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🚀 How to FI: Beginner’s Guide to Reaching Financial Independence with Stephen Baughier! 🌟
488 Plays9 months ago
🚀 Welcome to "How to FI: Beginner’s Guide to Reaching Financial Independence with Stephen Baughier"! 🌟
Watch this episode on How to FI on YouTube.
🔊 Dive into this enlightening 20-minute talk by Stephen Baughier, hosted at a Salesforce Talent Stacker event. It’s an incredible resource for anyone new to the FI journey or in need of a motivational refresher. This presentation is one of the most accessible and inspiring introductions to the concept of financial independence you'll find today! 💡
🌐 References:
- For more about the Salesforce Course and Events, visit Talent Stacker.
- Attend a CampFI
- Free FI Lessons at Fiology
- Tune into the ChooseFI Podcast for more on financial independence.
📺 If you’re watching this on YouTube and have questions about achieving FI, feel free to ask in the comments. I’m here to support and guide you on your journey to financial independence. 🙌 🎙️ This episode is a feature of the Forget About Money Podcast, hosted by David Baughier, where we delve into the intricacies of financial planning, and what it means to be truly independent.
🗒️ How to FI Summary: In this engaging lecture, Stephen Baughier discusses key strategies for reaching financial independence. Learn about effective income-generating investments, applying the 4% rule, and calculating your FI number. Discover how altering your savings rate can accelerate your journey to FI. The talk underscores the importance of balancing financial success with enjoying life's moments.
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Transcript
Introduction to Financial Independence Talk
00:00:00
Speaker
Hello, everyone. What you are about to hear is a 20-minute presentation given by my brother, Steven Boyer, at a Salesforce Talent Stacker event. If you are new to Fi or looking for a motivational refresher, you'll find this talk one of the, if not the, best introduction to the concept of financial independence available today.
00:00:21
Speaker
If you're watching this on YouTube and you have any questions about financial independence, please ask them in the comments. I'm glad to support your journey. Here we go. All right.
What is Financial Independence?
00:00:37
Speaker
All right, so you're here to learn about financial independence, and you will. What I'm gonna tell you today, especially if you've never heard about it before, it's gonna be very powerful. It's gonna be something that you can take your personal finances to the next level and accelerate your path to financial independence.
00:00:52
Speaker
However, knowledge alone doesn't make change, right? Improving your finances requires that you are intentional and that you take action. So throughout this talk today, I want you to think about how the information I'm giving can be used at this point in your life and what actions you're gonna take, big or small, because we know that even the smallest decision now or smallest action now can change its trajectory. For years down the line, you'd be at a completely different place.
00:01:20
Speaker
So even small decisions are very impactful.
00:01:24
Speaker
We're gonna talk about financial independence. Obviously we're gonna define what financial independence is. We're gonna cover the topics that make financial independence possible. And I'm gonna share some steps that you can take to start improving your finances. I'm gonna give you some resources to check out because a lot of people when they first hear about financial independence, they just get excited. They wanna go down the rabbit hole. So I'm gonna point you in the direction of a few resources.
00:01:51
Speaker
I'm going to share some communities that you can lean on and learn from during your path to financial independence. And at the end, I'm going to share a cautionary tale that will hopefully help you maintain a healthy perspective while you're working towards financial independence. So what is financial independence?
00:02:12
Speaker
I was very surprised to find out that financial independence is not in the dictionary. You look it up in the dictionary, it's not there. It can be a very subjective term. A lot of people like to define financial independence into however it suits them. I've been involved with the financial independence community for 10 years. I've hosted over 40 in-person financial independence
00:02:37
Speaker
I've listened to over 100 talks on individual topics. Throughout these events, I've probably spoken to thousands of people who were financial independence enthusiasts. And after all of that, what I've come up with was this very simple definition of financial independence. It's the ability to maintain a sufficient lifestyle without trading your time for money. That's it. No more, no less. It's the ability to maintain a sufficient lifestyle without trading your time for money.
00:03:08
Speaker
What that means is, if you're financially independent, you can quit your job. It means that you can spend those 40 plus hours doing whatever else you would rather be doing with your time.
