Young folks can usually digest a difficult message more easily when it comes from someone who is not: (a) their parent; (b) their teacher; nor (c) anyone else whose lectures they are sick of hearing. In that spirit, we’re starting out 2014 with 10 ways people of any age can safeguard their financial independence. Please feel free to pass it along to anyone in your life who could use a nudge in the right direction from someone other than Mom and Dad.
Wealth is not gauged by how much money you make, but rather how much you keep. Accumulating wealth, regardless of your age, gives you options and independence. It’s sad when people toil in jobs they hate because they need the money. Anyone in that position finds their employer controls their time and, sad to say, much of their happiness (or lack thereof).
We all want to be free to enjoy our lives in the manner we choose. Those who manage to achieve this state of nirvana have internalized these 10 pillars.
Pillar #1: Do Not Make Debt a Way of Life
Debt is enemy number one of financial independence. Let’s take a look at the most common form of debt, a home mortgage.
Joe and Suzy are in their late 20s with a young family. They’re tired of paying ever-increasing rent and want to buy a home. They sacrifice and save $50,000 for a down payment on a $250,000 home.
Joe and Suzy chose from two mortgages, both charging 5% interest. One is based on a 20-year amortization, and one has a 30-year amortization. How much will the home really cost them?
If they choose the 20-year mortgage, their payments are $1,319.91 per month. If they choose the 30-year mortgage, their payments are $1,073.64 month—$246.27 lower. By choosing the lower payment, they’re adding $69,732.00 to the cost of their house. Why did it cost so much more? Because of the rent they paid on the money they borrowed for another decade. Had they been able to make the higher payments, they would have 10 years with no house payments to accumulate wealth for retirement.
If, instead of paying the mortgage, they saved $1,319.91 a month for the next 10 years after they’re done with the home loan and earned 5% interest on their savings, they’d end up with $204,958.63 in savings at the end of the tenth year.
Therefore, their choices are to sacrifice a bit now so that in 30 years they have a home paid for and $204,958.63 in the bank, or a slightly smaller house payment and a home paid for without a good start on their nest egg. Many of the choices you make 10-20 years ahead of retirement can pay off very well when you want to retire.
I’m a firm believer in paying for your home as soon as possible. Unfortunately, beginning with a starter home and moving up to McMansion after McMansion has become commonplace; this habit can make it practically impossible to pay off your home in a timely fashion.
Pillar #2: Saving and Wealth Accumulation Are Different
Some of the happiest folks at our 50th high school class reunion still lived in modest homes in nice neighborhoods which they had bought in their 20s and 30s. These homes had been paid off for years, and they managed to accumulate a lot of wealth when they no longer had to make house payments.
On the other hand, those who bought McMansions were trying to sell and downsize in a down market. They needed equity from their homes to enjoy financial independence in their golden years.
Financial independence and happiness comes to those who live within their means and make wealth accumulation a major priority. Financial independence is relative, and your attitude plays a big role. For some, financial independence means living in a doublewide in a 55-plus community; for others, it means million-dollar homes and five-star travel. My wife and I have friends in both camps, and it makes no difference: they have all put themselves in a position to enjoy a lifestyle they can afford without major financial worry.
Pillar #3: Never Go into Debt to Buy a Toy
This is a personal favorite. Whatever your toy of choice—a boat, motorhome, four-wheeler, you name it—if you want it badly enough, save the money to buy it. Interest rates on toys are exorbitant because they depreciate so rapidly. I have too many friends who borrowed thousands of dollars for a boat, made extra payments, and still had to write a check to the loan company when they sold it. I get it! It’s damn tempting, but just don’t do it.