Notes on Financial Freedom by Grant Sabatier.
Grant Sabatier went from $2.26 to $1 Million in five years. This book is a roadmap that guides readers how to reach their own financial independence.
There are seven levels of financial freedom:
- Definition - having clarity about where you are and where you want to be.
- Sustaining - earning enough to cover expenses, living paycheck to paycheck
- Emergency Fund - when you escape living paycheck to paycheck
- Stability - having 6 months living expenses saved and zero debt (outside of mortgages)
- Flexibility - having 2 years living expenses saved
- Financial Independence - being able to live off investments forever
- Abundance - more money than you'll ever need
The seven steps to reach financial freedom:
- Figure out your FI number (usually 25x annual expenses saved)
- Figure out your current net worth
- Shift how you think about money, have a growth mindset!
- Focus on what can impact your savings the most. Track what you spend and see what's best to cut.
- Hack your nine-to-five. Use your full time job as a launching pad to make more in the future.
- Start a profitable side hustle and diversify income streams
- Invest as much money as early and as often as you can
FIRE stands for financial independence, retire early. But the focus here is on financial independence instead of retire early. Focus on time instead of money. Money is a tool that can be used in exchange for freedom.
Summarizing this chapter:
- Money is unlimited
- The traditional retirement approach doesn't work: you spend the most valuable years of your life working fore money and it's not designed for you to retire as quickly as possible
- Compounding exponentially increases your money over time. The earlier and more you invest, the faster your money will grow. Start now.
- Inflation hurts your savings
- Don't defer your dreams
- Frugality may be important, but don't focus on it by sacrificing earning potential
- Money and time don't have a linear relationship, you can earn more without sacrificing more time
The 4% rule states that if you withdraw 4% of your portfolio each year, you should have enough money to last the rest of your life; assuming your portfolio is invested.
This is based on the Trinity study, which took into account inflation. The total time studied was based on thirty years of retirement. There was a 98% success rate. The study looked at market conditions from 1926 to 1997.
Given the 4% rule, if you multiply your annual expenses by 25 -- this is your FI number. This is the amount you'll need to save in order to be financially independent.
Steps to take:
- Save more than 25 times your annual expense
- Defer taking investment gains as long as possible
- As you get closer to retiring, increase your emergency fund to cover a full year
- When you withdraw from your portfolio, live on as little as possible
- Preserve your investment principal
Consider the implications of recurring expenses. For example, if you spend $350/mo on takeout food
that means you need to save an additional $350 x 12 x 25 = $105,000 for FI. Can you reduce that
monthly expense? How about your lifestyle, can you get to FI faster if you buy a used car instead
or move to a lower cost of living city?
This chapter also covers the Rule of 72: to estimate how long it takes for a portfolio to double
just divide 72 by expected compounding rate. So at 7%, that's 72/5% = 10.2 years. Utilize compound
interest to reach FI earlier by investing early!
Net worth is the most important number in personal finance. Calculate it by adding your assets and subtracting your liabilities.
Pay down debt with the highest interest rate first.
Always invest enough to get your company's 401k match. It's free money.
Daily habits equal riches. You make better decisions when it becomes a part of your daily routine.
Automation is the status quo. It's just the beginning -- automate your investments. But can you build daily habits around the automation? Can you get an overview of your finances and challenge yourself to increase your savings rate by 1% every month?
You'll need to build a strategy to get to FI. There are three parts:
- Income - how much you're making (increase this)
- Savings - how much you're investing (increase this)
- Expenses - how much you're spending (decrease this)
They're all essential, but to fast-track FI you'll need to increase your income to dramatically increase how much you can invest as early as possible -- to take advantage of compounding.
Have an enterprise mindset - take advantage of every opportunity to make more money and build wealth. Cut expenses, optimize fees/prices, minimize taxes, build multiple income streams, etc...
Four general ways to make money:
- Full time employment - not only an income stream but take advantage of all benefits. Get insurance, learn on the job, utilize 401k, negotiate equity, negotiate working remotely.
- Side hustling - diversify your income, consider doing something you'd enjoy anyways, learn new skills while getting paid.
- Entrepreneurship - scale your side hustles, perhaps into your next full time job.
- Investing - invest as much as early as possible, into stock/bond/real estate.
Calculate your real hourly rate. It includes all the time you spend dealing with your full time job, including: commute, preparation, de-stressing. When you make a purchase, is it worth that time?
Ask yourself before buying anything:
- How happy will this purchase make me?
- How much money do I have to make to afford this?
- How many hours of my life am I trading for it?
- Can I afford it?
- How do prices compare in terms of percentages?
- Can I get it for less or trade for it?
- How much am I spending on convenience?
- How much would this cost me for the rest of my life?
- What is the per-use cost of it?
- How much will this money be worth in the future?
- How much time/freedom is this buying me in the future?
