6 Simple Steps to Financial Independence

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2:30Mindy Jensen:A lot of people think building wealth and reaching financial independence requires complicated investing strategies, perfect market timing, or even an extremely high income. But for most people, building wealth is actually driven by a few simple principles repeated consistently over a long period of time. In this episode, we break down the six steps to building wealth and achieving financial independence.

2:59Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my loves to build wealth co-host, Scott Trench. Thanks, Mindy. Great to be here. It's net worth it to me to come up with a really good pun for this particular intro. I think that many people make building wealth out to be much more complicated than it has to be. It's not extremely simple, but we can distill it into, I think, six fundamental building blocks, which we're going to talk about today. And I'm looking forward to it. So with that, do you want to kick us off with step one?

3:27Mindy Jensen:Yes. So step one is tackle the big expenses. I don't want to throw a little duh after this, but that is number one, tackling your expenses because less money out for things can be more money into investment accounts. So let's start with the big three, housing, transportation, and food. Housing isn't just your rent payment or your mortgage payment. There's a lot more to it. In many cases, as a tenant, you're also responsible for utilities. You have renter's insurance. If you're a homeowner, you've got even more expenses, taxes, insurance, your HOA dues if applicable, repairs. There's a lot that goes into your housing expense.

4:09Mindy Jensen:And if you can keep this low, this is gonna be one of your biggest expenses ever. The lower you can keep that, that's the less money going to housing and more money available for your investing. Transportation, just like housing, it's not just the car payment. It's your gas, it's insurance, it's maintenance and repairs. I think it's the repairs that a lot of people don't remember to factor in or budget for. Food is restaurants and grocery stores, but it's also coffee out, drinks at the bar, vitamins and supplements if you're taking those and not tracking them as a separate expense. It's a lot of different things.

4:46Mindy Jensen:And you can go out to restaurants and pay inflated retail prices for somebody else to make you dinners all the time, or you can cook them from home and save a lot of money. There's lots of ways to hack these expenses. And these are just the three big ones. What would really, really help you if you are trying to get your expenses under control is to know where your money's going. Track all of your spending. When you track every single dime that's going out of your pocket, you get a much more clear picture of where your money's going. A lot of times when you're not tracking your spending, you're actually just kind of spending willy-nilly.

5:28Mindy Jensen:Like your money is just flying out of your pockets and you don't know where it goes because it's only a dollar. It's only$10. What is that? I don't need to keep track of that, but those little expenses add up. So to track your expenses, you can DIY in a notebook in the least technological way possible. That's how I first started tracking my expenses when Carl and I were trying to figure out where all of our money was going. You can also do a spreadsheet. There's a lot of DIY apps. Scott, you and I both use Monarch to track our expenses, track our net worth, track our investments. Once you add all of your accounts to your Monarch account, you pop in and you get a complete snapshot of your financial picture in like five seconds.

6:11That's right. Me and my wife track our spending with Mark. And we literally, every week, we have a little household meeting that we schedule for an hour. It usually takes 30 minutes. And one component of that meeting is just to review the last week's expenses, every single transaction, and make sure that they're categorized. That gives a tremendous amount of control over day-to-day spending. But I also argue that that's the 20%, right? If you're looking for an 80-20 approach to saving money, the 80 % is your housing, transportation, and food expenses, just like you said, Mindy. This is not like a new analysis.

6:42It's the most obvious analysis you could possibly come up with. It's just that most personal finance discussions out there tend to avoid the hard topic of saving money on housing, transportation, and food because they're big decisions that impact you every single day. But because those are 60 % of the average American's household spending, and because I saw that early on, I chose at an early age to house hack or live with roommates. I lived with roommates for a year before I house hacked to keep my housing expense very low. I chose to buy a Toyota Corolla instead of a fancier car that I could have afforded and a bicycle, which I generally used as my main means of transportation when the weather was nice or I could.

7:23And then I also decided to pack my own lunches most of the time with reasonable food from reasonable grocery stores instead of eating out for lunch or dinner on my own, for example. I did not forgo meals out with friends when those came up, but the vast majority of my food, reasonable purchases from reasonable grocery stores. And those three decisions are what enabled me to achieve a very high savings rate with reasonable choices everywhere else. It's just that those require very hard lifestyle choices for the first few years, or at least a few years out of a career. And some people want to avoid those decisions.

