How to live a financially smarter middle class lifestyle

According to the PewResearch Center, 51% of Americans live in middle class households.  Most of these Americans seem to be stuck in a sick cycle of living paycheck to paycheck and working 40-50 year careers.  Half of all Americans have absolutely nothing saved at all for retirement.  Two thirds of working Americans don’t contribute any money into an employee sponsored or tax deferred retirement account offered by their employer.

Why are Americans such bad savers? 

A common reason cited as to why Americans stopped saving their income is that income growth as stopped while other expenses have gone up.  It’s true that expenses such as housing, health care, childcare and college costs have skyrocketed.  Student loan debt repayment can also take up a big part of one’s monthly expenses.

What is not often discussed is that American spending has gone up considerably.  This can be partly attributed to rampant consumerism along with easy credit and financing programs.  Too little income combined with increasing spending leads to poor savings rates.

Consumerism is on the rise

Advertisers have convinced consumers that they need to spend their extra money on material goods.  Consumers have become focused on buying shiny new things, thinking that their purchases will make them happy.  Retailers of fast fashion, mass producers of cheap and disposable clothing, have seen retail sales grow 10% over the last 5 years.  Americans now spend over $250 billion a year on clothing.  Poor individuals often spend money on things that give the appearance of wealth, such as name brand clothing and shoes.   

Unhealthy obsession with cars 

Americans continue to pay more and more for new vehicles, locking in monthly payments for longer durations.  I’ve noticed a trend among middle class individuals to judge someone based on the type of car they drive.  If it’s a luxury vehicle, people automatically assume that the car owner is rich.  New research shows that the average car loan is now almost $31,000.  The average monthly car payment is now $517.  The average term for an auto loan is now 69.3 months, or 5.8 years!

Nonstop monthly subscriptions and payments

Consumers often focus on monthly payments instead of paying for things up front.  Companies know this, and often try to get consumers to sign up for subscription-based services.  Look at all the different monthly subscription programs are available, everything from Dollar Shave Club shavers to Bark Box dog treats delivered monthly.  Very few care about the true cost of their purchases.  Homeowners are often encouraged to take out a HELOC (home equity line of credit) to use towards home improvements or other expenses.  Financing makes it easy for anyone to afford anything.      

Paying for conveniences disguised as necessities

With housing costs increasing dramatically in cities, many choose to move further away from their jobs into suburban areas where housing is cheaper.  This leads to long commutes, often over 30-45 minutes each way.  Many of these individuals end up exhausted by the time they get home.  Lack of time to cook and clean leads to increased spending on conveniences such as: eating at restaurants, bringing home take-out or hiring house cleaning services.  I’m surprised how many of my neighbors and friends regularly pay for a housekeeper.  Other conveniences people spend on (that they consider necessities) include dry cleaning, barbershop visits, manicures, pedicures, and even massages.  $20 here, $50 there and then your entire paycheck is gone with nothing to show for it. 

There are very few things we need to be truly happy: healthy food, safe shelter, and good relationships.  Once you get the basics covered, everything else is just nice to have, and not a necessity.     

Act your wage

Many people don’t bother acting their wage and often spend beyond their means.  I’m sure many of us know middle class people who complain about not having enough money.  Almost every middle class individual I know who complains about having financial troubles fit a common profile:

-       They finance a smartphone that is less than 2 years old with a cell phone bill at least $75 or more.

-       They have car payments on one or more vehicles.  Or worse, they lease vehicles, locking in a perpetual monthly car payment forever.

-       They have an expensive mortgage or high rent payment. 

-       Their homes are very nicely decorated with high-end kitchen appliances and furniture.

-       They own name brand clothing and accessories such as pricey purses, wallets, watches and jewelry. 

-       Many commute over 30 minutes each way. 

-       Many eat out for lunch and dinner frequently.  Alcoholic beverage frequently accompanies dinner.

-       They think that the only way to get rich is to win the lottery or inherit the money from their parents. 

-       They are waiting until they get a raise before saving.

-       They need to do more “research” before they start investing.  This basically means that they won’t be investing for a long time.

The spending habits of the middle class simply keep them on a hamster wheel, stuck in an endless loop of living paycheck to paycheck.  I suppose financial independence for them means being able to start collecting Social Security checks on their 62^nd birthday. 

