“Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris – I wanted the independence. I desperately wanted it.”
– Charlie Munger
Hello everyone. I am back from traveling overseas.
After a pleasant vacation, I have been asking myself: what if you had the independence and flexibility to do what you want and when you want to do it?
In other words, what if you could have financial independence and freedom of action, too? How would you achieve that?
After a lot of soul-searching, I have decided that independence and flexibility are currently a high priority of mine (although I do NOT want to be on vacation all the time).
Reliance on myself is becoming increasingly important.
For many of us, uncertainty also drives a desire for freedom and flexibility. And if there is one thing we have right now, it is an uncertain world. That point hit home to me as I watched the Gaza war unfold while overseas.
So, I will talk about my finances and the choices I will have to make to achieve a greater degree of freedom, flexibility, and independence.
And I will tell you about my action items. I hope you can benefit by seeing if any of my initiatives would also be a good fit in your own life.
WHAT IS INDEPENDENCE, AND WHAT IS THE TIMING?
I define independence as being free of the influence of others, being self-sufficient, and having control of your life and decisions.
To implement this goal, I want to achieve the initiatives I have listed below by January 1, 2025.
My goals follow.
NO. 1: FREEDOM FROM MOST FINANCIAL RISK
Think of these as basic strategies to sleep well at night.
- Protect against risk by evaluating the full list of risks and alternatives–for a fuller range of risks and concerns, read here. What follows has to do solely with my situation and priorities.
- Reduce leverage on investment properties—we are paying down debt on my rental properties. At the present pace, it will take many decades to pay them off. However, I also monitor my other resources if I want to use them to pay off loans early.
We are conservative about debt. In general, the less debt, the better. After all, loans are partnerships between you and your lender. The smaller the loan, the less a lender’s requirements can potentially affect what you do and your overall financial health. However, while paying down loans is nice, you must also be aware that your equity in a rental property has an opportunity cost and must be balanced against an alternate return. So, the mere reduction of leverage is sound but also needs to be balanced against other opportunities to use your money. For instance, if rates suddenly plunged, would it be wise to refinance and take equity out if there was the chance to make more money by using it for something else?
By the way, I have no debt at all on my primary and secondary residences.
- Have and increase savings and build reserves —savings tend to reduce risk, too. But it is just what most financially independent do, regardless of the economy. See here.
At present, any savings you have earns a real return after inflation. For many years, that was not the case. Even retired, we save about 10-20% of our income.
- Evaluate income streams and make them less vulnerable/or have an alternative–I have two current income streams that I expect may be reduced in the future (hint: one is Social Security). While I cannot change that risk, I can plan to rely less on that income. For instance, if there was a 30% cut in Social Security, one way of replacing it with tax-free income would be to increase savings or reprogram my Roth IRA to throw off more cash and make up the difference. I have not yet made that change to my investments, but I might in the future. It is good to know your options.
Impact: considering different kinds of risk makes you look at your finances from a different perspective. Independence depends upon that. I sleep better at night knowing I have thought risks through. Think of it as financial sleep medicine.
NO 2: FREEDOM FROM WASTING TIME—THE VIRTUE OF AUTOPILOT
Most of my finances are on autopilot and automatic payment. That is essential if you want the freedom and flexibility to travel. My money is automatically paid out, deposited, or invested. But there are some exceptions, and it is time for me to get these obligations on autopilot.
But (sigh), some of that has been because I have not gotten around to it. And some of it has also been because I have changed accounts several times in the last few years due to security, hacked accounts, and other issues.
And then I do not always want to give up control. Like many of you, I do not always trust the organizations I owe money. For instance, there is always a risk that the gas company, the cell phone provider, etc., will overcharge occasionally, and I will have to chase down a refund. Have you ever noticed that bill invoices are lightning-fast and refunds take months? But I am willing to reduce control, especially if bills are on a level pay plan or do not vary much from month to month. Nearly all businesses send you an email upon payment, so monitoring is easy, and you can spot anomalies and fraud sooner.
