early retirement

Money Beyond

Saving The Next $50,000, You Can Do It Now

Money Maroon

On the journey to financial independence, each milestone is fuel for the next. One of the greatest initial milestone is that of accumulating funds over time. Once you have accumulated your first $50,000, it is time to think about saving the next $50,000 and beyond.  The biggest step on your journey to financial independence is the step you take today. Take the next step.

The Plan – Saving The Next $50,000

Just like enacting any plan that requires a change in habits or direct action, implementation of your plan to financial independence can be difficult. If you choose to save by cutting back on eating out, this will no doubt affect your social life. If you decide to work a side hustle, this will take time from other activities. To journey to financial independence, you will make sacrifices. 

However, by the time you begin saving the next $50,000, you have already made changes and can now use the momentum that you have build up saving your first $50,000 and further optimize your strategy. Because of the habits formed saving your first $50,000, saving the next $50,000 will be easier to achieve.

Your Emergency Fund

By the time you are on the path to saving the next $50,000, based on your lifestyle, your emergency fund may now be fully funded or very close to being fully funded. This is a huge step and should provide comfort for you and your family. Saving 3 months, 6 months, or one year of expenses in your emergency fund is a huge step and you should feel very proud of yourself for achieving this milestone. Further, you should be motivated by the fact that you can do it. You can do this. The steps taken to financial independence is paying off.

You got this
You Got This!

Once you have achieved a fully funded emergency fund, do not stop saving. Continue the same habits. Do your homework, research and optimize your plan. Achieving financial independence takes time and consistency.

Once you have fund your emergency fund, instead of putting money into an emergency fund, you are now able to contribute that money to another area of your plan. Will you be contributing more to retirement, paying down debt if you still have debt, or invest?

Contributing To Retirement

Once you begin to save, you should attend to your retirement fund, especially if your employer is providing a match. No matter how little you may contribute, contribute to your retirement. 

Now that you are saving the next $50,000, begin to increase your retirement contributions, especially if you have already paid down debt. In the year 2020, your contribution limits for a 401k is $19,500 (catch-up contribution limit for employees aged 50 and over is $6,500). The contribution limits for an IRA is $6,000 ($7,000 if you’re age 50 or older). As such, you are able to put away $25,500 ($33,000 if you are aged 50 or older).

On the path to financial independence, by consistently contributing to tax advantaged retirement accounts, it is possible to join the 401k millionaire club.

Paying Down Debt

Once you begin to save, you will  also need to attend to debts. You will definitely want to keep your accounts current by paying at least the minimum. Once your emergency fund is fully funded, it will be time to pay more than your minimum. 

Remember, the best way to obtain a 16-18% return (the average interest charge on a credit card), is to pay off your credit card debt.

It is advisable to pay down debts having the highest interest rate. This will lower your interest payments as you pay down the debt. Another approach is to pay down the smallest debt first, such that you have a snow ball effect of paying the least balance to highest balance. The method used here is up to you. Which method will motivate you to pay down your debts faster?

Paying down debt in the early stages of your journey to financial independence typically provides the greatest early return. Paying down debt yields exponential benefits as it frees up funds for contributing to retirement and investment accounts such that you are able to take advantage of the power of compounding.

Ride The Wave – Saving The Next $50,000

As you are able to fund your emergency fund, pay off your debts, and contribute to your retirement, you will begin to have more funds available to further your race to financial independence. The funds that went to your emergency fund can be used to pay down debt, contribute to retirement fund, and/or invest.

Do not feel the need to “reward your self.” You do not want to fall into the trap of lifestyle creep/lifestyle inflation. You do not want to raise your standard to living as you earn more/have more disposable income. There are lots of folks who save the same amount when making $100,000 as they did when they were making $50,00. If you follow this path, this will be a detriment to your ultimate goal of financial independence. 

As your income/disposable income increases, the amount you save/invest should be increase as well. Live below your means, and journey to financial independence.

Conclusion

On the journey to financial independence, each milestone is fuel for the next. One of the greatest initial milestone is that of accumulating funds over time. Once you have accumulated your first $50,000, it is time to think about saving the next $50,000 and beyond.  The biggest step on your journey to financial independence is the step you take today. Take the next step.

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Emergency fund

Benefits Of Having An Emergency Fund

Money Maroon

“Emergency” and “fund” are the new buzz words of any financial advice. You have heard it and have been told many times to have an emergency fund. How much you should save is typically dependent on who you ask. Some say have at least 3 months, others say have at least 6 months while others have recommended up to a year of your monthly cost of living saved. Whatever the amount you have settled on trying to save, start saving now. On the journey to financial independence, there are many benefits of having an emergency fund.

Financial Stress

Financial stress is not only one of the leading causes of divorce, but also stress and all related pathologies. This comes as no surprise in view of recent reports. Survey after survey notes that we are not saving enough for retirement. There are monthly reports noting that most cannot afford a $500 emergency without going into debt. Additionally, the average American has over $38,000 in debt. With regard to student loans, in the US, student loans are now over $1.6 trillion.