Instead of budgeting, can you save more by cutting back on your three biggest expenses: housing, transportation, food.
Housing usually costs 1/3 of average American's budget. Save by moving to a cheaper home, renting out extra rooms, house-sitting, house-hacking, or van dwelling.
Save on transportation by walking/biking. If you need a car, buy used.
Utilize credit card rewards and travel hack to save on plane tickets.
Save money on food by growing your own, cooking from home, meal prepping, and buying in bulk. Don't eat out all the time.
Use your full-time job as a launching pad to FI.
Maximize your benefits: 401k match, HSA, working remotely, equity, learning opportunities, insurance.
Also maximize your salary by determining your market value and negotiating raises. The net impact of every single raise will be huge over the entire course of your career.
Optimize your skills and networking. The more valuable and diverse your skill set, the better. Combine this with a growing network to find the best job.
Side hustling is a great way to diversify your income streams.
Every dollar you make side hustling should be invested to fast track investment growth.
Grant Sabatier recommends working for yourself instead of someone else for side hustles, since there are huge upsides when working for yourself -- mainly there's more earning potential. There's also more risk, but since you'll still be earning a paycheck from your full time job -- you won't have to worry about covering living expenses.
Before starting a side hustle, determine how much time you're willing to commit to it. Design your side hustles to take up that amount of time without going over.
Passive income side hustles are the best. Aim for that. If you build one or more passive income businesses that generates enough money for monthly expenses, your path to FI becomes much shorter.
Grant Sabatier's Side-Hustle Evaluation Framework:
- Analyze passion and skills
- Can you get paid for any of them? Can you launch a course? Can you sell it?
- Evaluate earning potential
- Figure out what to charge based on: your skill level, demand, competition, added value, perceived value, how much audience is willing to pay
- Get your first sale
- Build a lifestyle business
The maximize performance of investments:
- minimize risk
- minimize fees
- minimize taxes (on contributions and withdrawals)
- maximize returns
Steps to take:
- Separate short-term from long-term - keep an emergency savings account. If you need to save for a big expense short term (a house), keep the rest in bonds. Long-term investments should be buy and hold in US and international stock markets.
- Figure out how much you have to invest - automate your investments into your 401k/IRA/accounts. Try to increase investing rate by 1% every thirty days and re-evaluate every six months.
- Determine target asset allocation - figure out how risk averse you are, determine what percentage to invest in each of stock and bonds.
- Evaluate current fees - keep fees as low as possible. Use Vanguard index funds or ETFs.
- Pick the right investments - Utilize tax saving vehicles like 401k and IRAs. Use index funds. Invest in the whole market for diversification.
- Max out tax-advantaged accounts - Max out 401k/IRAs first, especially if you have company match. Consider SEP IRA and Solo 401ks for your side hustle income. Also don't forget the HSA. Contribute to 529 if you have children.
- Invest in taxable accounts - Any leftover money should be held in taxable investment accounts.
Grant Sabatier recommends real estate investing as a way to diversify your investment portfolio.
Real estate also has the added bonus of leverage: the appreciation on your stocks grows in proportion to your whole portfolio, whereas with real estate it grows on your down payment (due to taking out a mortgage). This means you can grow your money faster at a slight risk.
Your monthly mortgage payment including taxes/fees shouldn't be more than 40% of your monthly take home pay.
The two primary ways of real estate investing is flipping or buy and hold. Usually when you buy and hold, you'll also rent out the property.
When you're ready to retire, develop a withdrawal strategy. You need to minimize any early withdrawal penalties -- which usually require you to be 59.5 years old to withdraw from tax advantaged accounts.
Live off side hustle income as long as you can before touching investment accounts.
Then withdraw from your taxable accounts first.
After that, start withdrawing from your tax-advantaged accounts in this order: traditional 401k, traditional IRA, HSA, Roth IRA, Roth 401k.
Consider using the Roth Conversion Ladder loophole: convert funds from a 401k to a Traditional IRA to a Roth IRA. Five years after the conversion, you'll be able to withdraw without a 10% early withdrawal penalty. You'll still need to pay taxes on the conversion from Traditional to Roth.
Remember to keep busy with interests and hobbies!
This chapter includes tips on how to reach FI:
- Just get started!
- Focus intensely and learn to say no. It's too easy to waste time, but it's our most valuable asset. Make the most of it.
- Execute consistently. Build habits.
- Know when to ask for help.
- Relax.
The habits to reach FI:
- daily - check net worth using an app, invest an extra $5, strategize on how to make an extra $50, review past purchases
- weekly - check passive income performance, bookkeep
- monthly - review saving performance, increase saving percentage by 1%, check income performance, pay bills, analyze and adjust cash flow
- quarterly - check FI number progress, reallocate portfolio, review hourly rate and salary
- annually - review automated investments/payments, prepare for tax optimization, project cash flow, review investment fees, review annual subscriptions, review annual giving