Building Financial Momentum

With the right actions today you have the potential to reach financial independence decades before your peers.

Have you ever tried getting back into working out after years of being away from the gym? What's the hardest part? If you're like me, it's simply taking that first step back into the gym because the pre-requisite for that first step is the rekindling of your "why" and having that clear vision of what I want to achieve. Then with a plan in place, a vision for the end result you're ready to move mountains on day one. If you're able to sustain your motivation for just 2 to 3 weeks it should be long enough to morph that routine into a solid habit. From that point on going to the gym is no longer a chore, its apart of your lifestyle and in-time the results speak for themselves!

As it turns out, building the right Financial Independence habits for your life will likely start out in nearly the same way. It's more than possible to have FI if you start today but the first domino isn't going to knock its self down!

The 1st Domino

“With the right financial systems in place you could be on track to be Financially independent in just 15 - 20 years of working.”

When you have an account balance of zero or even negative the journey to FI could feel so distant that it's not even worth thinking about. However, this is exactly how nearly everyone starts the journey. No one can start our bench pressing 250 LBS on the first day at the gym. It just comes down to REPs and SETs. Of course, you have to consistently put in the work but over time you'll see the results.

If you're going to have the benefits of compounding interest(the most powerful element of the entire FI equation) working for you on this journey you have to get started ASAP. So start today! Dream up your "WHY" and write it down so you can look at it everyday. This is the fuel you need to set in motion the momentum that will carry your FI Plan forwards.

“If you want to be successful, figure out what your goal costs, then pay it.”

Once you fully commit to the idea of financial independence and you're excited about the possibilities it could have for you and your family it's time to direct that energy towards determining the actual "future state" that you desire. eg. what will this dream cost? This might be obvious but I can't emphasize this enough. If you want to be successful, in any area of life, figure out what your goal costs, then pay it. As a good plain vanilla starting point, I would suggest $50k in annual gross passive income. Based on a 4% annual withdrawal rate it will require 25x that value in an investment portfolio to reach Financial Independence which is $1,250,000. (FI = $50k x 25 = $1,250,000). In future blog posts I will show you how to calculate "Your Number" but for now this is less important and the key is just taking action towards the general goal of $1,250,000 today. Action today, not a year or two from now, is the only way to build your Financial Momentum that will carry you forward.

Step One: Setup Automatic withdrawals to fund your FI Fund. I've never liked the idea of budgeting and I'd venture to say its likely the case for most of the creative Maker Revolution types reading this. So instead of adhering to a strict budget in a much faster and direct way I first decided on my percent allocation towards investing. For me this started at 15% of my gross income. After a few months you'll have a handle on how sustainable this is long term. If you can take the weight just ratchet up the percentage. Once you've decided on your percent withdrawal it's time to put this on autopilot. This way every future month will have an automatic deduction that goes straight into my investment accounts.

Financial Momentum is built on a daily basis. The key contributor to achieving liftoff here is your savings rate. Once you're consistently saving then its time to start making your money work for you!

Don't budget, scrutinizing you and your spouses past purchases, just bucket what percent you plan on investing and then automate the monthly allocation! There's a time and place to squeeze your expenses but at the start of the journey just start with automating your monthly FI Funds.

Step Two: Invest the FI Fund into a diversified portfolio. Having your FI sitting around in just cash is a guaranteed way to loose 1-2% of it's purchasing power annually. Remember the Federal Reserve has two objectives; to maximize employment and to keep the inflation rate at 2% over the long run. They have the keys to the printing press of our fiat currency so don't bet against their ability to reach their goals! Put your cash to work for you and focus on investing. Each month your investment fund should automatically invest in a broadly diversified portfolio of Stocks and Bonds.

At this juncture it's worth noting that most Investment Firms over complicate "the right allocation" and charge hefty fees to "manage the complexity" so in a future post we will cover target allocations from top to bottom. It's much easier than most realize.

Step Three: Net Worth Tracking. Even when you're starting at zero its a worth while exercise because it instills the Millionaire mindset. You'll begin seeing purchases as either long term assets, liabilities or expenses. Prior to a purchase you will start to consider the opportunity costs. Knowing that money could be earning you 8% in the market that $20k boat will cost you $1,600 in just the first year! When you consider purchasing a new car and you see it costs your Net Worth $5,000 in just the first day you drive it off the lot. Of course its even more of a loosing proposition when you consider over a 10 year period of time its residual value will drop like a rock down to no more than $3,500 - $6,000. Even though it looks cool in the moment it costs you your TIME in the future. By tracking your net worth it will help you visualize and internalize the goal of Financial Independence. Everyone's journey has setbacks and mountains to climb but keeping track of your progress is a monthly opportunity to reflect on your progress. It may start out more as a reality check, it did for me, but in time, you'll look back and be proud of how far you've come.

The Fundamentals of Financial Momentum

The idea of saving 15%, 25% or even 50% of your gross income for investments may seem outlandish. However, this is a core step in moving towards your FI goal. FI only works if you spend less than you make and consistently invest that money over time. Keep in mind nearly everyone feels like they are starting with the hurricane wind at their face. It's an uphill battle at the start but it does get easier. The momentum you need starts with the above three steps. Once the train is moving down the tracks you'll see your investments start to grow and create you more money over time. Half of your FI fund will someday be made up of just the interest on the money that you put in. Ponder that one... If you have the luxury of time on your side start now and let your money earn money on your money. This is how the rich get richer. Invest in assets and over-time you too will be rich. The automatic monthly deductions will get more comfortable in time and your net worth calculations will start to surprise you.

It's time to go back to the gym! No one every won a body building competition, a 100 Meter dash or set the school record in high jump by hoping someone or something would do the work for them. The workout plan is on the wall, it's time to grind it out!

If you want Financial Independence - Own your current financial position, put the FI plan in motion and stay consistent. Over time the results will start speaking for themselves.