your taxes.  As your side hustle grows, there are many benefits to creating an LLC.  The most lucrative side hustles are ones that generate passive income.  Passive income disrupts the notion that you need to trade your time for money.

The book offers a side hustle evaluation framework to help you choose your next side hustle:

• Analyze your passions and skills

Think about what you enjoy doing and look at your skills.  Can you get paid for any of them?  Also think about what new skills you would like to learn, as there is nothing like a paying client to motivate you to learn how to do something.

• Evaluate the money making potential

Once you have a list of potential side hustle ideas, you have to narrow it down to the ones that can make you the most money.  This starts with looking at market demand and competition.

• Figure out what to charge, get your first sale, and get paid as much as possible

The more in demand your skill set, the more you can charge for your service.  How much you charge also depends on what your competition is charging, so do some research.

To get your first sale, it is important that customers connect with your story.  For your company website, the About page is the most important page because we are all human, and selling any product or service is all about connecting with people.

• Know when to scale

You should consider scaling your side hustle if you have been able to consistently sell your service or product and have been making a profit for the past six months.

Key Concept #4

Stock Market & Real Estate Investing

Up until this point, you have learned several concepts including understanding that working is trading your valuable time for money, how to maximize your income, and minimize expense.  The final element to putting you on your path to financial independence is understanding investing.

Unfortunately the financial services industry makes it seem like investing is very complicated, but they are really just excellent marketers, as the truth is anyone can learn to manage their own money through a little self-education.  If you do need to hire a financial advisor, make sure you go with one who charges on an hourly or project basis, not someone what charges on a percentage of assets.

For stock market investing, the book makes the strong case for using low cost index funds, as all the academic research indicates this approach is superior to trying to pick stocks or find the next hot mutual fund.  Specifically, Grant is an advocate of the Vanguard Total Stock Market Index (VTSAX) since it gives low cost broad exposure to the US stock market, including some exposure to mid cap and small cap stocks.

To reach financial freedom, taking advantage of the various retirement savings accounts is critical.  In addition, having a strategy to minimize taxes goes a long way.  Grant recommends investors should always try to max out tax-advantaged accounts first (such as 401ks, 457(b), 403(b)) If you happen to be one of the lucky employees that has access to a 457(b), this is the account you should max out first since you are allowed to withdraw the money penalty free before age 59.5.  Next, consider maxing out your health savings account (HSA).  Your HSA is just like another retirement account, and you can deduct your contributions from your taxable income and use the money you contribute (and investment gains) tax-free anytime for medical expenses.  Next, consider maxing out your IRA.   Finally, if you still have money to invest after you’ve maxed out your tax advantaged accounts, you should open up a taxable account (i.e. brokerage account).

Real estate investing is the other area Grant recommends investors focus on if they want to speed up their path to financial freedom.  Because of the use of leverage and certain tax advantages, in many ways real estate can be a superior strategy to building wealth than investing in the stock market.  Grant is an advocate for putting down 5% instead of the standard 20% on a home because he believes the opportunity cost of waiting to save enough to come up with the 20% just isn’t worth it.  For example, if you have a mortgage rate that is below 5%, chances are you are better off using the additional cash to invest in the stock market than having it tied up in home equity.

There are two primary strategies for real estate investing: flipping properties, or buy and hold for the long-term.  When it comes to hitting your FI number as soon as possible, cash flow is more important than appreciation, so focusing on the buy and hold strategy is likely the best option.  The book provides an example of how over a ten year period, buying just 5 rental properties could have the potential to generate over $6,000 per month in rental income.  Real estate investing is scalable, so you can build your portfolio depending on how much money you have to invest and time you are willing to commit.  The book offers 9 tips to help you find an amazing investment property:

1). Develop real estate investing criteria to follow

2). Set a budget and get preapproved for a mortgage or loan

3). Look for properties that generate immediate positive cash flow and have appreciation potential

4). Find a realtor who does the hard work for you

5). Hunt when everyone else isn’t (such as in the winter months)

6). Look for foreclosures or short sales

7). Test-drive the neighborhood (try staying in an Airbnb nearby)

8). Find an experienced home inspector

9). Be prepared to walk away from the deal

(Financial Freedom p. 280-285).

Key Concept #5

Budgets Are Overrated / How To Live Off Your Investments

While budgets work for some people, the reality is you will not save the most money by cutting back on small expenses.  Instead, you save the most money by controlling your biggest expenses, which are typically housing, food, and transportation.  The author argues that just be optimizing these three expenses, you can realistically increase your savings rate by 25%.

