Financial Independence through deferred gratification

I went to the USS Midway museum with my wife yesterday.  It’s a giant Navy battleship docked in San Diego that you can walk through and it’s pretty cool, even if you’re not really into WW2 history. On one of the decks, there was an interactive flight simulator, the kind you can control and make the plane spin and do loops.

While we were in line, she wondered out loud how much one of those 4,000 lb machines would cost.  I told her I wasn't sure, but that I could probably afford to buy it, though I didn't think I should (because that money would be better spent making me more money).

Do you understand the kind of freedom that comes from knowing you can blow $30k (I'm guessing) on a video game machine if you felt like it, and it wouldn't affect your bank account?  That freedom is called financial independence. And the best way to gain that independence is to start saving as early as possible.

Often when I talk to people about early retirement through a high savings rate, they tell me they don’t want to live a miserable frugal life, only to die the day before retirement or to wait to enjoy the money til they’re 70 and too old to enjoy life, or the Camaro they can finally afford.

But that’s the wrong way to think about it.  It’s not all or nothing.  You can save as much as you want. Granted, the lower your savings rate, the longer it’ll take you to hit retirement, but you don’t have to go all out like those people that use a cup of water a day to clean themselves to save money.

Do you know the kind of freedom that comes from having a financial cushion, even if it’s only $2,000? You have wiggle room.  An emergency won’t devastate you.  What about having enough money saved at 33 that even if you never saved another dime and let your investments ride without withdrawing them early, that by 60 you were assured of a VERY comfortable retirement?

That’s me, by the way. I saved up all that money over the past 7 years.  And I never felt like I was depriving myself.  I could still live my life, but I did it sparingly.  I weighed the satisfaction and value I’d get from the thing, meal, or trip I wanted to buy against the future utility of those funds. So basically, do I want to buy a Dodge Charger now (as opposed to a cheaper, smaller car), or a Ferrari later?

I can now say yes to many more things in life because I have money saved.  Parasailing this weekend?  Sure, why not?  Emergency trip to another country?  Chump change. Eat at a fancy restaurant the day before I get paid?  Why ask? Sure.  But… would that money be better put to work making me more money?

And because I saved and cut back when I was younger, when everyone else is still living paycheck to paycheck and the only way they're going on vacation this year is if Mr Mastercard foots the bill for a while, I'm riding high on increasingly larger passive income streams and don't have to think twice about spending money on something I find important.

When everyone else is still struggling with crippling mortgage debt because they took on more house than they could afford and/or drive a similarly financed expensive vehicle because they need to give themselves a certain amount of luxury, I'll be living a simple but satisfying life, comfortable in the knowledge that I could purchase their house and car (in cash, several times over) if I wanted to.

That is freedom, folks. And you can achieve it if you prioritize it.

Interest: the rowboat analogy

Let's imagine you're in a rowboat on a lake.  Your rowing speed is about 5 mph, and that's exactly how fast the boat is going.  The faster you row, the faster you go

Now imagine you're on a river whose current is about 2 mph.  If you're rowing upstream, your overall speed will be 3 mph.  

Yes, I know that's not a rowboat; bite me

You're still rowing at about 5 mph, but the stream is eating away at your speed.  If you were to row downstream, you'd be going at 7 mph.

What's my point with all this rowboat stuff and the bad drawings?  It's a good analogy for interest.

If you've ever bought a car, had a savings account, or owned a credit card, you probably know what interest is.  It's the extra money you have to pay back on top of the money you spent/borrowed.  Interest can suck when it's working against you (when you're in debt), but it's pretty awesome when it's working for you.

When you're on the lake, you move as fast as you row.  That would be like a bank account.  Your money grows as fast as you add to it.  When you're rowing upstream, that's like being in debt.  You can throw $500 at your debt, but if your interest this month is $200, you really only chipped away at $300 of the loan.  Interest works against you in this case.

Rowing downstream is like having investments.  You add $500, and the interest that your money earned makes it grow.  So not only did your money grow by the $500 you added, but by an extra $200 that your portfolio earned for you.

This is why it's so important to get and stay out of debt.  Debt is a killer of financial independence and having a comfortable retirement.  Get out of debt ASAP, and save as much as you can.  Your future self will thank you for it.