00:03:23
Speaker
The cool thing about it is the bills will still get paid, right? But most of us are not in this situation. Some of us today haven't even thought about the possibility of financial independence or being rich or quitting your job unless, you know, it was in terms of you're going to get this inheritance from a distant relative, you know, or win the lottery, right? But I'm here to tell you, was that
00:03:49
Speaker
Get those scratchers, man. Get the scratchers, yeah. Everybody go get them. But achieving financial independence is possible, and you have a much higher success rate than playing the lottery. So we're going to revisit this definition again. So it's the ability to maintain a sufficient lifestyle without needing to trade your time for money, right? What it doesn't say is that you have to quit your job. It doesn't say that you have to have a million dollars. It doesn't say you have to have $10 million.
00:04:20
Speaker
It doesn't say what a sufficient lifestyle looks like. And it definitely doesn't say that you can't depend on friends and family to have your needs met, like financial or otherwise, right?
00:04:31
Speaker
It just says we don't need to trade our time for money to pay for our sufficient lifestyle, whatever sufficient means to us at a given time. So just think, if you're financially independent, if you didn't have to trade your time for money, if you didn't have to go a job, how would you spend your time? What would your relationships with your spouse, with your family, with your children, with yourself look like? Would you learn a language? Would you learn how to cook something new?
00:04:56
Speaker
Would you relax more? Would you read more? Would you exercise more? Would you still work? If you like your job, you can still work. Would you volunteer for organizations that are in alignment with your values? Would you travel more? Where would you go? I'm asking all these things because I want you to envision what that ideal life looks like because that is your Wi-Fi. And the Wi-Fi is what's going to keep you motivated
00:05:22
Speaker
once you get to the boring stages of financial independence. At the beginning, you're very excited. You're like, oh, this is new. I'm going to make all these changes. You're going to automate all your bills, and you're going to start diverting money into savings. And once you start doing all these things and put it on autopilot, then it's boring for a while. And that's called the accumulation phase. And that's where community comes in.
00:05:53
Speaker
But your Wi-Fi is what's gonna keep you motivated and on the path. So we're gonna talk about some things that make Fi possible.
Creating a Financial Perpetual Machine
00:06:02
Speaker
If the definition of financial independence means, and I'm gonna repeat this over and over again, having the ability to maintain a sufficient lifestyle without trading your time for money, how do we make that happen? If we're not working for a paycheck to get money to pay our bills, how are we gonna pay our bills? How are we gonna make that money? But we're not gonna make the money.
00:06:20
Speaker
We're going to build a money-making machine, and it's going to make it for us. I like to call this a perpetual money-making machine. And it's not as foreign a concept as it sounds.
00:06:36
Speaker
Who here has been in the military, right? So there are people who serve in the military. If you're not in the military, you probably know someone who has. My brother, for example, he served in the United States Navy 20 years, retired a few years ago. Because of his service, he gets a retirement check for the rest of his life.
00:06:55
Speaker
How does the Navy do it? They have a perpetual money-making machine, right? Another thing that we might be more familiar with, some of us, is like Social Security. And during our working lives, we pay a portion of our paycheck into the Social Security system, and then when we get to be a certain age, we're qualified to start taking income from that. Another perpetual money-making machine. Well, if the Navy can do it and Social Security can do it, then we can too, right?
00:07:23
Speaker
But what makes this possible for us is what's known in the personal finance space as the Trinity study. I'm not going to get all into the details, but basically what the Trinity study is, it's a 1998 research paper put together by three professors at Trinity University. And what they've come up with is a lot of numbers.
00:07:50
Speaker
All right, so what we're going to do is this is basically the result of their study.
Understanding the 4% Rule
00:07:55
Speaker
Big picture is what they did is they tested withdrawal rates from portfolios. And so they said, well, after a certain amount of time at taking certain percentages out of our portfolio, will we have money left over?
00:08:07
Speaker
And so we're going to focus more on the higher success. We don't want to be down here where the zeros are zero success. That's not where we want to be. We want to be up here where these success rates are higher. So we're going to zoom into that area. OK. And so what we're looking at is this right here is.
00:08:23
Speaker
The portfolio, 100% stocks. This portfolio is 75% stocks, 25% bonds. And this is 50% stocks, 50% bonds. It's a lot of numbers. You don't have to know all that. So what we're looking at, though, is basically this number and this number, that 98 and the 95.
00:08:39
Speaker
And you see at the top of that column, it's 4%. So what that says is, I don't know if anybody's heard of the 4% rule. This is where the 4% rule comes from. So what it means is if we have a stock portfolio, either 100% stocks or 75% stocks, 25% bonds, we can withdraw 4% of that portfolio
00:09:00
Speaker
For 30 years, right here, this is 30 years, with a 95% success rate, which means we're going to have money left over. So we won't run out of money. 95% chance we won't run out of money.