Less Financial Stress

What would having a months cost of living in a bank account do for you emotionally and psychologically? Would this mean not living pay check to pay check? What about being able to afford that unexpected car repair, and being able to cover that often raised $500 for an unforeseen expense. The stress relief and feeling of well being, yes, these are the benefits of having an emergency fund.

Now, multiply the amount saved by 2, 3, 6, 12, or 24. The more you save, the better the feeling. The more saved in an emergency fund, the less financial stress.

An Emergency Fund Provides Confidence

With less financial stress, comes confidence. The confidence to take active steps in life to better yourself and financial position. If you are not worried about living pay check to pay check, you can focus more on your career, education and/or family. All of which builds confidence. The more you save, the less on a tight rope you live. The more you save, the less reliant you are on your job to pay for the next 1, 2, 3, 6, 12 or 24 months of expenses.

Confidence is the ability to push back when your boss mistreats you or put you in a compromising situation. Having an emergency fund puts you in a position to fight back because financially, you may not be completely reliant on that job. An emergency fund gives confidence and options.

An Emergency Fund Creates Opportunity

Having an emergency fund allows you to take advantage of opportunities. Opportunities do not come along on a predicted timecourse. Opportunities present themselves on a random untimed basis. 

Consider the previous financial downturn of 2008. To many, the recession was a devastating event for all the known reasons. However, to others who had money saved and were able to buy into the stock market at a significant discount or purchase homes at discounted prices, the recession was a massive opportunity. The financial downturn of 2008 was a realized opportunity to many who had the financial reserves to take advantage. 

While the financial downturn of 2008 is an outlier with regard to the size of the opportunity, the same principles apply for the small opportunities that present themselves daily. Those who have the financial capital and confidence to do so, will take advantage of these opportunities. Having an emergency fund will place you in a better position to take advantage of small and large opportunities alike.

Conclusion

An emergency fund is a specific group of assets, typically cash, that are readily available to help one navigate unexpected financial difficulties. These financial difficulties include but are not limited to loss of a job, illness, and/or repairs. Whatever the amount you have settled on trying to save in an emergency fund, start saving now. On your journey to financial independence, there are many benefits of having an emergency fund.

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Income and expenses

Understanding Income and Expenses

Money Maroon

On a basic level, financial independence requires an understanding of your income and expenses. Without a full understanding of what you are taking home and what you are spending, you will remain financially lost.

Asking The Questions

If you are thinking about financial independence, you have asked certain questions and have come to certain realizations. When did you realize that you may have to work the rest of your life? When did you realize that there are families who could relax and not lift a finger and their wealth would continue to grow? Upon the realization of the first thought, you will almost certainly think of the second.

Was it in school? Were you visiting a friend? Did you overhear a conversation? Were you on vacation? Was it after viewing a facebook picture? Was it following the purchase of a big-ticket item (home or vehicle)?  Were you checking your account balance, reviewing a bank statement, or looking at your paycheck? Were you paying a bill or a portion thereof? Was a purchase declined?

The Calculation

At one point or another, we all do the calculation. If my salary/yearly income after taxes is $X, and my expenses are $Y, $X-$Y = working forever.

At this point, one has a choice: (1) continue down the same path or (2) make a change. You are reading this because you want to/have made a change.

On a basic level, to change the above in your favor requires an increase in $X and/or a decrease in $Y. While this is a basic concept understood by all, the above is easier said than done.

Increasing Income

With regard to increasing $X, you may:

  • Save
  • Request a raise at work, 
  • Start your own business, 
  • Invest,
  • Begin one or more side hustles, 
  • Go back to school, or
  • Change jobs. 

Decreasing Expenses

With regard to decreasing $Y, you may:

  • Give up coffee and avocados (or whatever your daily morning pleasure may be),
  • Downsize your life (reduce the size of your home, or vehicle)
  • Bring your lunch to work, 
  • Cut back on purchases (shoe, clothing), 
  • Move closer to work, 
  • Change modes of transportation (buy a bicycle, take public transportation), 
  • Change living conditions (get a roommate, move in with mom), 
  • Paying down debt, or
  • Decrease the number of vacations/ stay at an air bnb rather than at a five star hotel.

Taking action to improve your financial situation is harder said than done, especially if your financials are impacted by your education level, children, health or student loans. The combination of any two of these will significantly impact your saving rate, and thus your retirement plans. However, the fact that you are thinking about your financial future means that you are ahead of the crowd. Continue on your journey to financial independence by understanding and tracking your income and expenses.

Conclusion

Financial independence requires an understanding of your income and expenses. Without a full understanding of what you are taking home and what you are spending, you will remain financially lost. We will tackle paths to financial independence here at JoToFI.com. Journey to early retirement and financial independence.

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Video Summary

Financial Independence: Income and Expenses