How can you live a financially smarter lifestyle?

If you want to start saving and investing significant amounts of money, you have to change your current lifestyle.  Tracking your spending is the first step towards living a financially smarter lifestyle.  If you don’t keep track of how much money you are making and spending each month, you’ll never know how much money you will need to retire.  It’s hard to create savings and investment goals if you don’t even know where your money is going.  If you prefer to track your finances manually, I recommend ClearCheckbook.  If you want to have all of your income and expenses tracked automatically, I recommend Mint or Personal Capital.  Mint seems to be better at tracking income and spending or creating a budget.  Personal Capital excels in tracking and managing your investment accounts. 

Focus on the big wins

Many people focus on little frugal hacks and ignore the big expenses.  Sure it may feel great to buy groceries or clothing on sale, but you’re not going to reach financial freedom with these small wins.  That’s simply being penny wise and pound foolish.  Focusing on the big wins is what really makes a huge difference.  Most people spend the most money on three big things: housing, transportation, and food. 

Housing doesn’t have to be expensive

The bigger your home or apartment, the more housing expenses you’ll have: higher insurance, higher property taxes, higher cooling and heating costs, and more room to fill with junk.  Consider house hacking by having a roommate or two.  Consider moving into a cheaper location.  Would you rather be house rich and financially poor?  Or would you rather live in a modest home and really be rich?  If you can save $500 a month or more on housing, you can save $6,000 or more each year.

When it comes to buying a new car, many people are only focused on the monthly car payment.  Other associated costs that need to be factored include: insurance costs, fuel expenses, maintenance costs, and registration fees.  All these costs get way more expensive if you have a luxury vehicle.  If you finance a vehicle, you are stuck making monthly payments for many years. 

Transportation costs don’t have to be expensive

Also included in transportation costs are commuting expenses such as fuel costs, vehicle wear and tear, and lost time.  Stuck in a car commuting through traffic is the absolute worst way to spend your time.  If you don’t have a car payment, you’ll have a huge chunk of money to save and invest.  We own 2 paid off vehicles and expect to drive them for as long as possible.  Having 2 car payments a month can take a huge chunk out of your savings potential.  If you have a short commute, you’ll permanently save on fuel expenses and your car will probably last longer too.  

If you can save $517 a month on car payments (the average monthly car payment), that’s $6,204 saved each year.  If you can save money on your car insurance with one simple phone call, you can save even more.   

Quality food doesn’t have to be expensive

We eat out for many reasons: to celebrate, to catch up with friends and family, or because we are too lazy to make our own food.  Eating out can be a fun and tasty experience.  Eating out also is considerably more expensive than preparing your own food.  Likely, food prepared in restaurants is unhealthier compared to a quality home cooked meal.  If you’ve never tracked your food expenses, you may be in for a shock when you finally add up the numbers.  For most people, food expenses (groceries, restaurants, Starbucks, fast food, and snacks) make up a large chunk of your monthly spending.  This is an area we are constantly working on.  I hate the feeling of throwing away food that’s gone bad in the fridge.  Nowadays, we keep our fridge lean and try to eat everything we purchase.  I’m convinced that a packed refrigerator is less of a sign of wealth, and more a sign of waste.    

We bring our lunch to work almost everyday.  We eat plenty of fresh fruits and vegetables.  We eat meat and poultry in moderation.  Preparing food at home doesn’t have to be difficult; we bake and use our crock-pot frequently.  We love to eat out - we just don’t do it every single day. When you experience little luxuries such as eating out constantly, they set the standard for the new normal.  If we were to eat out multiple times a week, it really wouldn’t be that special of an experience.  The benefit of rarely eating out is that when we get a chance to, we really appreciate the experience.  We are actually living a richer life by limiting our rich experiences.

If you’re looking for delicious, budget friendly recipes, check out the BudgetBytes website.  If you can save $300 a month on food expenses from eating out less, bringing your lunch to work and cooking at home, that’s $3,600 saved each year. 

 

If you can save big on housing, transportation and food like my examples above, you can save $15,804 a year, possibly more. There are many tiny frugal hacks such as clipping coupons, making your own laundry detergent or driving out of your way to a gas station that is only 2 cents cheaper per gallon.  Saving $10 a week on your groceries only saves $480 a year.  Saving $5 on each gas fill up won’t compare to cutting out your $500 monthly car payment completely.  Tiny frugal hacks won’t save you nearly as much as just focusing on the 3 biggest expenses in your budget.