The cost of housing accounts for approximately 33% of the average American’s budget.  Although it may not work for everyone’s situation, the concept of “house hacking” is introduced as a way to significantly reduce the housing expense or perhaps even live for free.  This involves purchasing a property and renting out the spare bedroom(s) to help cover the mortgage.

Transportation accounts for 19% of the average budget.  The easiest way to save on transportation costs if you have to buy a car is to buy the cheapest used car you can and not take out an auto loan.  Even then, a car still costs on average about $8,500 per year if you drive 15,000 (this includes insurance, gas, maintenance, etc).  Factoring this in, the best way to save on transportation is to not own a car at all, which can be easier said than done depending on where you live.

Fast forward 10 years, and imagine you have hit your financial independence number.  The book offers some advice on how to live off of your investments for the rest of your life.  If possible, it is best to try to use money you make from real estate rental income, side hustle income, or other sources of passive income to cover your monthly expenses before touching your brokerage or retirement accounts.  This approach can have an extremely big impact on your chances of never running out of money.  For example, if you make an extra $2,500 a month off rental income and need $5,000 a month to cover your living expenses, the amount you need to withdraw from your investment portfolio is reduced by 50%, leaving an additional $30,000 a year in your investment accounts to continue to grow.

The safe withdrawal percentage, which is the amount you can withdrawal from your portfolio each year without risking running out of money, is a highly debated, but the book recommends 3%-4%, with annual adjustments for inflation.  It goes without saying that you should plan to take out as little money as possible to keep as much of your money invested and compounding.  Due to sequence-of-returns risk, your investment performance of the first five to ten years of retirement can have a dramatic impact on how long your money could potentially last.  For instance, if right before you retire you have a portfolio with 100% in stocks and the market drops 30%, you a starting retirement with 30% less money and likely less than your target retirement number.  You can also reduce the sequence-of-returns risk by moving some of your investments into fixed income that you can live off of during your first five to ten years of retirement, which guarantees income that is not impacted by the performance of the stock market.

While it can vary depending on your personal financial situation, Grant recommends that if you need to live off of your investment gains before age 59.5, it is better to withdraw from your accounts in the following order:

1. Traditional 401(k) or 403(b)
2. Traditional IRA
3. HAS
4. 457(b)
5. Roth IRA
6. Roth 401(k)

The reason you should take withdrawals from your Roth accounts last is because the investment gains are growing tax-free. If you need the money before age 59.5, the nice aspect of the Roth IRA is that you can withdraw your contributions anytime without penalty.  If you invested in a Roth 401(k), then you should convert your Roth 401(k) to a Roth IRA before taking any withdrawals because with a Roth 401(k) you have to withdraw a percentage of your contributions and gains, so you are taxed if you take early withdrawals and are thus subject to an 10% early withdrawal penalty.

The book mentions the concept of the “Roth IRA Conversion Latter”, which is a way to avoid the 10% early withdrawal penalty on your tax-advantaged accounts.  Here’s how it works:

1. First convert the money in your 401(k) or 403(b) into a traditional IRA
2. Next convert your Traditional IRA into a Roth IRA. You’ll need to pay taxes here, so convert only as much as you will need.  Once your get closer to retirement, it should be easier to determine how much you might need to withdraw to cover your living expenses.
3. In five years you can withdraw the money you converted from your Roth IRA penalty-free.

The reason it is called a latter is because every year you will want to convert another portion of your Traditional IRA to a Roth IRA so that you are building a ladder.  At each step you have to wait five years after conversion to withdraw the money tax-free.

Apply It

*Calculate the percentage of your income that you save and invest (i.e. your savings rate) and strive to increase it by 1% every 30 days.  The higher your savings rate, the faster you will achieve financial independence.

*Try to hack your full-time job by learning as many skills as possible that you could potentially apply as a freelancer.  Ask your boss to work from home at least one day a week to gain more flexibility in your schedule and ultimately give yourself opportunities to work on your side hustle projects.

*Try using a website such as www.personalcapital.com to track your investments across your various accounts.  Analyze how much you are paying in fees and switch to low cost index funds if you have any high fee active mutual funds or ETFs.

*Consider renting out a spare bedroom on Airbnb or a similar site to reduce your housing expense, which is by far the largest expense in most people’s budget.