3 Ways You Can Achieve Financial Independence And The Retirement Of Your Dreams
My life’s ambition is to help as many people achieve financial independence as possible. That means being able to retire comfortably, as early as possible, in order to live life on your terms, not those of your boss. I recently came across an inspiring article that highlighted a married couple whose financial situation mirrors that of millions of Americans, including, up until recently, my own. Let’s take a look at the story of Al and Lesia Riddick, and how their experiences can serve as a great guidepost to our own journeys to financial independence and the retirement of our dreams.
From $150,000 In Debt To $1.5 Million Nest Egg
In 2002, the Riddick’s got married and started their new life together with $150,000 in debt including: a mortgage, student loans, and car payments. The Cincinnati couple decided to devote themselves to becoming debt free, and by 2007 had paid off all of their debt. This was very fortunate because in 2010 Al lost his job of 16 years, thanks to the aftershocks of the Great Recession. Fortunately as he told Nerdwallet, “When you lose a 16-year job but you have no debt whatsoever, it allows more options in life. Option A was to get another job, and option B was to follow my passion and purpose to help other people become more financially fit, so that’s what I did.”
Thanks to being debt free Al was able to start his own business, Game Time Budgeting, a company focused on teaching others how to become financially independent. He later wrote a book, “The Uncommon Millionaire”. So how did this couple go from $150,000 in debt to a networth of $1.5 million today? By following a three step process that we can, and should, all strive to emulate.
Step 1: Control Your Expenses And Enjoy Life While Living Beneath Your Means
Budgeting is no fun but it’s essential if you want to become debt free, financially independent, and achieve the retirement of your dreams. The first step is to think of your household like a business, which means getting a handle on your cash flow. In the case of the Riddick’s they don’t live like paupers, but are just very disciplined with prioritizing what expenses matter to them. For example, they don’t attempt to “keep up with the Jones” by impressing their friends with conspicuous consumption.
According to Lesia: “Some of our friends think we’re kind of weird, but we don’t think we’re weird. … Sometimes people expect you to live in a bigger home and drive big fancy cars that cost a lot of money, but we just choose to live a different lifestyle. At the end of the day, it’s really all about choice…A lot of times people say, ‘You’re still driving that old Toyota?’ … I’m like, “This is why we can go on vacation, because we choose not to spend money on cars.” … I love couponing. We go to the matinee for movies. So we find other things we save on, but a lot of that money goes to our vacations. That’s what we like to prioritize.”
In fact, thanks to their ability to economize in all aspects of their lives except for their passion of travel, the Riddick’s are able to take not one, not two, but three international trips per year. The key is knowing yourself, your spouse, and what your most important priorities are. Better yet, as Mrs. Riddick explains, neither she now her husband feel trapped by their disciplined budgeting: “We also have our own allowances. … So that allows for the spontaneous spending. … It’s your personal money. You always get the same amount every month. So you can have fun as well.”
We all like eating out, going to the movies, and enjoying life in general. The secret to the Riddicks’ success is they managed to find a way to enjoy life to the fullest while being as efficient with their money as possible. In other words, they made sure to stretch their dollars to the max, thus allowing them to still live well, without having to spend above their means. Or to put another way, they set themselves up for long-term sustainability, where they can each spend a certain amount to make themselves happy, yet had the peace of mind knowing that becoming debt free and financially independent is just a matter of time.
Step 2: Pay Down Debt
Total household non mortgage debt has now surpassed $1.3 trillion, and the average American is drowning in debt. Consider these statistics courtesy of a 2017 study by NerdWallet:
- Median student debt (if you went to college): $49,000
- Average Mortgage debt: $173,000
- Median credit card debt: $16,000
- Average car loan: $30,000
- Median household miscellaneous (personal loans) debt: $10,000
- Average household debt: $139,500
Note that the average household debt figure includes those without any debt at all.
