In addition to a clearly laid out investing strategy, I think it’s a great idea for everyone to have a financial philosophy. Like my investing strategy, my financial philosophy is a mix of my views on personal finance, my values, and what I know about my own tolerance for things like risk (fair) and debt (none). Unlike my investing strategy, my financial philosophy is much more about what makes me happy, my emotions, and my personal relationship to money. Whenever I find myself tempted to deviate, I return to this document and it helps to keep me on course. It also can give you a pretty good idea of where I am coming from.
1. I seek to limit my tax liability as much as legally possible.
Like many Americans, I dislike paying any more in taxes than I absolutely have to. Many of the things our government tends to spend money on don’t match my priorities. But let’s not digress into a political debate; saving money and growing wealth can be bipartisan issues!
One of the easiest and most effective ways for me to reduce my tax liability is by maximizing my contributions to tax-advantaged retirement plans, such as 401a, 401k, 403b, 457b, IRA, Roth IRA, and a health savings account (HSA). Four of these are available to the vast majority of Americans, regardless of what sector they work in. Many public employees will have access to up to six of these plans and be able to defer a sizable portion of their income and lower their adjusted gross income (AGI), reducing their tax liability. We maximize our tax-advantaged retirement accounts to reduce our taxes by more than 70% while increasing our financial security.
2. I will reduce the real cost of my student loans.
Lowering your tax liability can also lower your student loan payments, because income-driven plans are based on your adjusted gross income (AGI). Like many people, I left college with a great education, a valuable degree, and a mountain of student debt. My student loans were just over $100,000, with about half of that being from undergraduate education. If you are planning on public service loan forgiveness (PSLF) or have student loans at a very low interest rate, using income-based repayment plans might save you money in the long run. Because I will be eligible for PSLF, I estimate that the combination of PSLF, income-based repayment, and minimizing my AGI will save me over $60,000. Once the student loans are gone, then it may be time to ramp up Roth contributions to reduce my required minimum distributions and tax liability in retirement, but that’s a topic for a few years from now.
3. I live a simple and frugal lifestyle.
Saving 50-70% of your gross income can be done either by having a very high income or by living a simple and frugal lifestyle. Our 2017 combined family gross annual income is just shy of $100,000 per year. We saved just over 60% of our gross pre-tax income in tax-deferred retirement accounts and that percentage will go up in 2018). As a result, we live on a gross income much closer to $37,000 per year. That funds a pretty nice lifestyle where we live, but it does require careful budgeting and getting off the hedonic treadmill of consumer culture. Doing so means we take advantage of free entertainment and spend our entertainment dollars in ways that produce the best value. It also means being smart about other expenses, like groceries, which are a major part of our monthly budget. Happily, all this has also meant more exercise and a healthier diet!
4. I avoid debt like the plague.
In 2012 I was a miserable, debt-ridden man with a mortgage, car payment, student loans, and credit card bills that sucked every penny out of my salary. When I pressed the panic button and escaped my debt and subsequently ended the relationship dynamics that contributed to that debt, I swore I would never again owe my life and earnings to someone else. Today I still have the student loans, but everything else is gone. A smaller house in a much more modest neighborhood is paid in full. I took on extra work for a couple years to pay off the car while still maximizing our IRA contributions. Credit cards are now for rewards, convenience, and security—and we pay them off in full every month. Yes, I know that some debt can be considered “good debt” and there are sound reasons to take a mortgage or finance a car in some cases. I can even understand how some folks may be comfortable with debt for real estate investing. I also know that I hate being in debt. It adds stress and exacerbates the feeling of being a wage slave. After twenty years of living with way too much debt, I developed an allergy to any kind of debt at all. In the end, I find myself much happier without it. I’ll accept a less optimal financial strategy to keep debt out of my life.
5. I invest thoughtfully and for the long-term.
Investing can be scary and it’s tough to feel like I can trust the advice of even the good people at TIAA. The truth is that the stock market is a wild and unpredictable place. However, the market is also one of the few places I can make relatively passive returns that will actually help me achieve financial independence. Simply put, I think investing the stock market is the best game in town.
I try to be a critical and independent investor and, on a good day, maybe even a smart one. I have serious concerns about following the pack and investing in the most popular index funds. Like most people using a 401k and similar accounts, I have to make the best of the limited selection of investment options. That is easier in some accounts than others, but I have an investment philosophy that guides me in choosing mutual funds. In accounts where I can invest in individual stocks, I do so. When it comes to picking stocks, I focus on value and dividends. The important thing when investing in individual stocks is to have an investment philosophy and a plan that implements that philosophy, and to stick to them. I have written mine out and follow them as best as I am able.
6. I will live a joyful and loving life today.
Today is my favorite day. After all, it’s the only day I have. If planning for the future means being miserable today, then I need to seriously reassess my plan. It doesn’t cost much to be joyful, to love, and to live a happy life. It is entirely possible both to live a great life today and to be on the fast-track to financial independence.