Budgets Don't Work...Here's What You Should Do Instead

I'm not a big fan of carefully following a strict budget. In fact, you don't even need to budget to reach FI. Yes, it is helpful to occasionally analyze your spending in key categories for planning purposes. But following a strict monthly budget is unnecessary, time-consuming, and worse case can be self-defeating.

Instead of following a budget, a better approach is to pay yourself first every month. This is a better alternative to budgeting because it is a no-brainer way to guarantee saving every month. What I mean by "pay yourself first" is to treat your monthly savings just like any other monthly fixed expense (rent, car payment, gym membership, etc). At the start of the month, invest 50% of your take home pay in a broad-based index fund (The Only Investment Guide You Ever Need). If you receive two paychecks a month, the first paycheck can be dedicated to your investments and the second paycheck for all of your other expenses. To make this a repeatable process, set-up a monthly automatic index fund purchase through your brokerage account. This will ensure you commit to your monthly savings goal without thinking about it.

If you have an employer matching 401K program, make sure you maximize this benefit as part of your monthly investment strategy. Your 401K contribution counts toward your 50% of take home pay investment goal.

The reason why "pay yourself first" works is because it takes all of the thinking (and second guessing) entirely out of the budgeting process. By automatically moving the money from your check book to your investment account, it becomes out of reach of day-to-day spending. Instead of agonizing over a strict budget, you've already saved your monthly goal so you're free to spend the remainder of your take home pay as you see fit.

The Only Investment Guide You Ever Need

Investing in the stock market sounds complicated and scary. In reality, it is one of the simplest steps to reach the joy of financial independence. Instead of picking individual stocks, all you need is a single broad-based index fund. An index fund, either a mutual fund or and exchange-traded fund (ETF), is based on a preset basket of stocks, or index. The simplicity of this approach is all you need is one index fund that tracks the Total US Stock Market index.

At Joy of FI, are favorite index fund is Vanguard VTI. VTI is an ETF that tracks the Total US Stock Market. It is very low-cost (expense ratio .03%) and tax efficient. Because it is an ETF, VTI trades like an individual stock throughout the day as opposed to traditional mutual funds which are bought and sold once at the end of the day. There are many other index funds out there that are very similar but we like Vanguard VTI to keep it simple.

One index fund is all you really need during your wealth accumulation years. Invest monthly, by setting up an automatic investment account or mark your calendar every month as a reminder. Invest regularly and regardless of the stock market situation. Remember, you are investing for the long haul so don't try timing the market.

So there you have it, the only investment guide you need as you pursue FI!

Why Financial Independence (FI)?

There are as many reasons why individuals seek financial independence as there are individuals trying to achieve it. Maybe you hate your job and want to quit. Perhaps you're tired of the financial stress of not having enough money. Or maybe you just want to spend more time with friends and family. This is the beauty of FI, it is completely personal and totally customizable to your specific situation. There is no right or wrong answer to the question "Why FI?". However, having a clear purpose for achieving FI will provide more meaning to the journey and keep you motivated.

Take out a blank sheet of paper and title it "Why FI?" Then brainstorm as many answers to this question as possible. To help with this exercise, here are a few reasons why people pursue FI.

• Quit a job you dislike
• Spend more time traveling
• To be financially secure
• Spend more time golfing
• Learn how to play a new instrument (piano, guitar, etc)
• Have more time to write a book
• Start your own business
• Stay at home to raise your children
• Have time to enjoy an old hobby
• Freedom to do what you want
• Enjoy hiking more outdoors
• To get out of debt
• Start a vegetable garden
• Volunteer at your child's school
• Start a new career
• Stop living paycheck to paycheck
• Set an example for your young children
• Create a blog
• Have a more flexible work schedule
• Try yoga
• Simplify your life
• Learn a new language
• Go back to school or take classes at a local community college
• Get involved with local politics
• Join the Rotary or other community service club
• Enjoy more time reading
• Never have to work for someone else again
• Take a long road trip
• Relocate to another city or country
• Coach Little League
• Improve your mountain biking skills
• Train to run a marathon
• Etc, etc

These are just a few of the infinite reasons why FI. Look at your list and choose the top 3-5 reasons that best fits your goals. Keep this list in a safe place and periodically update as needed. Remember there are no right or wrong answers to this question and your answers may change over time. Congratulations, you now have a sense of purpose as you embark on your FI journey! 

The 3 Simple Strategies to Achieve Financial Independence (FI)

What is "financial independence"? According to Wikipedia, "Financial independence is the status of having enough income to pay one's living expense for the rest of one's life without having to be employed or dependent on others." Although this may sound too good to be true, financial independence (FI) is a relatively simple concept to understand. With a little planning and a lot of discipline, nearly anyone can achieve FI.

At Joy of FI, we break down the Financial Independence basics into 3 Simple Strategies:

1. Set a Goal: To achieve Financial Independence, you will need approximately 25 times your annual expenses. If your annual living expenses is $60K, for example, you will need about $1.5M in assets to achieve FI.
2. Maximize Savings: Save at least 50% of your take home pay: Create a process to "pay yourself first" every month. If you receive two paychecks a month, it could be as simple as living off one paycheck and saving the second paycheck to invest.
3. Invest in Broad-based Index Funds: Invest your monthly savings into a broad based index fund (tracks the S&P 500 or total US Stock Market) then forget about it. Let the power of compounding grow your investments over time. Don't be concerned about the ups and downs of the market, you're in it for the long haul.

And that's it, there are only 3 basic strategies to achieve FI! If you follow these steps and save 50% of your income, you will be able to achieve FI in approximately 16 years. Save more and you can shorten the time to FI. For example with a savings rate of 60%, you can achieve FI in only 12.5 years! Remarkably, it doesn't matter how much you make...what matters is your savings rate and how you invest!

There's a lot of assumptions and math built into these calculations to achieve FI. The classic blog post by Mr. Money Mustache, "The Shockingly Simple Math Behind Early Retirement", is an excellent read for those who want to understand these concepts in more detail.

These three strategies are the basic foundation to achieve FI. It really is that simple and not complicated to understand. If you follow these strategies diligently you've solved the FI puzzle. Of course, there are many other excellent FI ideas but they are primarily tactics to help execute these 3 strategies. At Joy of FI, we'll examine many of these tactics in future blog posts.