Financial Independence

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Financial Independence

“Having cash gives you flexibility”

The Concept:

The most basic version of this is shown in the quote above: being debt free and having cash set aside gives you choice. You could take a fun trip around the world. You could start your own business. You could give generously to your favorite charity. You could retire early and have the money to enjoy it. 

The only question is how extreme you want to take it. Dave Ramsey talks about living on “rice and beans” while you are paying off large amounts of debt. Do you want to reach your goals in 10 years or 30 years?

My Story:

I was lucky enough to have very frugal parents that had money conversations early and often. You really can’t start too early with basic money concepts. I started with little “banks” for Saving, Spending, and Giving. I would receive an allowance of 75 cents, making an even three-way split across my banks. When I wanted to buy something, I had to save. No begging my parents for the newest toy or computer game. (My parents were generous on birthdays and Christmas, so that usually held me until the next year.)

As a teenager, I started completing extra chores and putting the money into a real savings account at a local credit union. Credit unions are really the best place to start as they can usually offer better rates on most products. I remember being asked about an ATM card and my mother saying “No.” almost immediately. The point of a savings account is to save the money and only take it out in an emergency or for a future planned expense. Even at this young age, I was learning the hard lessons. 

My first “real job” was working retail during the holidays of my senior year in high school. I didn’t make that much, but I learned about tax withholding and how to manage a checking account. I experienced my first and only overdraft fee on that checking account. Instead of my debit card being declined at the register, the bank let the purchase go through and created a negative balance. After paying off the fee, I closed the account with that bank. (I know that several online banks and even traditional banks are doing away with these types of fees these days.) 

For the next 10 years, I had my money in the credit union checking and savings accounts. I made my way through a failed college internship, first full-time job, and first steady office job. I saved up the cash for a security deposit on an apartment and moved out of my parent’s home into the fully financially independent world.

I could pay my rent and normal bills with my income. This is the way you are supposed to do it. No loans, no credit cards, just the paycheck and proper planning. Every paycheck, I could put a reasonable percentage into my 401 (k). I started working the late shift and every other holiday to save even more money. (Money is not the key to happiness, but I refuse to be 65 and barely surviving). 

As my income increased, I adjusted my retirement savings up to keep myself from spending all this extra money I was receiving. My job had me speaking with customers all over the country and I could see how important it was to manage money well. I even learned that people with a better credit history have cheaper auto insurance. (There are movements to get that data point out of the industry, but it is still early days).

The hand-me-down car from my parents was aging, and it was time for a new one. This would become my first genuine experience with debt. Even though I knew the “new” car would need some work, after spending something like $3,000 on repairs, I was pretty fed-up with the constant maintenance that was required. I calculated the numbers and decided that over the lifetime of the car, it would be cheaper to just buy a new one. (I have to point out that this was technically my first rationalization for increasing my convenience by using debt. I also bought the new car directly from the car dealer and fully financed through their finance company.)

Three years later, I ended up repeating this mistake after my car got flooded during one of the many Florida hurricanes. This time I got the 10-year warranty. I was lucky to have a very respectable credit score by this point, but taking on that much debt wasn’t needed. I could have purchased a slightly used vehicle for a lot less. Next time I get the used car and pay for it with cash.  

Not more than a year later, I discovered that my current workplace was not going to be around much longer. I had decided I wanted to stay with the company and booked some flights to visit the other locations. To read more about that adventure see Business or Pleasure Part 1. 

The adventure taught me a lot about myself and how I wanted to live in the future. Luckily, I found a job role and location that I liked and could secure a job a few months later. I immediately felt the pressure of having to pay for my move. Florida to Illinois is not a small move, so I had to make some decisions. 

Bank interest rates have been low my entire adult life thanks to the 2008 Financial Crisis and the more recent 2020 pandemic. However, this would not have prevented me from building an emergency fund. The only real savings I had back in 2018 was in my 401 (k). Over the years, the credit line on my cards had slowly risen, but after two big trips across the country, those were getting a little tight as well. Not to worry, I have good news: my 401 (k) allows me to take out a loan off of my current balance. Dangerous? Yes. I did not see any other way to come up with $6,000 that was needed.

By the time I arrived in Illinois, I had this loan on my retirement account, credit cards at about 80% usage, the vehicle loan, and a lower income after losing my shift pay. Also, don’t forget, I have almost no “in the bank” savings. All this became extremely ironic when I started my new job as a Bank Customer Service Rep. Yes, you read that correctly. I was processing money movement for customers all over the country. After 18 months of seeing the full range of financial scenarios, I decided I was over being the victim.   

The Change in Behavior:

I started listening to podcasts with people like Dave Ramsey and Chris Hogan. I started reading books about personal finance. (My dad was actually writing the first draft of his financial book.) I set-up automatic saving transfers with dedicated categories. I slowly started to see money that was mine. My bank even allows buckets inside your savings account for more granular control. I slowly built out a minimum emergency fund. I made a plan that shows how to pay off the credit cards (plural), and the vehicle loan. Phase 2 of the plan shows how much I would need to save for a full six-month emergency plan and at least 10% of a down payment for a house/condo. 

Let’s not kid ourselves. All this will take another 4 to 6 years, unless something dramatically changes in my financial life. This is the first time that I have thought truly long-term about my financial future. As part of this plan, I have a separate Travel Fund that has a small amount of money deposited into it every paycheck. This helps me see that “slow and steady” is working. It is hard to see when you are staring down a pile of debt. 

All that travel, moving, and living in a new place hasn’t paid off yet. My most recent steps to help with this was to sell off a few single stocks that I had invested in earlier. This will cut my credit card debt in half. My 401 (k) loan will be paid back by the end of this year. I am also moving into a rental home soon that will save me over $150 a month on rent.   

My Definition:

Financial Independence is being debt free and having a safety net in cash. When I have a decent down-payment for a house or condo, I will get a loan (last debt) and pay it off quickly. Then I will never get another loan again. I will close my credit cards and I won’t need a credit score. This is the right type of “extreme” for me. I did just fine without the credit cards before and I will again. I will be intentional and I will be generous. I will enjoy lots of travel throughout the year and pay for it in cash.