Mastering the art of working hard, building additional income streams, and increasing your savings rate were the easy parts. While these concepts sit at the core of the financial independence movement, there are 5 hidden obstacles jockeying to push you off course. Learn how to fight back against these silent killers.
The Financial Independence Movement
Financial independence is an elusive beast. Put simply, it means accumulating enough assets to pay for all of your expenses with the returns that these assets generate. No doubt, this is quite a worthy financial aspiration. But there’s nothing “simple” about it when you consider the dynamic nature of a human life.
Health crises, job relocations, marriage and divorce, kids. The list of seismic shifts that alter an individual’s course could go on forever. Some of these changes are expected while others will surprise even the most rigid planners.
But whether expected or unexpected, these developments are large, “hairy” issues. They’re the 800lb gorillas sitting in the room as you chase your financial ambitions. When you confront this sort of life event, it becomes your primary focus.
Beyond these hairy gorillas lurk a group of financial parasites, lying inconspicuously beneath the surface. Those chasing financial independence confront these parasites daily. Often, they don’t even realize it.
In the short term, the parasites may go unnoticed as they inflict minimal damage. But over the long term? They’ll eat you alive.
Today, we’ll expose these silent killers that hope to hinder your journey to financial independence. Time to bust out your microscopes.
Financial Parasite #1 – Taxes
I’ll wade, with great trepidation, into the polarizing waters of taxation. Regardless of your political views, I think we can agree on two fundamental points:
- Some amount of tax revenue is necessary for our society to function efficiently in its current form
- The smaller the portion of our paycheck that goes towards taxes, the more money we’ll have left to save and invest
Whoosh, okay exhale. Hope you’re still with me.
The takeaway here is simply that saving and investing are not created equal. Consider someone investing $6,000/yr in a taxable brokerage versus $6,000/yr in a Roth IRA. There’s no material difference in that individual’s world today. That’s $6,000 they won’t be able to spend on a vacation, gift, car, etc. Both of these choices feel the same. Yet the tax consequences lead to astronomically different future outcomes.
Illustrative Example – Taxable Account vs. Roth IRA
To illustrate, I ran the numbers through this retirement calculator. Assume the following:
- 7% annual market return
- $6,000 contributed annually for 40 years
- 25% tax rate (constant throughout lifetime)
- Contributions cease after 40 years, and balance is then drawn down over 25 years
Investing in the Roth IRA (Yellow Bar / “Tax-Free”) allows that individual to withdraw almost $110,000 annually for 25 years. That exact same $6,000 investment in a taxable brokerage (Blue Bar / “Taxable”) allows the retiree to withdraw only about $60,000 for 25 years. The delta between these figures represents the impact of taxes.
So while it might feel equally productive to shovel $6,000 into a taxable brokerage, recognize that you’re shortchanging your future self. Instituting a suboptimal tax strategy could drastically increase the time it takes you to reach financial independence. That’s why, in addition to the Roth IRA, I recommend the Health Savings Account for young professionals looking to dramatically accelerate the financial independence process.
And remember, none of this comes close to being illegal or even amoral. You’re doing yourself a disservice if you don’t capitalize on the tax incentives that the government builds into the system.
Financial Parasite #2 – Investment Fund Expenses
Even with all your investments spread across tax-efficient accounts, hidden fund fees will kill your progress. Investing in particularly fee-laden active mutual funds could more than offset any tax benefits you worked systematically to avoid. The two main expense metrics to monitor here are expense ratios and sales commissions on “loaded” funds.
Fund investors get charged expense ratios on an ongoing basis to cover fund operating expenses. The fees are calculated as a percentage of an investor’s asset value in the fund. This means the more your money grows, and the more you invest, the more money you’ll fork over in fees.
On funds that carry a load, investors also pay a commission, as part of the purchase price, for the privilege of buying into the fund. This commission often goes to the financial advisor who helped facilitate the transaction, creating a potential conflict of interest. Industry professionals are quite adept at skimming over commission structures and minimizing their impact. Don’t let someone else get rich off your investing ambition.
The data overwhelming shows that passive index funds outperform active managers after accounting for fees. The best index funds charge a negligible expense ratio in exchange for instant diversification and consistent long-term growth. Paying marginal fees and matching the market’s return is a formula that will propel you towards financial independence at an accelerated rate.
Financial Parasite #3 – Consumer Debt
Debt is a powerful tool for wealth generation when used responsibly. It can help you build wealth in an exponentially quicker manner.
Here are a few instances where the prudent use of debt can build greater wealth:
- Taking out low-interest student loans to invest in an education that will create job opportunities and provide access to a robust alumni network
- Mortgaging a rental property investment (that you’ve analyzed thoroughly) to magnify returns
- Scaling a promising entrepreneurial venture with a small business loan
But just as leverage gives when used responsibly, it takes when used recklessly.
Unfortunately, as a young professional’s income grows, societal norms and expectations tend to shift in lockstep. This makes the reckless use of debt more alluring.