7:54But if you really want to get ahead and achieve some kind of version of financial freedom early in life, I believe you must confront those three expenses or you're going to severely handicap your journey.

8:04Mindy Jensen:Yeah. And Scott, especially with the food, it's not an either or. Either I cook at home or I go out. There's no in between. You said it best. You said, I still went out with my friends, but I brought my lunch to work. There are so many ways for money to fly out of your pockets just through food. And housing, I think right now we're in a little bit of a squidgy situation. I know several people who bought a house a while ago, their house payment is now low, but if they would have bought a different house when they first started out, it would be even lower. They don't have the option of house hacking or they don't have the option of really reducing their housing expenses right now because of the interest rate environment we find ourselves in.

8:48Mindy Jensen:But if you do have the option to house hack, it's essentially it's just living with roommates or owning a duplex where you live in one side and you rent out the other side and the other side helps subsidize your housing payment. It's not a difficult analysis to see that millions, tens of millions of American households, once they buy a house that stretches them to their financial limits, are going to be trapped in that house. It's going to reduce their savings rate, deploy the vast majority of their liquidity, and they're not going to be able to sell or refinance unless things go very, very well.

9:21That was not a difficult analysis well before interest rates went up. We talked about it, and it's literally written down in many of the works that we've produced here. It's just so much more acute with the lock-in effect, the low rates that folks have today versus how we would have seen the situation five, ten years ago. But it doesn't change the fact that this is a very knowable problem that you can avoid for yourself if you make the hard decision to defer the dream house until you're wealthy.

9:47Mindy Jensen:Exactly. Scott, Carl and I are building our dream house. We have been married for 24 years and we have been live in flipping to get to the point where we can build our dream house. You should see some of the houses that we moved into. Nobody would call them a dream. Now, the ones we moved out of, those were dreamy, but the ones that we moved into, not a dream. So even if you can't traditionally house hack, there's still my version of house hacking where you are buying a house that isn't super pretty and you're putting money into it to make it look nice. We learned how to do all the work ourselves.

10:26Mindy Jensen:We learned how to lay tile. We learned how to install wood flooring. We learned how to do all this stuff. It's really not that difficult. However, even if you are paying somebody to do the work, chances are good you're gonna make money when you sell the house. Now, I'm not guaranteeing you're gonna make money when you sell the house. You definitely need to know what's selling in the area and not over-improve or under-improve for comparable houses near you. That's an episode we could get into a little bit later, like how to live in flip, because I've done 11 of them and I've got some tips. But you don't have to take it to the studs to make it a live in flip.

11:06Mindy Jensen:You could buy a house that's got black walls on the inside of the house that nobody else wants to buy, buy it, paint it. And now all of a sudden you got a nice house. Okay, Scott, now that you have thought about your big three, you've looked at where your money is all actually going. You have reduced the money that is coming out of your pockets and going to things. What are you going to do with that money? Well, you got to start investing it, right? The number one correlate to financial independence, the timeline to financial independence is your savings rate, the percentage of your income that you accumulate each year.

11:39You can increase that first and foremost by reducing your top three expenses like we just discussed, but you can further reduce it by playing a tax-advantaged investing game, right? Some of the most well-researched information out there suggests investing in market cap-weighted passively managed index funds. However, the way that you put money into those index funds can matter and to a big degree. And there's a lot of different and debatable approaches about the best tax advantaged order of operations. One that you might consider is going to be building an initial emergency reserve, maybe $1 ,000,$2 ,000, eliminating any bad debt with high interest, let's call it over 6, 6.5%, taking the 401k match offered by your employer, considering an employee stock purchase plan if the terms are favorable at your employer, then fully funding that emergency reserve to three to six months, then taking advantage of the triple tax advantaged HSA, health savings account if you have a compatible health care plan, fully funding your 401k or your Roth IRA.