Now I’m not highlighting these statistics to scare you, or give you a sense of doom or gloom. Rather it’s to give you hope. If you have a lot of debt, you are not alone. In fact, when I finalized my messy divorce, I was left with $50,000 in debt, no home, and no savings at all (my ex-wife got the retirement portfolio). I literally had to start from scratch and know how daunting it can be to see a mountain of debt looming over you and think “I can never pay that off”.
So here’s a trick that both the Riddick’s and I used to pay off our debt quicker once you’ve mastered your budget and are living below your means. Start by paying off your smallest loans first. While the interest payments may not necessarily be the lowest on those loans, the mental boost you get from scratching off a loan quickly from your list can help you stay focused on your long-term goal. And what about your big debt like your student loans or mortgage? Well that’s going to take time. So I recommend doing what the Riddick’s (and I) did, which is setting aside money for leisure and guilt free spending.
When you know that the fun you’re having isn’t going to harm your long-term financial health, you can enjoy eating out, or going to the movies, or a theme park, far more. In contrast if you have to put those things on a credit card that you can’t pay off each month? Well then from personal experience I know this can cause the entire activity to feel hollow and lose its luster.
Step 3: Convince Yourself (And Your Spouse) To Trust The Incredible Wealth Compounding Power Of The Stock Market
The biggest benefit the Riddick’s had is that their parents both taught them the importance of maximizing their retirement savings. Now mind you neither Al or Lesia are passionate investors. But they did make a goal, and stuck with it, to not just pay off their debt, but then continue living frugally and max out their retirement savings starting on January 1st, 2008 (once the debt was all gone).
The route they chose was as simple as you can get. They maxed out their 401Ks, optimizing their employer matches. What did they invest in? Nothing other than low cost S&P 500 index funds. These people knew that the stock market was a great wealth building machine, but didn’t have the time, expertise or interest in picking individual stocks. Note that the couple threw themselves into retirement savings at what can be considered the worst possible time, right about when the market peaked before the financial crisis. But the one thing that the Riddick’s did know how to do well was be disciplined, and take a long-term view of things. During the biggest stock market plunge since the Great Depression (second biggest in US history), they kept saving and avoided panic selling. They knew that stocks tend to go up over time, and that the lower and longer prices fell, the better off they’d be in the long-term.
Source: Returns 2.0, Wealth Of Common Sense
In other words, they intuitively realized that as long as your time horizon is 10 year or more, it’s almost impossible to lose money in the stock market unless you sell during a correction. Another thing they had going for them is that both of them were onboard with the entire financial plan. The budgeting, living frugally, paying down debt, maxing out their retirement savings, both agreed to this. Personally the biggest mistake I ever made was marrying the wrong person, someone whose financial mindset was 180 degrees different from my own.
While I have always been a saver and investor, my ex-wife was brought up believing that money is for spending, impressing your friends with nice things is important, and that debt is fine because we might all die tomorrow. In other words, she took the concept of “live each day as if it were your last” too literally. The number one cause of divorce is financial strain, and this couple shows that if you find the right partner, then you can overcome incredible obstacles and end up with enormous savings.
Bottom Line: Financial Independence Isn’t Easy, But It Can Be Done If You Follow The Right Path
Don’t get me wrong, I’m not saying that achieving financial independence is easy, or that everyone can necessarily do it. Life is messy, complicated, and a lot of things can, and will, go wrong with our plans. I myself have suffered numerous setbacks on my road to a rich retirement, and the Riddick’s started off their life together with no savings and a whole lot of debt. But they managed to turn their financial life around their story can serve as a great example of how there is hope for most people. Through three simple steps nearly anyone with: discipline, determination, and patience, can achieve the American dream of financial independence and a prosperous retirement. You just have to remember to: live below your means, avoid permanent and excessive debt, and follow a long-term buy and hold strategy with your portfolio.
Note: This article originally appeared at Dividend Sensei.
Photo: “Money!” by Tracy O is licensed under CC BY-SA
Category: Personal Finance
