To reach financial independence, it is important to save, invest and to create alternative sources of income. At the same time, it is also important that we keep our spending routines at bay to ensure that at the end of the month, the account remains positive, all bills have been paid and that there is still money left that can be invested. The basic formula remains as simple as it gets at all times:
Income – Expenses => Money on the bank => Money available for investments
Obviously, most of us won’t be able to set aside and invest large amounts that will immediately show a great relief. Adapting the investor mindset and truly understanding that time is our biggest asset takes a while and requires a lot of patience, but even more so, discipline.
Discipline and patience are key factors to create wealth and are both in my opinion, among the most important attributes of any human being. I might go a little far on this judgment call but I really want to point out the significance of these skills.
I can’t think of almost any situation when a patient person would not be rewarded at some point for their skill, benefitting from a much better risk/reward ratio compared to a person who rushes into things. Of course, there can be a situation where the fastest reaction may give a “winner-takes-it-all” reward. But in the long run, a patient person usually gets to where he or she wants to be in one way or another.
At the same time, nobody would doubt the benefits of a disciplined approach to any job, study or project that any person in any profession around the globe would face at any given time.
The great news is that both, patience and discipline are skills. It’s not something we are born with, but rather it’s something that can be trained. Some might find it easier or more difficult depending on the way they grew up, but overall, everyone can learn to be patient and disciplined, provided the right training and incentive.
To master patience and discipline, it is all about learning to control our emotions.
Most of our desires are initially based on our emotions. We smell a fresh banana-pancake on the road, and we want to have it. We see the new iPhone, and we NEED it. Our friends tell us about the new gym and the amazing yoga course, and we want to join it. The sun is shining hot and bright, and we want a cool beer.
There is nothing wrong with all of that, but what we got to learn is to step back before making a decision and be able to evaluate the actual benefit of it – and whether it helps us to reach our target or not. The banana-pancake surely smells and tastes great, but if you are not actually hungry and perhaps on a diet, then you should not buy it. There is a new iPhone coming out every year. Just keep using your old one, nobody really cares and it will do the job for 5 years at least. Unless there is anything wrong in your current gym, there is probably no need to change it. Well, you might consider if it comes cheaper with a promotion. And on any day, a glass of water will refresh you more and serve your body better than a beer.
The true strength of a successful person lies in the ability to evaluate situations and to make decisions that help him or her to reach set goals, even if it goes against his/her own desires and the ideas or expectations of co-workers, families, and friends.
This is easier said than done and you may truly be forced to do some great sacrifices along the way. But at the end of the day, no one said reaching your goals would be easy. In fact, it never is. But with time on our side, setting goals and working towards them with a disciplined routine promises a high chance of success.
Reaching financial independence quickly is not a simple task and thus not easy at all. In fact, I would say it is one the largest challenges of all times, with billions of people struggling to even think about it. It is not impossible, but in order to reach such an ambitious target, the focus and determination have to be at peak while one’s patience and dedication will truly be put to a test on more than one occasion.
- I can’t count how many times I have been fighting with my wife about expenses that I was not willing to agree on. I am talking about simple cases, like buying toothpaste. I mean, why would I buy toothpaste if my pack at home is still full? Or buying shirts. I still got 7 perfectly fitting shirts that are less than 4 years old and enough to carry me through the week. Why would I need more?
- I lost a lot of friends when I left my home country in pursuit of a better career and my personal goal of living abroad, in a low-tax, low-cost country. The logic was simple and turned out to be true, that we can develop better and faster in a developing surrounding. One needs to take some risk into account and accept possibly lower living conditions, but overall the risk/reward ratio is significantly higher compared with staying at home.
- Most of my colleagues are shaking heads when they see me and my family driving around in the small Mazda 2 while I surely could afford a BMW or a Mercedes – or a second car. But why would I want to spend so much money just on some convenience? Having a car at all is already a luxury factor for me that I would not consider to have if I wouldn’t have a family, so one is more than enough. And the additional costs for gasoline, repairs, insurance, cleaning, etc. are not attractive at all. It is so much cheaper to use public transport and in the event that you really need a car, just to rent it.
This samples may sound extreme, but I want to retire with 45 and that’s only 7 more years down the road. To get to this point, I needed to focus on the main factors:
- First to have a great career. I am sure I mentioned it before, but let me repeat: your career is your single most important starting point to get on the fast-track to financial independence, and there are more opportunities in developing countries.
- I need to save 30-50% of my income, but this won’t be possible if I have to give away 30-40% on taxes alone and finally
- I don’t want to spend another 30-40% of my income on basic living expenses including housing and food.
Following most financial advisors to save approx. 10% of your income is OK, if you plan on working until 65. If not, you need to save significantly more and considering this set of goals, the decision comes very rationally in my opinion. The samples don’t sound extreme to me at all. They rather show commitment to the set target. Without discipline, patience and controlling emotions, making those decisions wouldn’t be possible.
Now, this may not be everyone’s cup of coffee. Many people will say, that they want to enjoy their life and since there is a chance of dying much earlier due to an accident or unexpected medical condition, they want to make sure to make the most of it. But let me show you a very simple and brief overview. Numbers don’t lie so here it goes.
Consider living for 75 years. The first 25 years are devoted to family, school, university. Most of us have only good memories of this time due to the amount of time we spend with friends, families and other relations. Thus, out of this 75 years, 50 are left. Most of us intend to work until 65 when social security kicks in. So, from 25 to 65 are exactly 40 working years to consider.
One year has roughly 52 weeks or 14,560 days over 40 years (it’s actually exactly 14,600 days but the calculation with workweeks makes more sense here) with a 5-day workweek. That’s 260 days of work. The average European has 28 days paid vacation and another 14 days come for public holidays. So we are down to 218 days of work and 146 days off per year. You see there is one day missing out of 365 which is due to the work-week calculation, but it’s negligible in the grand picture.
A person who works 40 years will, therefore, have spent:
218 x 40 = 8,720 days working and
146 x 40 = 5,840 days not working over the period of 40 years.
For a person who sacrifices and goes all-in to finish with 45, the calculation is as different. From 25 to 45 its 20 years dedicated to working and then he/she is done. For the purpose of a comparison, let’s see how it works to compare the 40 years of work with the same amount of time split in 20 years with, and 20 years without work.
In this case, we will have:
218 x 20 = 4,360 days working and
146 x 20 = 2,920 days not working during those first 20 years, and
52 x 7 x 20 = 7,280 days not working during the other 20 years.
Thus resulting in a total = 10,200 days not working over the period of 40 years.
I specifically calculate in days, not hours and you might be right to dispute this. If you go for a career, you will have usually no way around pushing plenty of overtime but it’s the total timeline that I want to compare.
Thus, in my eyes, there is a possible double-reward here. If you are successful in retiring early, you get to double up your free time and you reduce your total time committed to work by half. Even more so, and not taken into account on this calculation is the fact, that you won’t need to worry beyond the age of 65. Because, seriously, if you think social security will be enough to take care of you, better think again. And what about if you don’t die early, but rather old? What do you intend to do with those additional 20 or 30 years, when you won’t be able to afford going out for lunch without sacrificing payments for your medical expenses?
This is some serious stuff to think about, but no matter what, it’s never the time to get all emotional about it. Rather realize your target, set goals and start working on it. Start investing. Time is your friend. And so is the investor mindset. Stop The Rat Race.