12:38There's a really good debate and there's a decision to make about which one to max. If I'm in a lower income tax bracket, like the 12 % income tax bracket, I'm probably going to favor the Roth, maxing the Roth before the 401k. If I'm in a higher one, like the 22 or 24 % marginal income tax bracket, I'm going to want to max the 401k before the Roth. Then considering things like 529 plans, and finally, things like taxable investment accounts. After we are very close to approaching financial independence, that's when paying off low interest rate debt comes into play. But you can see that there's room for nuance and debate and discussion in there.

13:13But writing a tax-advantaged order of operations down and then progressing as far through that as your financial situation allows is going to be a major boost, maybe 10%, 15 % boost to your savings rate depending on your tax bracket in a given year, which can make a big difference on the journey to financial independence.

13:30Mindy Jensen:Scott, you just ran through 11 steps and I counted out, not every single one of these will apply to every single person. There are five to 11 steps that everybody can use in their investing order of operation. So we're gonna make this a pretty little document to put on our resources page, which is biggerpocketsmoney.com slash resources. is, and then you can go in and make your own investment order of operations. Take out the ones that don't apply to you. Keep the ones that do. If you want your 401k below your Roth IRA, you can move them around. We're not the boss of you. But what I like about this, Scott, is that it gives people a place to start.

14:10A mistake people make that I've made in the past is attempting to be optimal when reasonable ought to be the goal. And there are many reasonable variations of this order of operations, picking one and committing to it and then changing it in year two or three as your circumstances change is going to put you ahead of 99 % of people. All right. What's the third step to building wealth here, Mindy?

14:30Mindy Jensen:Scott, the third step is to actually have a written goal or vision or aspiration for your life. And I am going to go right back to you on this one. You created an amazing document that you have already uploaded to our resources page. It is the goal setting worksheet, and it is a nine-page document. Carl and I are still in the middle of doing hours. It is not a five-minute job. It is going to require you to think about what you want your ideal life to look like. And I don't want to work anymore. Isn't going to cut it. Scott, you have given such clear instructions and such great examples in the goal-setting worksheet.

15:13Mindy Jensen:But having a clear goal of the timeline you want to reach financial independence, having a clear goal of what you want your life to look like afterwards helps you start thinking about all the things you want to do. Oh, I just want to quit my job. Yeah. And you can't just quit your job. And I mean, I guess you can just quit your job and sit around and do nothing all day. But I don't think that's really what most people are trying to accomplish here. So Mindy, as you said, yes, I think that having a vision for your life is really important in the wealth, in the context of wealth building, because what are you saving and accumulating and investing for?

15:45This question has never been a challenge for me because from the get-go, I had a vision, like what I want for my life. And this is kind of cheesy guru stuff in many cases, which is why we just offer this for free at biggerpocketsmoney.com slash resources. You can just make a copy for free. You don't have to give us your email address or anything. You can download it as a Word document or open it as a Google doc here. And it's just like a seven-page template. You can download and modify it or write in it if you want to print it out. And it just says, you know, list some gratitudes. Think about what you want your life to look like?

16:16Your physical environment? What do you want your typical weekday to look like? Your life with your family, your community and relationships, and then your physical fitness and health, mental and happiness, financial position, or other categories if those are important to you. Some people have spiritual, for example, that they'll put in here. And I have my literal life vision, slightly modified for public consumption, but this is almost exactly what my wife and I talk about on a quarterly basis, an update in there as an example. And what's awesome is that the work that we put in over the last decade or 12 to 15 years in building wealth has spit out almost exactly the vision that we were looking for when we started.

16:54And that's a wonderful, wonderful outcome for us. And that's the point of doing all this. And the reason that's so important is when you're in year five of your grind on a wealth building journey, you're going to need to remember why you're setting out for this, making sure that you're actually building towards this future life that you want, that it's still realistic and that you're still on track. Yeah.

17:13Mindy Jensen:And Scott, this isn't just you and me thinking this is great. We have 2 ,500 people who have downloaded this document already. So if you're on the fence about it, just download it. Like Scott said, it's free. We're not even asking you for your email address. Although if you would like to, you can certainly sign up for our newsletter. And then modify it. Make the changes. You don't have to do exactly what we said, but if some, any version of here's the future state that I want my life to work towards, we'll help you with that. And then iterate on it, right? We thought we wanted something totally different five years ago when we got married, my wife and I, and we've modified that and eventually settled on the life that we have today.

