There are three levers behind financial independence. The first lever is earning more, and the second lever is spending less. The difference between earnings and spending is the savings we use to invest. Investing is the third lever. I have found that by focusing on these three items exclusively since 2007 – 2008, I am on track to reach financial independence somewhere around 2018. This doesn’t mean that I would do nothing – it just means I would have the extra security and the option to live my life on my own terms.

Emergency Funds, Retirement
Photo by stevepb (Pixabay)

I believe that achieving this goal is not an act of randomness, but an act of careful planning, execution and living life in a way that fosters building wealth. In addition, it is important to have systems, which are essential to living life in a way that fosters building wealth.

Earning

It is extremely difficult to find money to invest, if you have no money to pay for your expenses. This is where finding a decently paying job is important. I have always earned average income. In fact, my base pretax – salary never really exceeded $60,000/year until 2014/2015.

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I have focused on earning more however. I have achieved this by starting this site, which has made money in the past. I have also hustled by opening bank and brokerage accounts, as well as credit cards.

By investing my savings in dividend paying stocks, my level of passive dividend income has been increasing exponentially.

Savings

I have been frugal all my life. This is the reason why I graduated college with no debt, and $2,000 in the bank. Not having any debt was helpful, because I could put money to work for me and invest it, rather than waste it on expensive new cars for example. I have been mindful of spending, and only put money for things that I value. I have never had a budget, though I have always had the discipline to question every expense. My approach to zero-based budgeting is somewhat inspired by 3G Capital. But I always instinctively understood the fact that the less I spend, the more I have to save. When you have low needs, your savings have a much higher impact, that speeds up your snowball.

My housing expenses have always been decent, which is easy in the Midwest. I always lived by myself in an apartment, and my rent was always somewhere between $600 – $700/month. If I could do it all over again, I could have taken on a roommate. However, I like my privacy, and it has only been recently that I moved into a larger apartment with my significant other. As a result of this move, my per-person rental expense is down 40%.

My transportation has been low as well, due to the fact that I always drove old cars. My current car is 15 years old, and I plan to drive it to the ground. What has always helped me is the fact that I always lived close to work. In fact, in my current situation, I could probably walk to work.

The one thing I wasn’t smart about early was taxes. For the first 4 – 5 years of my journey, I ignored taxes. In early 2013, I had a wake up call, after I realized how much I was paying in Federal, State and FICA taxes. I have been maxing out tax-deferred plans available to me, and have cut my tax bill substantially in the process. I am also in the process of trying to have as much of my net worth as possible in tax-deferred accounts, using after-tax 401 (k) contributions.

I have always taken lunches to work, unless of course the company was paying. I like cooking, and usually spend time every weekend, cooking my lunches for the week at work. Cooking/assembling your own meals from scratch is both cheaper, and healthier. I do like to go out, but mostly for drinks. I do spend money on experiencing new things however. I try to go to a new place I have never been to at least once/quarter, both domestic and internationally.

I have been lucky, in that I haven’t had major health expenses. On the other hand, I have always had health insurance ( which was lucky as well). Of course, health insurance doesn’t cover all health conditions. So having my own nest egg, is a decent way to also insure myself against the unknown.

Investing

I choose to invest my savings in dividend growth stocks. By owning dividend growth stocks, I receive dividend income which grows every year, without any additional input from me.

I have found the positive feedback from receiving cash dividend in my brokerage accounts to be invaluable. With each check I receive, I am more committed to holding on to my strategy and not doing something stupid like get scared during the next dip/correction/recession/depression. Nor am I running around any time I hear a long-term bear loudly proclaim that we are about to enter one.

While everyone focuses on savings, I believe that intelligent investing is also very important. I like the challenge of analyzing companies, and deciding which ones to place in my well diversified dividend portfolio. This keeps my mind sharp, and always keeps me on the lookout to learn more about businesses and companies for potential inclusion in my portfolio. My investing is of course dictated by the goals I have set. I target a certain level of annual dividend income around 2018. I believe dividend income to be more stable than capital gains, which is why I focus on it. This predictability makes setting goals, and achieving them, much more actionable. I find that I have better visibility over the level of targeted dividend income, than the specific value of my portfolio at a certain point in time.

One small tweak I have done since 2013 is by owning low cost mutual funds in my 401 (k). After consolidating my tax-deferred accounts, I have an even higher allocation to those mutual funds. They also pay dividends actually, and I have found that investing in low cost funds to be a very easy way to put money to work, without a lot of effort on my part. In fact, my net worth and dividend income have really skyrocketed since I became smarter about taxes, and started maximizing those tax-deferred accounts to the max. I have found that having my dividend paying stocks in taxable accounts, and low cost mutual funds in my tax-deferred accounts works great for me. When I retire one day, and need the income form taxable and tax-deferred accounts, I would likely sell those mutual funds and buy individual dividend growth stocks with the proceeds.

I believe there are two ways for a dividend investor to accumulate their nest egg. The first one is to invest everything in dividend growth stocks from the very beginning, and watch the rising stream of dividend income over time. The second way is by accumulating their nest egg through buying low cost funds and ETF’s in their retirement accounts first. After they gain more knowledge, experience and capital, and they get closer to retirement age, the investor can slowly convert the pile of funds into an income producing portfolio that pays dividends. In my case, I am doing both essentially.

To summarize, I plan to be financially independent around 2018. This would be a decade after I started my journey towards financial independence. I achieved that by focusing my attention on earning more, saving as much as I can, and investing intelligently.  I believe that anyone can utilize this blueprint, and modify it to their own unique circumstances. The most important of all is the ability to design systems that carry as much of the heavy load for you as possible.

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