00:09:11
Speaker
That's great because what that does is it allows us to define something that we really haven't defined before. Probably, if you haven't heard of this, you haven't defined it before. What is enough for you? Now, I remember being younger and I was like, I'm going to be a millionaire when I'm 30. Or we probably all thought, I'm going to be a millionaire. But why? Why a millionaire? What does that mean to you? It just sounds cool, right?
00:09:36
Speaker
And then there's those people who say a million isn't what it used to be. And due to inflation and everything, it's just not what it used to be, and they're not wrong. But that doesn't help them plan for retirement. That doesn't help them build this machine.
00:09:54
Speaker
And those people who think a million is enough, they might stop working and realize a million is not. Or the people who think a million is not enough, they're going to work a bad job that they're unhappy at potentially for forever, no matter how much money they accumulate, because they're just scared that it's never going to be enough. But the Trinity study, it tells us what enough is. So if we can withdraw 4% from our portfolio without it running out,
00:10:23
Speaker
We're gonna do, this is the little quick math that I was talking about right here. I don't know if you can see this, but it tells, if we have a portfolio value, all we have to do is multiply that by four, and that tells us how much we can take out, and it's annually. This number's annually every year. So if we have a $100 portfolio, take out $4 a year, right? $1,000 portfolio, 40 bucks a year.
00:10:43
Speaker
$10,000 portfolio, $400, $100,000 portfolio, we can take out $4,000 a year. And if we get a million dollars, we can take out $40,000 a year without running out of money. Inversely, if we go back and look at that $40,000 a year, you see that
00:11:01
Speaker
40 times 25 equals a million. So we can look at it and say, well, we have a portfolio of X amount. We can multiply it by 4, and this is how much we're allowed to draw out without too much risk. Or we can say, well, I need $40,000. What portfolio size do I need to pay me an income of $40,000? So we just multiply $40,000 by 25, and that's how we get that million.
00:11:26
Speaker
So we're going to go in the other direction now. So think about what your spending is. What do you spend a year? Multiply that by 25, and that's going to be your phi number.
Calculating Your Financial Independence Number
00:11:35
Speaker
If it's $40,000 a year you spend on expenses, like we said, it's a million bucks. $50,000, $1.25 million. If you're going to spend $60,000 a year, you're going to need $1.5 million in your portfolio. $80,000 a year, you're going to need $2 million. If you spend $100,000 a year, you're balling. That's great.
00:11:56
Speaker
That's going to be $2.5 million that you're going to need to have saved up. Everybody with me so far? We're going to do a quick example. This guy right here, is he financially independent? He has a take-home pay of $75,000. He saves $10,000 of it, which means he's spending $65,000 of it. Everybody follow that logic? He's not saving it, he's spending it.
00:12:18
Speaker
So that means, oh, and he also has a portfolio value of 1.625 million. Raise your hand if you think he's financially independent. Yeah, it's close. Raise your hand if you think he's not.
00:12:39
Speaker
All right, so we've multiplied 65,000 spending times 25. That's where that 25. His fine number is 1.625. So his portfolio matches his fine number. He's financially independent. He's financially independent, right? So what about her? I'm going to talk about her for a minute. She has the same take-home pay. She saves 10,000 of it. And she spends 65. Same as him, right? What's her fine number?
00:13:10
Speaker
1.625, same as his. The situation with her is, even though Sia says that she's spending or saving $10,000, she's been saving that $10,000 for the last five years of paying down credit card debt and a car loan, high interest debt, which is smart. So right now, she's currently has zero in her portfolio. So what does she do? What does she do? She has to start saving, right? She has to start investing.
00:13:40
Speaker
So, so far we've defined financial independence, we've talked about our Wi-Fi, we've learned how to calculate a phi number, and now we're gonna talk about savings rate. Because, you know, she's probably thinking like, yeah, I got my credit card paid off, I got my car paid off, this is great, I still have this $10,000 that I've been putting in this direction, but now I don't need to, so I'm gonna start investing, I'm ready to start saving for retirement. But how long does
Influence of Savings Rate on Financial Independence
00:14:07
Speaker
that take? She needs to get 1.625 million,
00:14:11
Speaker
to be financially independent, and she's saving $10,000 a year. That's where savings rate comes in. So if our fine number is our destination, our savings rate is basically our gas pedal, all right? So how fast we reach financial independence is a function of our savings rate. So we're going to keep talking about her situation.