17:47Mindy Jensen:But the goal setting workbook is a great start. It gets you thinking about the kind of things that you should be thinking about, especially if you're in the beginning of your journey. However, if you've never sat down and written out your goals, this is super helpful. I had to think about a lot of different things than I was thinking about Scott. So thanks. And this is my job. I talk about this all the time. OK, Scott, what do we got next? Well, I think that translates very nicely into the fourth step to wealth building, which is gearing up for the seven to 15 year grind towards financial independence.

18:22There are outliers who get there sooner and there are unlucky folks, I think, who achieve a 50 percent savings rate and for whom it takes much longer to get to financial independence. But if you can get to about that 50 percent savings rate, you should expect a seven to 15-year grind to a state of defensible, permanent financial independence. And this is a kind of awkward phase for a lot of folks, right? You've got your spending dialed in, your income is growing, maybe you're getting an annual raise or a bonus along that journey. You're moving through, I use this word too much, but defensible retirement account investing stack and order of operations.

18:57And every year you accumulate and the market goes up, down or sideways and compounds or accelerates growth or maybe pulls back two steps forward, one step back. This is the journey to financial independence. It's boring in the middle, fundamentally, once you get all of these automations and the foundational components into place. That's the feeling of becoming rich. That's what this looks like. That's what wealth building looks like. And you got to commit to that and make sure that that journey is pleasant, right? That's where my framework was, you know, the fun in life is going out with friends, attending ball games, going on trips, those types of things.

19:31It's not the crazy dream house in the wealth building years or the fancy car or ordering Chinese food solo or in most nights. It's the things that are social that are pertaining to my entertainment or the fun components of life. Once I achieve financial independence, yes, then I want to begin thinking about the dream home. Maybe I can upgrade some things if my wealth and my financial a position to support it. But that is really what I think is the grind is all about is making sure it's fun, sustainable, rewarding your relationships and the important things in life are progressing, but you haven't quite gone in and splurged on the big things yet.

20:05Mindy Jensen:Absolutely keep the end goal in mind while also building in rewards for milestones and for fun. Carl and I were like, oh, okay, we have to put our nose to the grindstone and just get there. and our journey was about 10 years and it was about 10 hard years. And if I could go back and do it over, I would have made it a lot more fun. Incorporate the fun things, incorporate the easy things. I might not have done quite so many live-in flips, frankly, but just taking a little bit of the burden of we have to get to financial independence off of our shoulders would have been really great. So do as I say, not as I do, make it an enjoyable seven to 15 years.

20:49Mindy Jensen:Hey, make it an enjoyable eight to 16 years. If it takes an extra couple of years to get where you're going, but you love it the entire time, that is such a better experience. Yeah. Work hard, play hard is not incompatible with FIRE. Work hard, live large is incompatible with financial independence. Okay, Scott, I'm going to have you take the fifth step too. What is the next step that our listeners should be thinking about on their journey to financial independence and building wealth? I think that this is where we, you and I, Mindy, and BiggerPocketsMoney diverge from many other philosophies about building wealth.

21:27What we've talked about so far in reducing expenses, investing with a defensible approach, having a clear goal, and committing to the grind, that's the formula for wealth building. But across how many reps, thousands of reps talking to people who have actually built wealth and achieved financial independence, a huge portion of them and almost the overwhelming majority of those who get there very fast have also placed additional side bets, whether they're live in flips or house hacks or business bets or side hustles or, you know, some kind of project or alternative investment. investment. Many, many, many stories in the financial independence community have these tales, these one-offs, these things that don't fit nicely into the box of the formula that we just prescribed here.

22:11And we think you should be trying those kinds of bets as well. Not expensive bets. Don't take 50 grand if you're worth 100 grand and place it all on black in the investing space. But you can build a website. You can try something out. You can explore a house hack. You can think Think about a small partnership or try a side hustle while working your full-time job. And the success probabilities in any one of those does not have to be high if the cost to get into it is low. And the upside could be huge. And I think that you are doing yourself a disservice if you're not placing a handful of those bets every year across the aggregation of your FIRE or financial independence journey, because some of them will work across a large collection of bets.