Trim your expenses and optimize your spending
Middle class Americans spend an extravagant amount of money on conveniences as well as random crap.  Many of these extra expenses can be cut back or eliminated.  Are you paying for cable television?  Are you paying for visits to the barber every 2 weeks?  Are you spending over $100 a month on your electricity bill?  Is your cell phone bill over $100 a month?  If you have pets, do you take them to the groomer monthly?  

We’ve trimmed a ton of our monthly expenses.  We purchased a Roku years ago and cut DIRECTV from our monthly expenses.  Now we stream television shows and movies through Netflix or Amazon Prime.  If your cell phone bill is over $100, consider checking out Republic Wireless where phone plans with data start at $20 a month.  No one needs to pay for unlimited data.  You have much better things to do with your time than stare at your smartphone streaming gigs of data.  We are lucky to have our cell phone bill paid for by my company.  My wife has been cutting my hair since 2013 (going on 4 years now)!  We continue to work on keeping our electricity bill extremely low.  My wife recently started shopping at the local Goodwill thrift store.  We do our own dog grooming at home: we cut her nails, we take turns giving her hair cuts, and we bathe her every 3-4 weeks.  There's no need for us to spend $30-$50 a month on pet grooming.      

If you can increase your income, and decrease your spending, it’s only a matter of time before you hit financial freedom.  With each monthly expense you cut out, that’s more money that can go towards saving and investing.  If your expenses increase as your income increases, you’re actually moving further away from financial freedom. 

A simple rule we follow when it comes to spending on wants: we write down what we want and see if we still feel like we want to buy it in a week.  Most of the time, the excitement of the purchase is gone after a week has passed.  If there is something you want to buy, check if you can get it elsewhere for free or cheaper.  If the item you want to purchase is a tool, can you simply borrow it from a friend or neighbor?  Ask yourself if your purchase offers any true, lasting satisfaction.

When it comes to saving and investing, just get started
The most difficult part about saving and investing is often just getting started and being consistent with contributions.  Many people are full of excuses that basically self sabotage their progress. 

“I’ll start saving more money when I get a raise.” 

I recommend starting with just a simple percentage to aim towards saving.  You can start with 10% savings off ANY income: paycheck, side hustle, gifts from grandma, etc.  For example, if you get $100, multiply that by 0.1 and save $10.  Once you get into a habit of saving small amounts, you can easily and quickly accumulate significant savings.  Just get started.

“I need to do more research before I start investing.” 

For a quick run down of everything you need to know when it comes to investing, read my Investing Primer series.  For more in depth reading, you can’t beat the thoroughness and simplicity of JL Collins Stock Series.  I started investing in my 401K at 3% contributions, ramping up my contributions a few percentage points at a time until I hit the maximum ($18,000 contributions per year).  Now the balance in my 401K account 5 years later is over $180,000.  The balance in my 401K would have never reached this level if I didn’t just start with a simple 3% contribution to get the company 3% match.  The stock market will go down and it will go up.  Stay invested for the long run and you'll do just fine.  Just get started. 

Boost your income with side hustles
Many people have regular 8-5 jobs that bring in regular paychecks.  What many don’t realize (or don’t want to bother with) is that there are many ways of hustling on the side to increase your revenue stream.  The more side hustles you have, the more diversity of income you can bring in. 

You can hear great podcast discussion on side hustles on this Afford Anything podcast episode.  Three main types of side hustles are discussed: the sharing economy, freelancing / expertise based business, and e-commerce.

The sharing economy includes hustles such as Uber, Lyft, Airbnb, Taskrabbit (handyman type gigs), Rover (pet sitting), Wag (dog walking and pet sitting), and Turo (rent out your car).  With these types of hustles, you are trading your time or asset for more income.  With freelancing and expertise-based business, you are selling your skill set and knowledge base.  This includes side hustles such as tutoring or coaching.  E-commerce is basically selling products online.  This can include selling things on sites such as eBay, Craigslist, or Etsy.  You can either buy merchandise at low prices to resell at higher prices, or you can produce your own goods.  I’ve done all sorts of side hustles including renting out a room in our home, teaching at the local university, and reselling on eBay.  Side hustles can quickly bring in extra money and diversify your income streams.       

