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Core Fundamentals: A LARGE Part of What You Earn is Yours to Keep (Part 3)

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The importance of staying out of debt was discussed in Part 2 – Core Fundamentals: Treat Debt like the Plauge (Part 2). Once this barrier has been overcome, the next step in establishing our ‘Path to Early Financial Independence’ plan is to analyze our monthly savings rate. In order to adequately build a growing portfolio, sufficient funds must be injected on a regular basis.

I strongly believe in being aggressive when it comes to selecting a savings rate goal. Without diving into any complex analytics, the most obvious reasons are the profound psychological effects – a rapidly growing portfolio is appealing to the senses. This may not apply to everyone, but in general, I think people like to see immediate results. As such, it will be a lot easier to stick to an investing plan when you see the cash or dividend checks increasing each month.

My Portfolio (January 2012 – April 2012)

We’ve all heard this saying before: “A part of what you earn is yours to keep”. To achieve early financial independence, what you keep is ever more significant. In my eyes, a ‘part’, or merely a small fraction of your monthly earnings saved is insufficient to meeting this goal. When I speak of financial independence, I am talking about  having enough money coming in through passive income means that you can fully cover the costs of your monthly expenses, and thus, sustain your lifestyle. Since your monthly passive income stream will exceed your monthly expenses, you won’t be going into debt! Since you are able to fully fund all your expenditures  (rent, food, utilities, internet, phone, etc.), you won’t need a regular 9-5 job, hence financial independence!

How do we go about achieving this goal? And how do we do it quickly enough so that we can become financially independent sooner rather than later? The ‘early‘ part in early financial independence implies that time is not on our side. Thus, we must make haste! So, there is really only one way that I know of to accomplish this task: SAVE A LOT more than you spend. As the title says: A LARGE part of what you earn is yours to keep. It’s really as simple as that.

All Mine!

Whereas typical mainstream media will try and convince you that you only need to save 10% or 20% of your net income, I’m going to suggest differently. For myself, I am aiming for 60% to 70% every month. This may sound like a lot, but you don’t have to get there immediately. As I described in Part 2, I originally had a $36,000 car loan to pay off, in addition to graduate school loans. I was hardly saving at such a high rate! However, as soon as the debt cleared up, I committed myself to saving at a much higher rate.

Saving a lot doesn’t have to be so difficult. I think a lot of us lose our senses on how little ‘basic necessities’ each of us really needs. It’s rather perplexing, since many of us were able to sustain a minimalist lifestyle while getting through college. If we could make do and be so thrifty for 4 years, why can’t we continue to do so now? Why do we become so distorted with how much money we need once we land a well paying job? Here’s my own breakdown of monthly costs, from April 2012 that exceeds the 70% savings target (adjust as needed to accommodate for your own target/income level):

Rent $750.00
Utilities $15.00
Internet $15.00
Food $175.33
Gas $59.44
Phone $50.00
Other / Fun $311.84
Total $1376.64
Expense Ratio 26.87%
Savings Ratio 73.13%

April 2012 Monthly Expenses

Ultimately, time is money. We are trading in valuable hours of our finite life to support our existence. In order to buy future time, we need to hoard present day money and invest it wisely (this will be discussed in Part 4). Early financial independence is an ambitious goal, so we need to employ an aggressive savings strategy to complement. If early financial independence is your cup of tea, then like all things in life worth achieving, there are no shortcuts. However, if you stay committed and consistent throughout, you will succeed.

 

{ 2 comments… add one }
  • Edwin SierraNo Gravatar April 1, 2014, 6:17 pm

    Looking forward to reading part 4!

  • JefNo Gravatar January 31, 2017, 4:16 pm

    100% agree with you here FI and great to have your site back (appeared as though the domain expired?)

    Enjoying reading through your old articles and sure there’ll be some gems in here!

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