Suddenly, it’s no longer acceptable to “live like a college student.” You buy that nice new house. Of course, that nice new house must be furnished with with top-of-the-line appliances and décor. And the nice new house is farther from work. So you finance a nice new luxury vehicle, to commute from that nice new house filled with the nice new furniture. You get the idea.
Although your income might’ve doubled since college graduation, your expenses have magically tripled. And you’ll have access to a seemingly infinite universe of credit cards, enticing you to upgrade now and figure out how to pay later.
If you find yourself falling into this mindset, it’s time to reset. Remember the credit card commandments. Bring your long-term financial ambitions back to the forefront.
Credit cards and personal loans will eat you alive if you let them. No matter how many taxes you avoid by structuring an efficient retirement portfolio. Or how many fund fees you dodge by investing in passive indexes. You’ll never outperform the interest rates charged by a credit card company.
Financial Parasite #4 – Hidden Fees
Life grows more complex as you age. When you begin working, there’s likely no one depending on you or the income you generate.
Then, along comes a spouse and kids. Next, additional leadership responsibility at work or in the community. The list goes on.
When you couple these increased demands on your time with a financial picture that’s also growing more complex by the year, you’ve created recipe for trouble. By this point, you’ll likely have an overwhelming amount of monthly payments to track. Mortgages, credit cards, family insurance premiums, pet bills, team dues, club memberships, etc.
The increased complexity of both your personal and financial life could cause even the most diligent individuals to stumble by missing or delaying payments. Worse still, this sort of mistake often comes with fees or penalties attached. While the penalties might seem negligible, they can build over time, especially if rolled into interest-bearing debt on a credit card or mortgage.
Luckily, technology can help you fight against this parasite. The auto-payment features offered with most credit cards and bank accounts should make the payment process relatively seamless. It’s worth investing a few hours up-front to link all your accounts digitally and map out a plan for your monthly flow of funds. This will free up valuable mental bandwidth to focus on more important priorities and minimize the impact of late fees on your financial freedom mission.
One more thing. If a monthly payment ever slips through the cracks…call the service provider immediately! Always. These fees are more negotiable than people realize. It costs way more for most companies to acquire a new customer than to retain an existing one. If this sounds intimidating, check out Ramit Sethi’s word for word negotiation script for inspiration.
Financial Parasite #5 – Excuses
The final parasite requires minimal explanation. To reach financial independence, recognize that you dictate the outcome of your own life.
It’s easy to fall into the trap of blaming others when you face a crushing blow. But it’s crucial to avoid this reflex as it creates a circle of negativity that will permeate throughout your financial life.
I’ve developed an internal framework to help avoid making excuses in response to these negative financial moments. Instead of viewing a loss as something that impedes my path to financial independence, I reframe it as an investment in my personal growth and money mindset.
Personal Example – Turning a Financial Loss into a Win
I recently put a fourplex rental property investment under contract. On paper, it looked like an incredible deal.
Then I walked the property with an inspector. His first words upon my arrival: “Hey man, so are you planning to gut this entire thing?”
It turned out the property needed two new roofs and a complete overhaul of the plumbing / electrical systems. But wait, there’s more! It also featured extensive termite damage and zoning issues. Conservatively, the deal would’ve required an additional $60-70K in repairs.
So after spending $600 on a comprehensive inspection, I had to pull my offer. This was a painful pill to swallow, to say the least. It would’ve been easy to use this financial loss as an excuse to give up on real estate investing entirely.
“I’ll never find a good deal in this market. It’s a rich man’s game. There are too many unknown factors to consider.”
I’ll admit some of these doubts began to run through my mind. But I pushed them aside. Instead, I recharacterized the $600 loss as an investment into the prosperous real estate business that I’ll create one day. I learned more about the real estate diligence process in that hour walkthrough than I ever could have from a book or podcast. Money well spent.
Applying the “Excuse to Opportunity” Framework to Your Financial Independence Journey
You can apply this same framework to the subconscious excuses that threaten to derail your financial independence goals every day.
Let’s look at a few common excuses that people encounter and how to morph them into opportunities:
We face financial challenges and setbacks constantly. Luckily, it’s not the ability to avoid these moments or doubts that dictates ultimate financial success. Rather, it’s the ability to transform negativity into opportunity. This mental fortitude and resiliency is perhaps the most important variable in the financial independence equation.
Fighting the Five Parasites to Reach Financial Independence
This article has shed light on the five main parasites that could eat into our financial independence goals.
The beauty of the first four? We can overcome them with education. These topics can be studied. External resources can help us refine our knowledge base, diagnose any issues, and apply effective solutions.
But the fifth parasite? Overcoming this one is entirely up to the individual.
There’s no getting around a mindset prone to excuses when faced with life’s inevitable challenges. To reach financial independence, we must find value and meaning in these tough moments, transforming them into opportunities to reflect, grow, and prosper.