Financial Independence is a long road for many and the advice is often the same: spend less than we earn and invest the rest wisely. The end result is what many consider to be financially free: where our assets provide enough income to cover our expenses.
There are four phases which represent a path from being stuck to reaching personal finance mastery. The end result is the master black belt who demonstrates his combat skills in an effortless, artistic expression of physical and mental harmony.
These phases do not represent the steps from being broke to being a millionaire. These stages come first, before the transition to becoming materially wealthy. I’m convinced these phases must be reached before one reaches financial independence in a healthy manner.
Along the road to achieving this larger goal are smaller milestones we should hit if we are to insure ourselves of maintaining financial independence.
If you’re a fan of psychology or emotional intelligence you will likely have come across various topics on learning a new skill. Malcolm Gladwell, bestselling author, is commonly credited with popularizing the 10,000 hour rule in his book Outliers. A more in depth analysis that provides more scientific proof was discussed in the book, The Talent Code, by Daniel Coyle.
Both excellent books and the premise is the same: it takes 10,000 hours of dedicated, smart practice to master a skill.
The reason why the majority of quick rich schemes and lottery winners end up worse years after they hit it big is because they skipped the steps I’ve outlined here. Whereas, if we take the time to transition from 1 to 4, then achieving financial independence is a permanent accomplishment unless we get struck by lightning or suffer a similar unfortunate event.
Mastering personal finance includes understanding our own emotions and beliefs. In my relationship with my girlfriend, we used to hold ourselves back from feeling happy or great because we felt guilty or undeserving. We both were experiencing lifestyles that were better than those enjoyed by our parents.
We have since grown through this stage and have shifted our perspective and focus on realizing the benefits associated with being in a better financial position to care for our parents as they become older. This was a stressful period for us but a step in the right direction.
While this is our personal situation, I have found similarities amongst many individuals who feel some negative emotion as they get closer to achieving financial independence.
Sure, this list primarily focuses on Financial Independence, but it also relates more generally to learning about personal finance. FI allows an individual to achieve enough wealth early enough to do more with their time than the standard 9 to 5. If we want to retire early, start up our own business, or quit our job to work for less pay in a more desirable location/industry, those are all options that become available.
Without further ado, here are the four phases and how they relate to pursuing financial independence:
Four Phases of Financial Independence
Phase One: The Matrix
The first phase begins before we become a beginner.
This is the phase where someone is plugged into the matrix without realizing they are part of the machine. They do not seek out ways to maximize their wealth by reducing their spending or increasing their income. Often, there is no money put aside for investments and so learning about investments doesn’t make practical sense given there is no potential return to be made.
Many people are jolted out of the first phase by a single event.
The story I often hear is how personal finance becomes valuable only after a difficulty or turbulent event in life. For me, my journey began when I graduated with 45k in debt thanks to student loans and witnessed my parents income disappear during the Financial Crisis. These two events sparked my interest in learning more about money so that I could remove that stress in my life.
Other common events include: purchasing a home, combining finances after marriage, having a baby, saving for college education, or suffering from a major setback such as the loss of a job or even worse, the loss of a close family member or spouse.
These events all have the power to push us into the next phase of our lives and with that typically comes greater responsibility.
The first phase ends when we see the benefits of not only personal finance, but begin to understand the possibilities associated with achieving financial independence.
Phase Two: Rookie Year
I use the term ‘year’ because this phase is often short lived.
As I mentioned above, the common advice is to live within our means.
If we want to achieve wealth sooner, then we need to find ways to live well within our means.
The difficulty (and where mistakes often occur) is in taking these initial steps.
It can be hard to break free from previous financial habits, especially if they have been engrained in multiple generations. For my family, cars have been a big purchase. They resemble a status symbol in terms of how an individual is doing in their job.
In my working career, I’ve moved closer to work so that I could walk. Avoiding the need for a car might be inconvenient on days when I need to rent a car for a day, but this single decision has put my financial independence date closer by at least 20%, or about 10 years.
This car example is just one small piece that occurs when we move through this “Rookie Year”. We start to identify similar purchases we might be making that don’t provide the type of security and confidence that comes from learning about personal finance.
