Keys to the FI Kingdom Part 1:
A Way to Get Out of Debt and Purchase Your Freedom
First Key to the FI Kingdom: Believe that you can change your narrative and decide what you want to achieve
A Different Narrative Requires a Different Way of Living. Let’s play a little game of pretend–that same game you used to play when you were 3 years old.
Pretend the narrative that you currently tell yourself is actually incomplete—it’s only half the story. Like watching a movie before the hero gets the special music and they end up accomplishing a lot in a very short amount of time–just think Rocky and Legally Blond . Now pretend that up to now your life-movie has been playing the introduction and the upbeat music that signifies a drastic change of character development just queued up.
Pretended the negative bits (“That’s just the way it is” and “I can’t do that because_____” etc.), are not completely accurate. Like a “rudder that steers the whole ship,” your beliefs can radically shape the little decisions that make up the big story of your life. Hold off disbelief and suspend judgment for just a few minutes here with me and just get curious:
“What if life could be different—really, really different?”
“What if I didn’t need to work the 8-5 fluorescent-light-soul-sucking-job for 30+ years?”
“How would I feel if I didn’t actively worry about money? What if I didn’t think about the mortgage payment, or the car payment, or making it to the end of the month? How would I engage the world differently if I wasn’t anxious about ‘surviving until the next paycheck?”
“How would not worrying about money affect my relationship with my spouse, my child, my loved ones?”
“What would I be willing to do to obtain this new life narrative of lowered anxiety and stress?”
“What if it really could be my story?”
As a boy of seven I thought my narrative was set. I remember going door-to-door with my dad handing out the latest sample of whatever he was selling that month. I can remember the worried look on my mother’s face when she didn’t know how we would make it until the end of the month. I grew up listening to my parents argue over money. Where are we going to get the money for these bills? How can we make the next mortgage payment? Are we going to be able to buy groceries for this week? And don’t even get me started about Christmas!
Your first Key to the FI Kingdom is to believe your story can change and your narrative is not set in stone, and then taking manageable steps to change your current course. If you believe “that’s just the way it is” then you’re right, you will fulfill your own predictions. But if you lean into the possibility of a different narrative, one where little changes can make a big difference over a 10-year period, then you stand a chance of a different story. (Need an example of small gains leading to big wins? Check our Sir Dave Brailsford’s story about 1% gains leading to gold medals).
Second Key to the FI Kingdom: Develop a spending plan that works for you
I just assumed I would always fight with finances. But one day in my second year of graduate school I was invited to see things differently—I was asked to imagine what life would be like with a little more intentionality. My boss at the time said I needed a budget and suggested I listen to Dave Ramsey. I told him I didn’t need a budget–after all “I didn’t spend any money anyway.” That was the story I told myself. Now, whatever you think of Dave Ramsey, his methodology for getting out of debt can be useful, even modified to fit different situations. You just need some cents-ability when listening to Ramsey. If higher education has taught me one thing, it is to listen with charitable ears for you never know what you’ll learn from people you disagree with. Learn what you can from people of different perspectives and worldviews, even people you don’t like—maybe especially from people you don’t like—and trust that you’ll come out the other side richer for it.
At first I didn’t even want to listen to Dave Ramsey–“What do we need him for? We pay our bills; we’re not in credit card debt; why do I need a “budget” if we don’t spend money on extra crap anyway?” I would tell myself.
My boss finally convinced me to listen to the CDs. It was while listening that I discovered the second key to the FI Kingdom: give every dollar a home by developing a spending plan (= budget).
You cannot hope to pay off your debt and move towards a trajectory of lowered anxiety through financial independence until you have a spending plan. This requires you to track where your money goes by both what you intended and by what you did not intend to spend.
A spending plan “spends” every dollar on “paper” first before it comes into your bank account—mortgage, utilities, groceries, entertainment, toiletries, gas/car, insurance, etc. It is a method of pre-spending that requires intentionality. You can use old school paper, a plain old excel spreadsheet, or and go to town. We used a spreadsheet just like THIS ONE (Please note the numbers are for example purposes only.)
Though the spreadsheet is helpful, I think it’s immensely helpful to create a spending plan spreadsheet for yourself–think of it like a Jedi Knight creating her/his lightsaber. The spreadsheet is your lightsaber! No Jedi Knight would be caught outside in the real world without their lightsaber–nor should you go without creating, and utilizing your spreadsheet regularly!
