The Five Transitions to Financial Independence: Money Tree Podcast Interview
Our life is a story filled with many chapters. Each chapter starts and ends with a transitional period that presents us with important decisions to make. These transitional periods are the key to unlock our personal legends.
If the story you want to tell is one of financial freedom, then look out for these five transitional periods and use them to write your story of success.
Transition 1: The Launch to Full-time
In our late teens and early twenties, we transition into the full-time labor force.
No longer are we students who depend on others for advice. We are adults who make our own decisions and are responsible for those decisions.
As we become earners, bills somehow become more frequent. The more money we earn, the more we tend to owe. Before we know it, we have quite the collection of mortgages, car payments, student loan, and credit card debt.
For some, that first student loan bill may serve as a wake-up call to learn about personal finance. For others, unfortunately, that first student loan bill is simply the first payment in a long line to follow.
At this point in our lives, we face an important decision. We can either let our debts hold us back from enjoying what is important to us. Or, we can take responsibility for them and use it as motivation to learn more about how to avoid debt, spend within our limits, set financial goals, and develop a plan for the future.
The day we recognize our relationship with money is the day we get to merge onto the on-ramp to financial freedom.
Keys to Transition 1: finding a mentor, reading personal finance books and periodicals, learning to invest with a small amount of money, building your safety net, realizing that compounding interest is our friend!
Roadblocks: alcohol, new car loan, credit cards, spending outside of our budget.
Transition 2: Choosing Personal Finance
In our mid to late twenties, we tend to settle into the path we’ve chosen. It is during this period in life we start to learn about our relationship with money and how we can use our money to beat the system.
This is a vital phase in life. We can either choose to manage and resolve our past debts or we can choose to invite more debt into our lives in order to keep up with the Joneses.
Debt is not only money we owe but also represents the amount of time we have to work to pay off our debts. Think about it, a six-year new car loan requires working six years to pay it off. A thirty-year mortgage takes thirty years of work to pay for it. It’s all pretty obvious, but why do so many of us choose to sign up for years and years of debt?
The good news is, there are alternatives. The alternative to buying a new car is saving your money to accumulate more wealth over time. You can do this by cycling to work or just by driving your old beater. You make the choices.
The same goes for a 30-year mortgage. There are alternatives. The ambitious alternative is to invest in a duplex or triplex apartment complex that pays for itself. If investing in an apartment building sounds intimidating, then take the easy route and live at home or continue to live like the college kid with roommates. By renting a home, you save on the mortgage, the upkeep of your own home, the insurance, and likely, some of the utilities. You make the choices. Live within your means or go into debt.
There are always alternatives!
Keys to Transition 2: first to work and last to leave, eliminate debt, go to the library, live like a college kid, start tracking your own personal profit and loss statement
Roadblocks: excessive spending on entertainment, comparing your lifestyle to others and working to keep up with the Joneses.
Transition 3: The Time to Bank Savings
In our late twenties and early thirties, if not before, it is really important to start saving as much as possible. The more we save during this phase, the sooner we get to break free from the grind.
It’s going to take at least a solid stretch of ten to fifteen years to bank enough money to get ahead.
During this period, it is important to continually improve your savings rate. Set a savings rate goal of 10% or 20% of your paycheck, then each month try to beat the prior month’s goal. How high can you go? 50%, 60%, or higher.
Monthly savings rate = monthly savings/total monthly income
Also, during this period it is important to start collecting income streams like retirement accounts, real estate rental properties, or other forms of passive income.
Don’t be afraid to binge personal finance books, blogs, and podcasts - they are your guidance counselors.
Learn how to minimize your expenses while maximizing your savings rate.
The hope is to live a purpose-driven life that focuses on your passions and not money.
Keys to Transition 3: max out your savings in a retirement account, know your expenditures and try to reduce when possible, track and increase your savings rate, set annual financial goals, minimize your food bill, don’t buy things you don’t need, read financial books, blogs, and podcasts
Roadblocks: overspending on a 30-year mortgage, dining at restaurants too frequently, TV / electronic device time could be spent more productively.
Transition 4: Semi-retirement
As you continue to save more and more money, the stress involved with money disappears. Your focus switches from having enough today, to making smart investments that will increase additional cash flow for the rest of your life.
The idea of living off of the 4% rule becomes reality.
At this point, some people might try to go full-on FIRE (Financial Independence, Retire Early) but from a developmental standpoint, it is smart to ease into your new role by living the life of a semi-retiree.
During the transitional phase of semi-retirement, you can continue to work part-time or take advantage of the opportunity to travel the world. There are a lot of programs like Workaway or international teaching positions that will pay for all or part of your living expenses, provide a work visa, and health insurance. Of course, this depends on the program you choose and the country you end up in, so do your research!
Semi-retirement is about working less in a corporate job and spending more time in your own personal development or on a life project.
It also gives you time to develop additional passive income streams like starting a blog, managing a real estate portfolio, or even creating your own products or books to sell.
Use this period to develop as an individual and tap into your creativity.
Keys to Transition 4: minimalism (how many things do you really need to live?), vacation in nature, explore your passions, create additional streams of passive income
Roadblocks: too much time (is that possible?), staying on your budget, making aggressive investments.
Transition 5: Financial Freedom
What does it mean to be free of money?
Debts will be a thing long forgotten. Work is what you choose to do to develop as a person or to help others.
The purpose of your life becomes clearer, life’s journey turns inward. You spend more time reflecting and working on your life project.
Most importantly, you become a non-believer in the religion of money!
Keys to Transition 5: meditation, exercise, life project, building a social network, helping others, finding your happiness routine
Roadblocks: not applying yourself, alcohol, too much time spent on TV / electronic devices, lack of social commitments
The journey to financial freedom is a long one, but obtainable. Remember, the joy is in the journey and not in the end destination. Make sure you live to learn and one day you will reach your goal of financial independence
You make your choices. You write your own script.