00:14:34
Speaker
The formula for savings rate is your savings over your take-home pay. Your savings divided by your take-home pay, your ratio of your savings to your take-home pay, however you want to say it. So in her case, remember, since she's saving $10,000, she has a take-home pay of 75. So her savings rate is 13.33%. Her time to fi is 47 years. Yeah, she's not happy about that. She was all happy right before. And she was like, 47 years? Nope.
00:15:05
Speaker
So how can she get there quicker? She's going to need to increase her savings rate. She can save more by earning more and taking her extra earnings and putting it to savings. She can save more by spending less. So she can reduce her expenses and take that money that she's now spending that she normally would spend and put it to savings.
00:15:27
Speaker
So let's take an example of her earning more. Her take-home pay is 75. Her savings is 10. Her spending is 65. None of that changed. Her fine number is what it was. Her savings rate's 13. Her time to five was 47 years. But now she's gonna earn $10,000 more a year. She's gonna put that 10,000 towards savings. So her fine number's the same because she's still spending 65 a year. And her savings rate is now 23.5% instead of the 13%.
00:15:57
Speaker
So her new time defy is, that's where this handy dandy chart comes in. So if she has a 23 and a half percent savings rate, you go down to the 23 and a half, it's somewhere in here. So it's somewhere between 32 and 37 years. So we'll say 33 years, which is a lot shorter time than the 47, right? 13 years. So just making that one change saved her 13 working or 14 working years.
00:16:25
Speaker
So now, she earned more, put that to savings. So let's say instead of earning more, she didn't want to go out and get a side hustle. She didn't really want to work hard at work to try to get that promotion. Her, she was like, listen, I'm good on the income. I'll just reduce some expenses.
00:16:41
Speaker
Her take-home pay is still $75,000. Remember, she didn't get more money. But instead, she still added $10,000 to her savings. So now she's saving $20,000. And she's only spending $55,000 now. She was spending $65,000. She's saving that extra $10,000 now. So her phi number actually went down because her savings went down from $65,000 to $55,000 a year. So her phi number is $1.375.
00:17:04
Speaker
Her savings rate is now, remember the calculation, savings over income. She's saving 20,000 now. Her income is still 75. 26.67% is her savings rate. So her new time to phi is, remember, we've got to look at this chart. It's 26.67%, so right around here.
00:17:24
Speaker
So she's looking at a time to phi is 30 years. So before was 33 when she was just earning more. But now she's actually, instead of reducing her time to phi by the 14 years, it's now reduced by 17 years. And these are small changes.
00:17:41
Speaker
What if she did both? We're going to go through this quickly. So now she's making 85, because she was making 75, so she's making more money. She's now at 85. She reduced her spending to 55, and so she put the difference in the savings. So now instead of saving $20,000 a year, she's saving $30,000 a year.
00:17:59
Speaker
Her phi number is the same because she's still spending the $55,000 a year, so it's at 1.375. Her savings rate's the 30 divided by 85, which is 35.3%. So if you look at the chart, 35.3%, say 35, we're looking at a 25-year working career. So we went from 47 down to 25.
00:18:20
Speaker
And that's not even counting for all the promotions, any kind of windfalls that she has throughout her life, any kind of bonuses, things like that. It's just a $10,000 increase in income and a $10,000 decrease in spending. So you can see how that's very powerful.
00:18:39
Speaker
So again, I just said this. So the first time, it was like 47 years, she wasn't happy about that. So then she increased her income, reduced it to 33. If she decreased her spending, she reduced it to 30, or by 30, or 230. And then she did both. Now she's 20, she can retire in 25 years.
00:18:57
Speaker
All right, so that's the basics as a very basics of financial independence. I just wanted to run through some examples there Think about how that can be applied to you If I'm gonna give you some we can talk we're gonna talk more after this but the thing so if I had to pick one blog one book one podcast and Like one course.
Recommended Resources for Financial Independence
00:19:18
Speaker
This is what they would be for you. Mr. Money mustache blog
00:19:22
Speaker
If you haven't heard about it, check it out. You probably have heard about it, but if you haven't, it's kind of addictive. His writing style, he's an engineer from Canada, retired like 30, 33, somewhere around there. And a lot of people love this blog. A book would be A Simple Path to Wealth, written by Jim Collins. He also has a blog called jimcollinsnh.com, I think.