After developing a cash-only envelope system and tracking all of our expenses I was dumbstruck—we had saved about 1/3 of what we would normally spend just by tracking our spending and making the decision to give every dollar a home before it was spent. Said another way, we “spent” every dollar on an excel spreadsheet before we actually spent it. Without a target you will miss it, without a path you will wander off, and without a spending plan you will always overspend. It’s like one of the laws of nature, without pre-deciding how each dollar will be spent before you receive the paycheck then it will be spent on something unintentional—Intentionality is paramount. For me and my house, we made a spending plan.
It’s very important to develop an emergency fund at this point in the game, at first a simple $1,000 in the bank, but eventually 3-6 months worth of expenses is a good goal starting out–once you have a million in investments and have access to other means of emergency money you can explore the option of reducing your cash amount. You should not invest in stocks/bonds until you have this emergency fund in place–there’s a great psychological benefit to knowing that you’re secure and you won’t go broke if your AC or Heater goes out. . We personally use a high-yielding online savings account from Ally Bank (I have no affiliation with Ally Bank, nor do I receive compensation from Ally Bank) and have it connected to our Brick-and-Mortar bank (you can transfer money within 3 days for free by logging into the bank where you want the money at and requesting it from their website–remember, pull the money never push it since pushing it will normally incur fees). This allows us to get better yield and it keeps the money just far enough and inconvenient enough so that we’re not tempted to quickly withdrawal from it. It then just sits as a line item on our spreadsheet protecting us from emergency situations.
Cents-Ability Tip: If you spend 100% of your paycheck each month and don’t discover a way or “life-hack” to invest each month, you will most likely find yourself 65 and without a nest egg for your golden years. Time is your greatest ally when it comes to investments. The math is simple: spend less than you earn and invest the difference. Over time your investments will grow at a compounded annual growth rate (e.g. approximately 50k becomes 100k in ~10 years, then 200k in another ~10 years, and then 400k in another ~10 years). Unless you need to pay off a 18% interest credit card, I would recommend developing the skill and habit of investing each month. It helps to pay your future-self first, even if it’s as little as $50.00 or $100 dollars a month, that’s still $8,650 or $17,300 respectfully in a 10 year period at ~7% annual return on investments.
Once we completed graduate school we began to use the Dave Ramsey “Snowball” method of destroying debt. This is where you pay the minimum amount on all your various loans and take all remaining cash and throw it at the smallest loan. Now arguably this might not be the most cents-able method, but the psychological reward was a big boost to our moral, and so unless you’ve got debt on a credit card with 18% interest rates, I would strongly recommend taking out the smallest debt first. Once you’ve crushed the smallest loan, take the money you were using on it and apply–attack!–the next smallest loan. The great thing about this method is that the psychological benefits of little wins keep you moving forward and on track. Without little wins, it’s incredibly difficult to continue month-in and month-out dropping large portions of your paycheck towards a mountain of debt without seeing any real change. Make a mile-marker chart and celebrate your little wins (marbles in a jar on the dinning room table, a chart posted up on your refrigerator door, etc.)
Just to be clear, so there’s no misunderstanding, debt free living happened for us on ~$65,000 a year (gross pay, so before taxes). I’m not a computer engineer. I don’t have a fancy pants finance degree. I don’t work on the 82nd floor of a high-rise and make $150,000 a year.. I made ~$30,000 a year and my wife made ~$35,000 and we managed to pay off $74,402 in student loans in ~3 years. We then had to push “pause” on our accelerated student loan debt-demolishing project to pay off a $19,000 car. The grand total was $93,402 paid off in ~3 years on ~$65,000 a year (before taxes!). That’s basically just over 1 school teacher’s salary (according to Salary.com the average school teacher makes $47,529–$68,819 in 2019). Oh, and did I mention we went to Europe during that time? I know, it was probably not the most cents-able move, but it kept us going because we had something to look forward to–again, we’ve found out that this is as much of a psychological game as a numbers and spreadsheets game. I don’t think what we did was spectacular. I don’t think it was herculean. I don’t believe our story is unique. I think with a few intentional life hacks most people can improve their financial situations dramatically by following a few cents-able strategies.
If you’re still on the fence on your ability to pull this new narrative off let me say this, I was sitting in that same chair, looking at my 70k+ in school debt and 19k in car debt and wondered “how the hell am I ever going to get out of this hole?” It only took us ~3 years. It can be done, and done without a fancy pants computer-engineering high paying salary. Yes, it can be discouraging at times. There will be some months where you fail to meet your goals. There might be little life modifications that make you stand out—good, that just means you’re acting with intention. But you cannot afford to skip out on investing in your future story, your future reality. As Mr. Ramsey says “Live like no one else now so you can live like no one else later.” Paying off your debt is a big step, but it is only the first step towards the FI Kingdom. If you can keep trying, and adjusting, and making intentional decisions to better your situation, spending less than you earn and investing the difference, your story will be the richer for it.