Commitment is habit forming

It’s easy to get excited about saving money and investing.  Staying committed and focused on your goals is another matter entirely.  The important thing is not make your life miserable trying to save every penny you can.  The path towards financial freedom is not about depriving yourself of all joy in life.  It’s about being efficient with your money, optimizing your spending, cutting out all unnecessary expenses and investing in your future.  When you start committing to good financial decisions, they eventually become habits that require no motivation to maintain.  

Listening to financial podcasts about money such as the ChooseFI podcast and Afford Anything podcast have kept me motivated.  I walk 3 miles everyday with my dog and enjoy listening to these podcasts on my walk.  I’m exercising my body and my mind at the same time.  

It’s nice to have friends with the same financial outlook and goals.  I’ve joined a few financially focus Facebook groups (Mustachians on Facebook, Mustachians in Practice, and ChooseFI) and it’s nice to constantly read and participate in discussions about saving and investing.    

The Bottom Line

Would you be satisfied with sacrificing your family’s future due to current poor financial decisions now?  Are you content with the status quo of a 40-50 year working career?  We only get to live so long on this earth, do you want to spend the majority of it working a 8-5 job with a 1 hour round trip commute? 

Financial freedom is about happiness, peace, and pursuing what is really important in life.  Financial freedom is about working because you actually enjoy what you do, not because you need the income.  Financial freedom is about being a positive role model for your children, family, and friends.  If you can educate your children on how to take control of their finances, they will be set for life.  Once you reach financial freedom, your life choices can be focused on happiness instead of money. 

We still have a ton of work to do on our journey towards financial freedom.  We continue to work on bringing in more income, cutting out frivolous spending, and investing the difference.  The best things in our lives don’t revolve around spending money.  Focusing on optimizing our finances has definitely helped us lead a more meaningful and happy middle class life.

Our son is happiest when he is running around our neighborhood and exploring all of the plants and flowers.  This costs nothing. 

My personal review of Personal Capital

I’ve recently signed up for Personal Capital and have already been using the service extensively.  Personal Capital is a financial account aggregator that offers free financial tools to help you manage all of your finances in one place.  I’m sure many of you may have heard of it or may already be using it.  Think of Personal Capital like Mint.com, but more heavily geared towards tracking your investments and net worth.

I've been using Mint.com since 2007 and I love the simplicity of automatically tracking your expenses, income, investment returns, home value, etc.  Keeping track of my credit card charges through Mint has helped me catch a few small fraudulent charges over the years.  Mint is free and I regularly recommend the service to anyone interested in keeping an eye on all his or her financial accounts in one place.   

I've also recommended using ClearCheckbook as a manual way to balance your banking, credit card, and investment balances.  Some people find manually keeping track of finances to be a pain, but I feel like it helps me keep an idea of what is going on with our expenses.  After all, if you don't know how much money you need to live off of, how will you know how much money you need in the future for retirement?  I use this service daily to track my expenses and financial account balances.  ClearCheckbook is free.

Anyways, let’s get back to Personal Capital.  I've put off signing up for the service for a while, because I didn't want to mess around with yet another financial tracking app.  Mint and ClearCheckbook already do such a good job of tracking all of my bank accounts, investment accounts, home value, and rental property value.  Mint also does a great job helping us create and stick to a budget.  Where Personal Capital really shines is analyzing and managing your investments.  When compared to Mint or ClearCheckbook, Personal Capital offers superior tools for managing your investment portfolio.

Personal Capital’s features really impress me.  When you login, the dashboard provides you with your complete financial snapshot.  You can see information about your cash flow, budget, investable cash, investments, credit card debt, mortgage(s), and property values.

An excellent overview of our finances.  The mortgage tab includes our personal home mortgage as well as our rental property mortgage.  The other asset tab includes the value of both our home and our rental property.

I totally get why over 1.4 million people use Personal Capital to track over $350 billion.  I can see why so many financial bloggers highly recommend the service.  Personal Capital offers a ton of information regarding your investment portfolio, asset allocation, investment fees, tax optimization and projected retirement.  Signing up for Personal Capital and using the tools and resources offered is completely free.   