00:19:46
Speaker
where pretty much everything that's in this book is in that blog, but the book's a really good read. It's a simple read. Where Mr. Money Mustache is mindset and day-to-day philosophy, just to get your mind right. The simple path to wealth focuses more on the money. How do you invest? What do you invest in? This book is really easy read. It simplifies so much.
00:20:09
Speaker
If you're in the podcast, the ChooseFI podcast is probably the most popular podcast in the Fi community. They've been around since January of 2017. It's just a great resource. And full disclosure, I don't know if anybody's heard of Phyology, but I have a twin brother, the one that retired from the Navy. He and I put together this Phyology course. So basically what it is is you go, you just put in your email address, you're not charged anything.
00:20:37
Speaker
You just get an email every week that covers a topic of financial independence, and it's for 52 weeks. And as far as communities go, there's a ChooseFI local group. So the podcast that I mentioned earlier, they also created local groups. So if you go to choosefi.com slash local maybe, or just how to Google things, you might have a financial independence group already in your town or in your city.
00:21:02
Speaker
And you can also start one if you don't, if you want to meet other people where you live that are into financial independence. There's the Economy Conference. A woman named Diana Merriam has done this for probably three years now. It's happening right now this weekend in Cincinnati. It's basically like a TED Talks for the Phi community. So it's really nice, a very kind of high production value event.
00:21:26
Speaker
And then there's Camp Phi, and that's something that I've done. I've done Camp Phi since 2017. We just finished last week our 42nd one, no our 44th one, and it's just been wonderful to provide a way for people who may not be comfortable talking about these topics, like with people at work or with their family,
00:21:47
Speaker
or their neighbors, they can just go and hang out for a nice relaxing weekend at a retreat center. It's a lot like this. And we actually have one here. We've done one here the last few years. I'm going to have one later this year. I wanted to close out with that cautionary tale that I was telling you about that I'm going to... It's a poem. I did not write it.
00:22:09
Speaker
It's written by a man named Herbert Kaufman a long time ago, early 1900s, and the name of it's called Fool's Gold.
Enjoying the Journey to Financial Independence
00:22:18
Speaker
See him there, cold and gray. Watch him as he tries to play. No, he doesn't know the way. He began to learn too late. She's a grim old haggis fate, for she let him have his pile, smiling to herself the while, knowing what the cost would be when he'd found the golden key.
00:22:32
Speaker
Multimillionaires he, many times more rich than we, but at that I wouldn't trade with the bargain he made. He came here many years ago. Not a person did he know. He had the money hunger bad, mad for money, piggish mad. He didn't let a joy divert him. He didn't let a sorrow hurt him. He let his friends and kin desert him while he planned and plugged and hurried on his quest for golden power. Every single wakeful hour where the money thought he'd dour,
00:22:56
Speaker
And all the while as he grew older and he grew bolder, he grew colder. And he thought that someday he would make the time to play, but say he was wrong. Life's a song. See, in the spring youth can sing and can fling, but joys wing when we're older like birds when it's colder. The roses were red as he went rushing by and glorious tapestries hung in the sky.
00:23:17
Speaker
The clover was waving, the honey bee slaving, a bird over there around delayed a soft air. But the man couldn't spare time for gathering flowers or resting in bowers or gazing at skies that glided in the eyes. So he kept on and he swept on through mean, sordid years. Now he's up to his ears in the choices of stocks. He owns endless blocks of houses and shops. The stream never stops pouring into his banks. I suppose that he ranks pretty near the top.
00:23:42
Speaker
What I have wouldn't stop his ambition one tittle, and yet with my little, I don't care to trade with the bargain that he made. You'll see him today. Watch him try to play. He's come back for blue skies, but they're new guys. Winter is here. All is gray. The birds are away. The meadows are brown. The leaves lie aground. And the gay brook that round with its swirling and whirling of waters is furling its bosom in ice. And he hasn't the price with all of his gold to buy what he sold.
00:24:10
Speaker
He now knows the cost of the springtime he lost, of the flowers he tossed from his way, and say he would pay any price if the day could be made not so gray. He can't play. So my ask of you is this, now that the genie's out of the bottle, you know about financial independence, you're like, let's do this, let's do whatever it takes. My ask of you is, make sure you play along the way. Thank you.