Outside of our expenses, we also face risks with where we begin to invest our money. Pursuing financial independence means we have excess cash flows that can be used for whatever we want. If our aim is quit our job, then that’s one of the benefits afforded by smart investment decisions. For others, they might want to funnel that excess cash into developing a business. And for some, the pursuit might be to afford a family vacation next year.
My experience through this phase was that I read dozens of books on the latest and greatest investment techniques. I then read a few books by Warren Buffett & John Bogle who recommended buying a slice of the ENTIRE market. By following this approach, we can put our money to use and still have all our time left to increase our income, find new ways to save money, or enjoy our time elsewhere.
Investing in the market for the long haul can be simple and getting started has never been easier. The rules of the game have been relatively unchanged for decades, and technology has made it possible to manager a portfolio from a handheld device with the touch of a button.
But just because it’s “age-old” and easily accessible doesn’t mean there’s nothing to it. A word of advice (a warning, really): It is not uncommon to be approached by professionals who claim to know what is best for our money. Without having had much experience, it is easy to view these professionals in the same way we view doctors.
Quickly, we learn this period is a stressful one because we understand that there is A LOT more to learn. I’ve had the common thought of “I wish I knew this before I…” on many occasions.
Luckily, the core principles remain the same and if we focus on the fundamentals, then we will quickly pass through this phase with limited stress.
The best approach through this phase is learn as much as we can from the mistakes of others. If we make one ourselves, then brush it off, learn from it, and move on.
Phase Three: Competency
This phase represents the 10,000 hours I discussed above. This isn’t to say we will diligently work on personal finance and perfecting our portfolio, but this is the phase most of us will spend the bulk of our time in. Reason being that this is where we transition into becoming financially wise, not only with our investment approach and our spending habits, but more critically, with our emotional intelligence.
We begin to notice where there’s an opportunity or where a situation is too good to be true. Arriving at this understanding still requires a lot of work as we think through our options and weigh all the various factors.
Competency is also the first stage where we often are solicited by friends or family for personal finance advice or even asked for money. This phase can create enormous amounts of stress and each family is different.
It has been my experience that it is best to focus on making ourselves strong before we make others strong.
This stage is commonly the first time we can demonstrate modesty and humility with money. When we begin to accumulate enough money for a lifetime at an early age, some individuals will see this as a stockpile of money that can be used today. Friends and family may start to view us in a different light. Some will look up to us and ask for advice, but others might resent our success and be envious of our situation.
Phase Four: Mastery
The fourth stage is Mastery.
A quote from the famous jazz icon Charlie Parker sums this phase up perfectly and I don’t need to add more than this, “Master your instrument, master the music, then forget all that shit and just play.”
What phase along these four do you find yourself in?
The most important take away is understanding that these phases vary much like a spectrum. My girlfriend and I fluctuate between stages 2 and 4 at about a 45, 45, 10 ratio.
By embracing my unconventional approach to paying down my student loans, I feel I have mastered the mechanical steps that can help me reach financial freedom. I’ve learned how a budget can work side by side with my lifestyle instead of against it.
Does this mean we’re done now?
Not even close. There are phases to gaining Financial Independence, but it should not be seen as a “phase” in and of itself, but rather as a lifelong process of building wealth. It is not like building furniture — we don’t put the pieces together and leave it sitting pretty in the livingroom. It’s more like getting a puppy. We brought it home, now we have to raise it; our state of wealth must be cared for with discipline.
We have a LONG way to go in terms of the emotional aspects of accumulating wealth & sticking with our budget. Of course, there is always room to expand our income, but our focus most recently has been on decreasing the amount of money we spend.
With that being said, one of the joys we have been pursuing has been to find frugal hobbies that help us enjoy our path to Financial Independence.
In this regard, I may never truly reach a level of mastery, but I have seen a track record of improvements made each quarter going back to when I started tracking in 2011. The best approach I have found is to focus in on the bigger items we can improve in the span of a few weeks or months. Not only does this help in terms of monetary gains as a % of the period before, but also in terms of feeling happier and more at peace with the decisions we make related to our personal finances.
P.S. As the first quarter of 2016 is coming to a close, I will be posting up our financial net worth. I’ve noticed A LOT of personal finance bloggers post up their numbers on a monthly basis and I may adopt such an approach. Either way, check back again Saturday afternoon or subscribe to my newsletter to receive it earlier.