When I was tracking our investments with Mint, I could only see the account balances in our different investment accounts.  Every time I wanted to check on our exact asset allocation, I would have to manually pull all the information out and calculate everything by hand – that gets tedious and annoying.  Once I signed up for Personal Capital and linked all of our investment accounts, I could instantly see our exact asset allocation.

Seeing this information helps us better keep track of and rebalance our asset allocation.  This chart tells me that it’s time for us to load up on more bonds and international stocks.  Our investments are mostly in the Boglehead 3-fund portfolio.  This portfolio includes a piece of over 3,600 US stocks (Apple, JP Morgan Chase, Google, Chevron), over 5,500 international stocks (Nestle, Toyota, HSBC), and over 6,300 individual US bonds.   

Homeowners and landlords can plug in their home address and Personal Capital will automatically use Zillow to add your property value into your net worth.  Personal Capital can also track your student loans, mortgage, credit cards, checking and savings accounts.  I recommend married couples share the same login and information since you can get a big picture idea of how much the both of you are worth together, and see what's going on with your combined your incomes, credit card spending, and investment portfolios.  

The Personal Capital retirement planner is very easy to use.  You input your investments, savings, risk tolerance, desired monthly expenses in retirement and your desired retirement age.  The retirement planner allows you to add large upcoming expenses such as a home purchase, or college tuition.  You can also add income events such as projected Social Security distributions, rental income, pensions or inheritances.  The retirement planner then calculates your likelihood of successfully retiring when you want to.  It’s nice to step back and get a big picture look at your odds of successfully retiring when you want.  

We still have a lot to work on with our retirement.  I'm still playing around with the retirement calculator - it's actually a lot of fun.

The retirement planner allows you to adjust your savings rate and annual expenses, providing instant feedback on how those changes affect your retirement and allowing you to check if you are on the right track for your retirement.  No matter your financial situation, the retirement planner can help build a detailed plan for your retirement.

Personal Capital displays beautiful graphs and charts to help you visualize your investments and asset allocation.  The software and interface are easy to use.  The iPhone app is great as well. 

Once you hit 100K of investable assets, a licensed financial advisor from Personal Capital will call and see if they can schedule a free telephone consultation.  During this phone call, the financial advisor will take the time to discuss your financial goals and questions.  The financial advisor will discuss ways to improve your portfolio, reduce your fees, and optimize your taxes.  There is no obligation to speak with them but it may be nice to get some input on your personal financial situation.  This phone call is free of charge.   

In addition to the free investment and retirement tools, Personal Capital does offer professional investment management.  Their financial advisors can manage your assets by helping you stick to your asset allocation, cut investment fees, do tax loss harvesting, provide customized retirement planning and much more.  Here are the fees:

There are 3 levels of account management: Investment Service (up to 200K in investable assets), Wealth Management (200K to 1M in investable assets) and Private Client (over 1M in investable assets).  

These levels of management offer features such as 24/7 call access, 401K advice, college savings, estate planning, private equity review, hedge fund review and more.

While Mint.com and ClearCheckbook.com are great for tracking your finances and sticking to your budgets, Personal Capital excels at tracking your investments.  This is especially helpful when your investment account balances start growing into significant values.  There is definitely a place in your financial toolbox for Personal Capital.  I highly recommend checking out Personal Capital and playing with the investment analyzer and retirement planner.  You can sign up for your free account here. 

I am an affiliate for Personal Capital.  If you sign up from a link on this page, I may receive compensation.   

The pillars of financial independence

On my daily walks (~2.5 to 3 miles a day), I enjoy listening to various podcasts.  One podcast I enjoy listening to from time to time is the ChooseFI podcast.  While most of the concepts presented on the show are not new to me, it’s interesting to hear the various ideas of financial independence (FI) presented as well as interviews with notable financial bloggers.  One episode I recently heard and really enjoyed is called The Pillars of FI.  I think the hosts of this episode did a great summary of the fundamentals of financial independence.  It’s a great reminder of the things we need to focus on as we pursue our financial freedom.  Here are the pillars of financial independence discussed on the episode.

