THE FI MENTALITY: THE PURSUIT OF FINANCIAL INDEPENDENCE STARTS WITH YOUR MINDSET

“We cannot solve our problems with the same thinking we used when we created them.” –Albert Einstein

“The mind is everything. What you think you become.” –Buddha

INTRO

How do you think about money? More specifically, how would you define the role that money plays in your life? What is money’s purpose?  For us, like many young people starting out, we wanted to make a lot of money so that we could have all of the cool stuff. A big house. Nice cars. After all, what else would you work so hard for?  That lady that drives the Grand Wagoneer has to be super successful, and there’s no way that guy driving the decades-old rusted-out truck has any money, right? Nobody ever told us that there’s a whole different way that financially savvy individuals think about money.

Our wake-up call came a few years ago, in Cabo San Lucas of all places. We were staying at a resort and, as we have a tendency to do, making friends at the pool. The couple we were talking to, both in their late 20’s, made a comment in passing about how they had flown their plane down the day prior. Two margaritas in, so of course we pried. How the hell could someone in their 20’s afford a private plane?  And why were they so humble—15 minutes of reality TV will show you that most young individuals with that kind of money love to flaunt it.  Little did we know that the conversation that would unfold over the next hour in a resort pool in Cabo San Lucas, Mexico would trigger a domino effect in changing the way we think about money.

Our Cabo friends told us about they own a ranch and a couple of small businesses.  More importantly, they told us about how whenever they make more money, the first thing their minds go to is not new clothes or vehicles.  They immediately think about how they can put their money to work, and what additional money-producing assets they can acquire.  And perhaps the most important question that came up during that conversation was one that they asked us: “have you ever heard of Rich Dad, Poor Dad, because that book changed our lives?”.  We weren’t big readers at the time, and to be totally honest we thought the idea that a book could change your life was laughable.  But they had a plane and we didn’t, so we took the bait and ordered a copy of Rich Dad, Poor Dad off Amazon before we left Mexico. We each read the book within a week of getting home and without a doubt, it changed our lives.

Okay, enough of that trip down memory lane. The whole reason we tell that story is because our money mentality before that trip and within a few weeks after was a complete 180. Once you buy into the process, the positive changes can happen rapidly.  But before embarking on any journey, it’s imperative to have the right mindset. This is especially true when it comes to the pursuit of financial independence. This post highlights three of the most important ways we shifted our money mentality, thereby accelerating our trajectory to financial independence.

THE FI MENTALITY

Categorizing Purchases – Assets vs. Expenses vs. Liabilities: Prior to our shift in mentality, we were always active savers but we never gave more than a few seconds of thought to what we were purchasing. Now, when looking at our monthly budget, we aim to (1) allocate as much money as possible to buying assets, (2) use as little money as possible for expenses, and (3) eliminate entirely the purchase of new liabilities. Be mindful that the way these categories should be thought of in terms of your pursuit of FI is much, much different from the way these terms are typically thought about in an accounting sense.  For example, on your personal balance sheet, your car might go down as an asset. For the FI mentality, your car is a liability. Here’s how we think about these three buckets:

1. Assets: Something that we expect to increase in value and generate cash flow. For us, the majority of our money saved is earmarked for stock investing (specifically through the purchase of index funds) and real estate investments. The driver behind both our stock and real estate purchases is that we are taking the money we have today, and purchasing something that is going to grow that money over time. In the interim period from the time we buy and sell the asset, we’re looking for the asset to put money in our pocket by way of positive cash flow. With stock index funds, we’re receiving and reinvesting dividends. With investment properties, we’re receiving cash flow through monthly rental payments, all while the properties appreciate in value. We’re firm believers that the purchase of cash flowing assets is the single most important tool to reaching financial independence.  We talk about it so openly and often that if you ask our four-year-old what money is used for, she’ll tell you it’s to buy assets. Now if only we could convince her to put that into action instead of burning her quarters on gumballs.
2. Expenses: Something that we expect to cost us money one time. The one-time piece is key to differentiating an expense from a liability. Examples include gas and grocery costs, medical bills, and bar tabs. On the path to financial independence, especially in the early years, the goal has to be to limit expenses.  The good news is that this is the category over which you typically have the most control—it’s easier to decide to not eat out for a month than it is to go buy an investment property. But this is also the category that requires the most self-control, and as such often necessitates the biggest mindset shift. If you want to be financially independent, you are going to have to reduce your expenses, at least until you have enough income-producing assets to pay for your desired lifestyle. You don’t have to live off rice and beans, but you’re going to have to sacrifice. This starts with self-discipline. But more on that in a later post.
3. Liabilities: Something that decreases in value and costs you money over time. As noted above, you may think of your car as an asset because, so long as you aren’t upside down, you could go sell the vehicle for cash. But there are two main things that make your car a liability for purposes of thinking about FI, even if it’s currently paid off: (1) you aren’t going to be able to sell your car for more than you originally purchased it for; and (2) since the time you purchased the vehicle, it has continued to take money out of your pocket.  In many ways, a vehicle is the opposite of an investment property. Your vehicle’s value drops by an unsettling percentage within seconds of you driving it off the lot while an investment property will typically appreciate in value over time.  Additionally, while an investment property puts money in your pocket through the receipt of rental payments, your car has continued to syphon money out of your pocket due to necessary repairs and maintenance. Liabilities result in negative cash flow, meaning that they continue to cost you money over time.  And unfortunately in today’s society, the majority of individuals put a greater value on material possessions that are often categorized as liabilities than they do on the aggregation of assets. Why would I want five income-producing investment properties that none of my neighbors know about when I could instead make everyone think I’m rich by driving my brand new Escalade through the pick-up line at school? If only we could see the monthly payments on that Escalade… Purchasing unnecessary liabilities might give you short-term gratification, but it’ll come at the cost of hurting your bank account and in many instances, increasing the stress in your life.  Think about the recurring costs that come with a purchase before you pull the trigger.