So, it is time to get back up to speed. I recently went over my accounts to see which ones were on autopilot and which I needed to fix.
The exception will always be my monthly credit card bill, which I must monitor because of fraud concerns, and review and pay monthly.
For an example of how automatic money management happens, see here.
Impact: you can save a lot of time by placing your finances on autopilot. However, there is an exception: it is important to review your credit card expenses for fraud.
To achieve this freedom, you must first list all your non-automatic bills. Then, you must arrange to get them paid from your credit card or bank account.
NO. 3: FREEDOM FROM MAINTENANCE—PHYSICAL AND SOCIAL
Reducing maintenance is about two things: 1) reducing the cost of ongoing obligations and 2) reducing the time you spend dealing with things that break down or need to be fixed.
So, if you have not done so, consider dumping unreliable things or relationships that constantly need maintenance.
For instance, if the car is always in the shop, maybe it is time to change and buy something reliable.
If a personal relationship is constantly exhausting and draining, it may be time to cut it back or out.
Our situation is rather prosaic compared to those examples. Yard landscaping has been a task we want on maintenance autopilot. So, we started by getting rid of a messy deciduous tree that we constantly had to clean up and planted one that is drought tolerant instead—no more raking leaves. In addition, we made the front yard drought tolerant, too, and there is no more grass to mow, lawns to water, or broken water sprinklers to fix. The entire system is on an automatic watering system.
Those changes mean we no longer need a gardener and can save money on water too. So now, if we left for a month or two, the plants, served by automatic watering systems, would be fine. None of this means there will be no yard maintenance, but it can be left for a long time without causing concern about damage or care.
If we want to go to Portugal for three months, we can. It will be a bit of a mess when we get back, but nothing we cannot handle.
Impact: unreliable or high-maintenance items cost time and money. Take a look at what you might change.
NO 4: FREEDOM VIA DELEGATION
Sometimes, you get freedom by giving one of your roles to someone else with more expertise.
For instance, I recently hired a property management firm to manage one rental property. The properties are starting to throw off enough cash to justify the move to simplify my life. Sometimes, delegating to others allows you to have far more flexibility.
Impact: there is a trade-off between time and money when you delegate. You pay more, but you use less time. However, I also found that there can be a second advantage to hiring expertise: there is often a better outcome than if you do it yourself. For instance, the management firm’s knowledge of the market allowed me to raise the rent and pay their additional fee.
NO 5: FREEDOM AND INDEPENDENCE VIA REDUCTION
Marie Kondo is famous for popularizing this concept.
You can read about Kondo’s tests here. For our limited purposes, you should ask four questions about physical items:
- Do you have to maintain it?
- Do you have to keep track of it?
- Do you have to insure it?
- Do you have to keep it secure?
If the answer to any of these questions is yes, the next question is, do you need it? If you have not used an item recently, it indicates that you probably do not.
This logic has turned into a crusade at my house. You see, my spouse has declared war on crap and clutter. So, we have been throwing out things we no longer value, or that cost us.
It is logical, but It isn’t easy. And you have to keep it up.
If we are not constantly going through the throwing-out process, the clutter fairies drag in more junk overnight. And in the morning, the junk has multiplied.
Junk and the maintenance of junk is an obstacle to independence and flexibility.
Impact: You can probably save money and time if you go through the four questions I have posed and answer honestly. Moreover, if it turns out there are items you don’t need, you can sell some items and fund things you do.
A CAUTION
As Charlie Munger has noted, it is equally important to avoid stupid mistakes as it is to be brilliant. So achieving independence does not automatically make you a genius or free from potential error.
After all, it is one thing to be free to make your own decisions. It is another to make good ones. So, many independent people consult trusted family, advisors, and friends when making significant decisions.
Finally, you may be asking about another category I did not touch on: self-maintenance. That includes everything for you: food, streaming, gym memberships, etc. That is its own subject and will be part of a future post.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Nathan McBride
License: Unsplash