Benjamin Franklin: “Beware of little expenses; a small leak will sink a great ship.”
During my wife and myself’s journey of FIRE (financial independence retire early), one of the most important things we did together was to sit down at the end of the year to see how we did the previous year. Did we manage to put away decent amount of money towards our retirement? Did we manage to make extra payments towards our mortgage? What about credit card bills and debt?
Sometimes it’s easy to lose sight of what you’re doing when you’re living through hectic day/week/month. I mean who has time to sit down and to think these days in our crazy, internet fueled world we’re all living in?
Well, the short answer is, you must sit down, to think, to reassess, and to reaffirm your plans once in awhile. There is no better time to do that than at the end of the year (or the beginning of the year).
End of the year is a great time for several reasons:
- You can clearly see the amount of contributions you’ve made into your retirement accounts whether it’s the company sponsored accounts like the 401k or an IRA (Individual Retirement Account) at the end of the year. For accounts like the 401k, you can find out how much you’ve contributed and if you’re lucky, how much your company contributed to your account as part of company matching.
- You can find out how much you’ve paid down your mortgage for the year
- You can figure out how much debt you’ve managed to pay down (if applicable)
- You can see how you’ve managed your budget for the entire year
As we look forward to the year 2024, sit down with your significant other to look back at your previous year so you can make sure you’re still on track to be financially independent or to retire early. Here are some of the things we used to do during our yearly financial and other checkup:
- Did we meet or exceed our goal of putting away money towards our retirement?
I started putting away the minimum amount of 3% into my company sponsored 401k account (my company’s minimum amount it put away when I don’t do anything to it except open one) the first couple of years. I, like most people, didn’t know or was too lazy to learn how to properly utilize the 401k account.
I didn’t know what to do, was too proud to ask anyone, and honestly, it was just too intimidating. I remember attending a meeting set up by HR (Human Resources) and 401k company’s representative, but like most people attending, I had the common “deer in the headlights” look all throughout the presentation.
I came away from the meeting more confused than ever, and I just about gave up trying to do anything with it. So for the first two years of my 401k account creation, I was buying company designated “Target date funds”, which are ok if you’re lazy and don’t know how to or what to choose as investments, but the downside is that the fees sometimes tend to be higher than say index funds, and the rate of return tend to be lower than other funds.
In the beginning, I didn’t know any of this (nor did I want to know), so I kept putting away the measly 3% of my salary into my 401k account. I was clueless and hopeless, thinking I can retire (not to mention retire early) by putting away this tiny amount.
After encountering the FIRE movement, I finally decided to take matters into my own hands and started to force myself to learn about investing. Long story short, by the penultimate year before my early retirement, I was putting away something like 24% into my 401k, which at that time, was the maximum amount I can contribute to the 401k! Hooray!
Don’t be afraid to ask for help if you’re not comfortable with the 401k account or the IRA account. Ask someone (your parents, HR, 401k company, relative, etc.) to help you get set up initially. My nieces and nephews have asked me to help them once they got jobs with 401k, and now they’re on their way to becoming financially independent if they keep at it.
Have interest to learn how to invest. There are so many places to learn how to do that if you’re looking for help. The best person who should look after your money (and your future) is you! Get after it!
If you’ve put away 5% last year, increase it each year (sometimes few times per year). Within a span of 1 1/2 year, I increased my contribution amount from 10% to 17%, then again to 20%. Before I did that, I thought I was going to die, seeing my paycheck decrease.
After two of those reduced paychecks though, I didn’t miss it. I adapted to living with less money by budgeting: spending less than what you make. Talking about budgeting leads into our next thing…
- How did we do on budgeting for the year?
You really can’t figure out how much you can save if you don’t know how much you spend every month. Create a budget by adding in your income per month, then jotting down every single thing you purchase into that budget.
After a month you’ll get an idea how much you bring in vs spend. Try to embrace minimalism (of living with less), not “Keeping up with the Joneses”, and to stop looking up influencers on social media to be swayed into buying anything!
Once you do all that, you should have more money you can save each month. You need to begin to practice budgeting to get better. It’s like anything you become good at. Practice, practice, and practice.
Retiring early (or retiring) depends on two things really:
- Budgeting so you know what you’re spending vs what you’re bringing in. The less you spend, the quicker you’ll become financially independent because it means you’ll be able to save more money. The opposite is also true: the more you spend, the slower you’ll become financially independent because it means you’ll have less money to put away towards retirement.