1.  Low cost index fund investing

It is consistently proven time and time again that financial experts cannot consistently pick stocks or funds that will beat the average market returns over time.  Actively managed funds may on occasion beat passive index fund investing, but they don’t usually earn enough to make up for their expensive fees.  While an individual stock may skyrocket in value, it may also plummet in value.  I wouldn’t trust our entire retirement portfolio to a few hand picked individual stocks.  If you really want to make money on individual stocks, you need to take high risks and put a lot of money (and risk) into those stocks.  On the other hand, index fund investing has low costs, broad diversification, and reliable long term growth.  Read Jim Collin’s stock series for more information on index fund investing.     

Early in my investing career, I made the mistake of not investing as early as possible.  My first full time job did not offer a 401K retirement plan; I responded by not bothering to invest.  I kept telling myself that there would be plenty of time to invest once I started making more money.  When I finally opened a Roth IRA, I went with Edward Jones.  My Edward Jones financial advisor sold me on expensive funds with high expense ratios and a 5% front load expense.  For every $100 I contributed, the firm took $5 off the top.  I’m glad that I learned about Vanguard and low cost index funds.  I was charged a $40 fee for closing my Edward Jones account to transfer all of my money into a better place.        

2.  Do not try to time the stock market
Studies consistently find that investors that try to dance in and out of the stock market and time their purchases and sales tend to lose more money than investors that stay invested. Fidelity investments did a study of the portfolios that performed the best from 2003 to 2013 and they found out that the best performing accounts were from investors who were dead!  Since they didn’t touch their accounts, the balances were left to grow over time.  The second best performing accounts were from investors who had forgotten that they even had accounts at Fidelity.  Investors who try to chase performance or those that buy high and then sell low when their investments don’t perform do not earn as much as those who simply buy and hold.  When trying to time the market, you need to be right two times: when to sell and then when to buy.  It’s a loser’s game.      

3.  Affordable housing
Since your rent or mortgage is likely the largest expense, it is important to keep your housing expenses low.  I made a mistake of buying a house that was too large for my needs.  When I first started making good income, I bought the most expensive house that my income allowed me to get financing for.  This made me feel house poor for several years.  This is when I got creative and decided to rent out the extra rooms in my home to bring in additional monthly income.  Once my wife moved in and we combined our income, I finally felt much better about owning our home.  Our house is on track to be completely paid off in 13 years.

For those looking for housing in high cost of living areas, consider having a roommate to cut down on costs and share expenses.  Do you want to be financially free or live in a nice place you can’t spend time in since you have to work hard to afford the payments?  If I could go back in time, I would have looked to purchase a smaller home with less space to build up clutter, lower mortgage payments, and less property taxes and insurance costs. 

     

4.  Car ownership

Monthly auto loan or lease payments can hold you back from achieving financial independence.  One of the pillars of financial independence is buying a used fuel-efficient vehicle and driving it as long as possible.  Owning a car has many extra expenses such as regular maintenance, fuel costs, repairs, vehicle registration fees and auto insurance.  Higher end luxury vehicles need more expensive fuel, have more expensive upkeeps, and have higher insurance and registration costs.  Having a car can be a huge money pit.  This is why many financial bloggers recommend biking / walking to work if possible, completely eliminating the need for a vehicle and its related expenses.

Years ago, my wife and I both sold our paid off cars to buy new ones.  Looking back, I definitely regret selling those vehicles.  They still had many years of life left in them.  While many financial bloggers recommend buying used, I bought a brand new Lexus IS250 in 2008.  We leased a Prius for my wife in 2013. I definitely regret leasing the Prius - what a waste of money.  At $342 a month for 36 months, that’s $12,312 that could have gone towards investments or even a high quality used vehicle.  When it was time to return the Prius lease, we decided to purchase a new car in cash – and be completely done with car payments.  We expect many years out of our paid off cars. 

My dream is actually to be car free.  If public transportation were more feasible in our area, I would be all over it.  I’m looking forward to a time when self-driving vehicles can bring us where we want to go; I personally hate driving. 

5.  Food expenses

I have to admit, we love eating out.  We consider it a special treat to go out to eat at a restaurant.  That being said, we really don’t eat out that often, maybe 1-2 times a week.  We pretty much bring our lunch to work every single day.  Most of the time, we enjoy a home cooked meal.  Good food doesn’t take long to make, and you can be sure all the ingredients are fresh and healthy.  There’s no need to get into your vehicle, drive to a restaurant, wait to get served, and then tip at the end.  Preparing your own food is faster, cheaper, and much healthier than eating out.  Did anyone else catch the story about a frog found in a BJ’s Restaurant salad?

