Exponential FI

 When you work for a company, you work to build someone else’s wealth.  When you own a company, other people work to build your wealth. Fortunately, you don’t have to be Bill Gates or Elon Musk to own a profitable company.   Instead, as we touched on briefly in the article on assets vs. liabilities , you can buy stock in the company.   Buying a share of stock mean you actually own a small piece of a company. One of the most efficient ways to own stocks is by purchasing low-cost index funds.   These funds can either be in the form of mutual funds or Exchange Traded Funds (ETFs).   The key difference to a traditional actively managed fund is that the index fund simply tracks the relevant market.   For example, an S&P 500 index fund would hold shares of the largest 500 U.S. companies In the S&P 500’s case, the largest 500 with some consistent caveats: at least 10% mu...

How much do the things you buy really cost? What’s the best way to quantify that? Most things have a price tag, but is it really dollars you are concerned about? Vicki Robin and Joe Dominguez presented the concept of Life Energy in their book, Your Money or Your Life . With Life Energy, they show that there is a difference between what your “salary” is and the real earnings on your time. What you think you are making is reduced from one end by taxes and job-related expenses, like the cost of commuting, job specific clothes, or the things you buy to relieve stress from your job. On the other end, your effective hourly compensation is decreased by the time you waste getting ready for work, commuting, decompressing after work, taking vacations just to get away from work, and so on. Their website has a great calculator to help you get a feel for your real hourly wage. Ultimately, their point is that you are trading your life energy, your limited time on this earth, for mone...

To achieve Financial Independence, you will have to spend less than you earn, then save and invest the difference. Eventually, compounding returns will grow your wealth to a point where the continued growth outpaces your life's expenses. At its heart, a simple plan. However, it's easier said than done. Compounding returns are such a powerful ally that even a little invested savings can eventually get you there, but compounding requires time and often we live in the now. The money you meant to save can all too easily become the money you spent without intention. It helps to have a plan, to know what you are working towards. To be able to see the road ahead so you know where you are going. I created the FI Calculator for this purpose. The calculator uses a handful of inputs and simplifying assumptions to give you an idea of how long it will take to reach Financial Independence. You can also access the FI Calculator from the navigation bar at the top of the ...

You are saving money and learning about the difference between assets and liabilities . As you invest your savings into assets, the real magic begins. Your investments start to grow, whether it be from appreciation, cash flow, dividends, or all of the above. Then the growth starts to growth. Then the growth on the growth on the growth starts to grow. It’s a runaway chain reaction, but it does take time. This is the magic of compounding returns and leads to exponential growth of your wealth, the namesake of this blog. However, the opposite effect is just as powerful. Anyone who has ever been in credit card debt with interest rates over 20%, or even worse situations with payday or title loans, understands how hard you have to swim against the current just to stay still. The interest keeps racking up and many people never escape the debt. If this describes your situation, check out Dave Ramsey’s Total Money Makeover for steps to dig yourself out of debt before you start b...

In 2008 you could famously buy a foot-long sub for $5. In 2020, that same sub costs $6.75. As we look at generating enough passive income to cover our future expenses, we must not just think of how many dollars we will have, but how many sandwiches those dollars can buy! The difference between those two prices is the difference between a nominal price and a real price. Similarly, if we hide $100 under the mattress today, a decade from now we will still have $100 nominal dollars, but will have fewer real dollars, because we can buy less sandwiches with the same money. The green line shows the average price of sandwiches rising over time, with the shaded area projecting 30 years into the future based on the same growth rate. The blue line shows how the number of sandwiches we can buy for the same nominal money decreases as a result. While sandwiches are an illustrative example, this effect touches all goods and services and is known as inflation. In the US, Consumer Pri...

You have started your journey towards Financial Independence and are stashing away money, having found some space in between your income and expenses.  But what do you actually do with that money? It is time to put your money to work for you.  You want to invest your money into assets, which will make you more money.  At the same time, you want to avoid locking it away in liabilities, which will diminish your money.  What’s the difference?  To put it simply, if you lost your job tomorrow, assets would feed you while liabilities would eat you!  Understanding the difference between an asset and a liability is critical to Financial Independence. Key asset classes: Equities When companies issue shares of stock, they entitle the owners to a share of the equity in that company.  Generally, when those companies make a profit, they will reinvest some of the profits to help grow the company and pay the rest out to the shareholders in the form of divi...

Financial Independence, simply defined, is when your passively produced income is enough to pay for your life’s expenses.  But how do you get there?  When at the beginning of the path, it can seem daunting.  Even imaging enough wealth to generate that kind of passive income is a challenge.  However, the good news, and the real point of this blog, is that the decisions we make along this path drive non-linear results. A mathematician would tell you that a linear function is defined by the output being directly proportional to the input.  Your elementary school teacher would say they make a straight line on a graph.  Fortunately, on the quest for Financial Independence, we leverage the power of non-linear mathematics.  Maybe the most powerful, the exponential effect of compound interest when investing, we will get to later.  However, it starts with the disproportional effect of saving versus spending.  Let’s ex...