- By budgeting, you can put away the maximum amount each month into your retirement so you can decide to retire early if you so choose, or continue to work but be financially independent which gives you so much flexibility
Remember, budgeting is not just to get you to save more money during your accumulation phase of your retirement journey, but also to help you after you retire. You needed a budget yesterday, you need one today, and you’ll need it tomorrow. That’s how important budgeting is.
- Did we pay down the mortgage and make extra payments on mortgage?
We’ve owned three different homes in our lifetime. Although we didn’t pay down our mortgage on our first home, we did on our second, and also on our third home.
On our second home, we made roughly $350 extra payment each month totaling about $4000 to $5000 yearly and on our second home, we made at least 2 or more extra payments each year also totaling about $4000 to $5000 yearly. It was not easy, but then, no one said retiring early was easy.
We are glad we took the more difficult path of paying down our mortgage as that ended up saving us decent amount of money in interest over the term of the mortgage. Each year, we would sit down to look at a spreadsheet that shows the remaining mortgage balance and we would come away feeling better knowing we’re making strides.
This is why you should also do the same. Find ways to keep more of your hard earned money by spending less. Spending less will free up more money to either save more for your retirement or pay down the mortgage.
- Did we pay off or did we reduce our other debt?
There was a time when we had close to $20000 in credit card debt. It truly was a time of high stress and we felt like the whole world was against us even though we were the ones who spent the money in the first place.
When we finally paid off that debt, it felt like we lost an 800 pound gorilla that was sitting on top of us. We felt liberated and proud we had paid it off. Each year, sit down and see how much debt you have. Create a plan to reduce that debt, and plan on paying it off as soon as possible. Why give money to your lenders when you can put that money to good use on your mortgage and/or retirement accounts!?!
Don’t count on anyone or the government to bail you out of your debt. Take personal responsibility and pay your debt that you’ve accumulated. Believe me, it was a great lesson for us to never do that again!
Spending and accumulating debt is so easy. In the United States, 70% of our economy depends on consumption. Just because the stats say that, doesn’t mean you need to spend money you don’t have! Be a contrarian and don’t spend on things you don’t need.
If you do have debt, create a budget to pay it off. We did it, and so have millions of others.
- How did we do mentally? Do we still have an unwavering commitment to this goal?
Everything we do in life cannot be done haphazardly if you want to get results. You’re not going to succeed in anything if your heart and mind isn’t in all the way.
This is true of becoming financially independent. Everything in learning to be financially secure is hard to do. You have to do the opposite of everyone else to succeed: You can’t buy unnecessary stuff, you can’t take fancy vacations, and you can’t try to keep up with the Joneses.
You have to ask yourself. Is this what you want? For most people, that answer is a resounding “No”.
Most people will take the path of least resistance, meaning doing the same thing that everyone else does, to fit in. If you don’t care to fit in, with anyone else’s definition of “fitting in” except your own, then be committed to this goal 100%.
Don’t do this half way. Like anything you become really good at, commit, practice, make a plan, recommit, and repeat every so often. There are NO SHORTCUTS IN LIFE!
If you want something bad enough, you must sacrifice, persevere, and push on.
In conclusion:
I’ve said this a hundred times already but here it goes: Life is hard. Make something out of it rather than blaming everyone else for your problems. Man up, take personal responsibility.
Recently I watched an interview with a former NAVY SEAL David Goggins. His story is incredibly fascinating as he grew up abused by his father, became overweight (300 pounds in his mid twenties), but one day decided he needed to change the trajectory of his life. He was tired of his job as an exterminator making $1000 a month.
He joined NAVY SEALS and made something out of himself. Today, he is an ultramarathoner, a triathlete, an author, and a public speaker. If this story isn’t inspirational, I don’t know what is…
No one will solve your problems for you. No one will give you a nice and easy life for you. You have to do something about it yourself.
Make a plan to budget each month, pay down debt, save towards your retirement, then rinse and repeat! There’s something to be said for showing up each and every day to put in the work. Without this sacrifice and work hard, there cannot be success, no matter what the endeavor…
Good luck on your path to financial independence and keep up your good work.
Jake
Wandering Money Pig
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