 

6.  Tax optimization

Many financial experts recommend maxing out a 401K since it lowers your adjusted gross income (reducing your taxes), and also allows you to invest more money up front pre-tax.  Without getting into all the details now, there are strategies of withdrawing money from your 401K before the standard withdrawal age of 59.5.  There are even methods to keep your tax rate of withdrawals very low. 

The best part of investing in your 401K is that your 401K pre-tax deposits happen automatically.  You are dollar cost averaging your investments consistently with each paycheck.  Over time, you just get used to living off the remainder of what your paycheck provides – you won’t miss those contributions.  If you can’t afford to max out your 401K right away, slowly increase your contributions as your pay increases. 

7.  College education
With the help of scholarships, financial aid and cheaper college tuition due to attending public schools, my wife and I were both lucky to graduate college with very little debt.  College and higher education costs have skyrocketed today.  I hope there is some type of college costs reform in the future by the time our son is ready to attend college.  In the meanwhile, we have already started a 529 account for him at Vanguard.  While we feel it is important to help our son with his future college expenses, we also know that it is even more important to make sure we secure our own financial freedom.  As the saying goes: you can take out loans for school, but you can’t take out a loan for retirement. 

   

8.  Travel rewards maximization
This is a big one for me and my family.  Properly utilizing credit cards, rewards points and airline miles have been a huge part of our financial journey.  While I love my job, I love my 7 weeks paid time off even more.  Going on vacations helps to keep us sane and breaks up the monotony of our weekly work routines.  Credit card points and miles have allowed us to travel the world without breaking the bank.  We’ve even had the chance to fly Cathay Pacific First Class and Singapore Airlines Business Class – experiences we would never pay for with cash.  

We’ve used our points on ourselves, and have also shared them with family.  Thanks to extra miles we had, we will get to treat my father to his first business class flights – he’s quite excited.  I regularly write about how much money we save by paying for flights and hotel rooms with points.    

 

9.  Cancel cable subscription

While canceling your cable or satellite television won’t make you rich, it may reduce your monthly expenses by $50 to $150 per month, which can go towards investing.  The most important part about canceling your cable (or any other subscription) is that it keeps you mindful of where your money is going.  If your cable bill is $150 a month, are you getting $150 worth of value from the expense?  With streaming services such as Netflix, Amazon Prime, and HBO Now, it’s easy to activate and suspend service as needed.  With Amazon Prime, you can watch television and movies a la carte and if you really want to watch something specific that you can’t stream for free.  $100 a month invested at a 7% rate over 10 years will return over $17,700.   

10.  Reducing your cell phone bill

We get our phone bill covered through my employer since I occasionally need to be on call for the hospital when my patients need access.  If I didn’t have our $100 a month cell phone bill covered, I would look into cheaper cell phone plans such as those offered by Republic Wireless. 

11.  Unconventional thinking
Striving for financial freedom involves attitudes and actions that go against the grain of mainstream consumerism culture.  Society tells us spend on money on material things.  Clothing designers try to sell consumers on fast fashion - style trends that come and go in a matter of months.  Traditional financial pundits recommend saving 10% of your income for 30-40 years, and you might get a chance to retire at age 65.  Traditional financial advisors talk about focusing your retirement goal on replacing 80% of your income, when only your yearly expenses should be used as a guideline. 

I first learned about financial freedom when I stumbled upon the Mr. Money Mustache blog.  Start by reading this post, titled Getting Rich: from Zero to Hero in One Blog Post.  Mr. Money Mustache has opened my mindset up to the unconventional thinking involved with truly getting rich quickly.  No fancy stock trading tips or gimmicks, just cutting back on expenses, saving much more than traditional financial pundits recommend (at least 50% of your income), and investing the difference.  Being frugal doesn’t mean being cheap – to me it means cutting out wasteful spending and consciously choosing to spend your money on experiences or quality things that truly make you happy or add to your life.  Striving to reach for financial independence involves thinking outside the box.             

So there you have it, the pillars of financial freedom.  What are you working on to move closer towards your own financial freedom?