How I Became Financially Independent in 5 Years
Here’s my secret: I’m 32 years old and I am financially independent. And my husband and I did it all, from $0 to where we’re at now, in 5 years.
What is financial independence?
But let’s back up. Financial independence means I no longer need to work to support myself and my husband. This does not mean I’m filthy rich; this means only that if I stopped working right now, we would be able to continue living a simple life without needing to worry about paying the bills. If you actually do the calculations, that number is not as high as you might think.
Still, it’s a huge financial milestone that gives me a lot of freedom. Think about it: if you have enough money to cover my basic living expenses, why would you choose a job you don’t like? Why would you spend 8+ hours of my day, 5 days a week, with people whose company you don’t genuinely enjoy? It’s called financial independence because it’s the end of slavery — slavery to the rat race and to the whims of the corporate world. Financial independence gives you the freedom to design and pursue the life you actually want.
Where we started
When my husband Rob and I moved in together, we had a negative net worth. We had his three teenage children living with us and neither of us had a job. We lived in a small town that didn’t have many job opportunities in his industry and I, with my Australian permanent residency still in progress, was not allowed to work in Australia. Finally Rob found a job in Melbourne, and we moved the entire family there. We signed the lease on a ridiculously expensive rental house in order to get the kids in the right zone for the best high school we could afford. Despite Rob’s income, we struggled, borrowing from credit cards to finance expenses we just couldn’t seem to get on top of.
Eventually I got my permanent residency and a job. Even though my income could just barely cover the rent, that money made us feel rich. As the years went by and my salary increased, so did our expenses. We had lunch out nearly every day while we threw out spoiled groceries at home. We went to several concerts and theatres, some of them twice or thrice. We bought a car — on loan, of course. Almost our entire paychecks were immediately spent paying off the credit card bills from the last month; then we’d use the same credit cards to pay off this month’s expenses. In short, we were incredibly irresponsible. Still, thanks to dual higher-than-average IT incomes, we managed to convince a bank to give us a mortgage. Despite our incomes we could only afford a laughable 2% downpayment on the house — while we still owed money on credit cards.
Year 0 actually begins the day Rob’s current project ended. He was a contractor, so no project meant no job. Knowing we’d have to live tight on just my salary to meet the mortgage and our monthly living expenses, I started to search for budgeting tips online. What I found would eventually lead us down the road to financial independence. I took control of our finances and changed them around. Here’s what I did.
What we did
I consolidated all our accounts**.
We had several transaction accounts, savings account and credit cards, and the first step was to have fewer buckets for our money. Having fewer accounts made it easier to keep track of everything, especially in the beginning, and it also meant it was easier to calculate our (then negative) net worth and track changes to it.
I used the envelope system for budgeting to keep a lid on our daily expenses.
Specifically, I used an app called You Need a Budget (YNAB — and that’s an affiliate link), but you don’t need to buy it (although I personally think it’s more than worth it). I tracked every single cent then, and in fact I still do that today. Instead of having one account and one balance to look at, I created categories for every conceivable expense. Before I found YNAB, I just used an Excel spreadsheet. A big shift in habit was when I started to look at the category balance instead of the account balance. If we wanted to buy something that cost more than the budget for its category, we would look to see what other categories we could take the money out of. This helped us understand that every time we said yes to buying something, we were saying no to buying something else. Even if we paid using the credit card, that money still went out of the category balance so that we could at least make sure we weren’t adding to our credit card debt.
I automated transfers to pay back credit card debt and to our savings account.
I discussed with Rob an amount that we would save out of my salary every month for emergencies and I set up an automatic transfer from our normal transaction account to our separate savings account with another bank the day after payday. The automatic part is important — you don’t want to give yourself the chance to self-sabotage. This made sure that even if we went over budget, we would not touch our savings. I did the same for extra debt payments towards credit cards and our car loan until they were competely paid off. I also saved one month’s worth of household expenses as an emergency fund.
The waiting game
By the time Rob found a job again, we were debt free except for our mortgage. We suddenly had a lot of cash to spare, both from his salary and from paying off debts. As soon as that happened, rather than increasing our expenses again, I automated transfers to investment accounts instead. For us in Australia, this meant talking to our employers to salary sacrifice into our superannuation funds, for you, this could be contributing to your 401k. We started salary sacrificing as much as we could per year (at the time, that was $30,000 for me and $35,000 for Rob including employer contributions, but check the current limits with the ATO as they have changed). This was a huge deal because we never even saw the money as it was garnished from our wages. It also saved us heaps of tax (one year I calculated it to be about $8000 in savings for Rob alone). At this point we were saving 70% of our income.
When we got unexpected income increases or tax refunds, we put it towards investments. As our incomes grew, we maxed out our super contributions and started to look for something else to invest in. I invested our money into a low cost index fund, available from any stock broker. In our case, we used Vanguard’s VAS for Australian shares. Again, those payments were automated and transferred regardless of whether the stock market was doing well or not.
Then, we waited.
Within five years we had nearly enough to meet our subsistence-level figure. Some surprise financial windfalls finally pushed us over the edge.
I’m sharing this story not to brag about my successes but to let people know that financial independence is not just possible but SIMPLE.
Let me break down the steps again for you:
Calculate your financial net worth.
Revisit and optimise all your accounts.
Track every single expense for at least a month.
Make a budget.
Automate transfers to improve your net worth: first towards your debt, then savings towards an emergency fund and then to an investment account.
Now I’m not saying that everyone can do this in five years. My husband and I were lucky enough to have dual high incomes. But the point is not to do all of this in five years. The point is to start now.