Think of Prices in Terms of Pre-Tax Dollars: This way of thinking was the single greatest concept to helping us cut certain expenses out of our lives. At a base level, this is that idea that most everything you’re paying for is being purchased with post-tax dollars.  If your salary is $50,000, at the end of the year you didn’t actually have $50,000 available to spend. Uncle Sam gets his cut, leaving you with a (much) smaller percentage than what your salary claims to be.  For us, we think about expenses in terms of how much we actually had to make pre-tax in order to buy something. To make it simple, we usually just double the price.  Here’s an example: for easy math, say you get taxed 50% on each dollar you earn.  If you make $40/hour, that means you’re only taking home $20/hour at the end of the day. After an 8-hour day your employer says they paid you $320, but your bank account only shows $160. If you go to dinner after work and buy a $20 meal, did that meal actually cost you $20 or did it cost you $40? You only paid $20 to the restaurant, but you had to work $40 worth of time to afford the meal. If you start to think about this in as much detail and as often as we do, it’ll make you nauseous. The list price and the actual price are not the same thing. When you start to think of costs in terms of pre-tax dollars, you’ll quickly find that a number of items you purchase on a weekly basis may not seem so desirable.

Your Money Should Be Your First Employee: Money making money is crucial to achieving financial independence. Looking back on our journey to financial independence, there are very few things that haunt us more than thinking about how long we had cash sitting in a general savings account doing next to nothing (and, in fact, losing value when accounting for inflation). Your money, whether it’s $10 or $100,000, should be your very first employee—put it to work, and make sure it’s making you more money. This concept was never taught to us, and still today is not taught to the majority of individuals, which is extremely frustrating. Money making money can take many forms, but should involve your money providing some sort of return.  This can (preferably) come through the purchase of assets, but it can also take the form of making sure your money is sitting in a high-yield account. It may not seem like much, but having $10,000 sitting in a high-yield account as opposed to a standard checking account will result in your account balance being more than $500 greater at the end of the year. Every dollar you have should be functioning to make you more money. Don’t let it sit there being more unproductive than a city employee.

ACTION ITEMS

1. Cut a Couple Expenses: Write out a list of everything you’ve spent money on over the last month, no matter how small. Pick two items to cut out completely.  One of the first steps we took was to list out every streaming service we were subscribed to (and much to our surprise, there were a bunch), and cut all but one or two. For us, this resulted in saving more than $300/year for something that we have never given a second thought to. There’s almost certainly something that you’re spending money on each month that you don’t need and that you probably don’t care about. Find it and get rid of it.
2. Do Some Pre-Tax Analysis: Pick one thing that you buy at least bi-weekly, and figure out the actual cost of that item. Do you get coffee from Starbucks multiple times each week? If you get a $5 coffee three times a week, you’re paying Starbucks $15.  But using the pre-tax mentality, that means you’re having to earn $30 just to pay for that coffee.  If you make $15/hour, would you be willing to listen to Susan complain at her desk for two hours in exchange for three cups of mediocre coffee?
3. (Re)categorize your Possessions: Think about your main material possessions. Are there items that you think of as assets that are actually liabilities?  We know you love that camper, but after you made that initial purchase how much extra money has it taken out of your pocket?  Some of those liabilities you own may be worth the memories you’re getting out of them.  Many aren’t.  Consider whether you can rebalance your life to get rid of at least one or two liabilities.  Even better, start thinking about what you already own that could become an asset if utilized properly. Can you rent out the camper once a month to create cash flow? Turning a liability into an asset may be easier than you think.

IN CONCLUSION

Having the right mentality before starting any new adventure is vital to increase the likelihood of success.  The pursuit of financial independence is no exception. If you aren’t already doing so, start trying to think about money less as a medium than can be exchanged for material possessions and more as a means to achieving freedom and flexibility. Once you shift your mentality, it’s easy to get going down the right path and the right dominoes will start to fall.

Thanks for reading. We hope you’ve enjoyed this post, and invite you to continue exploring As Easy As FI.