Welcome to the letter this week. I mentioned in past weeks that I would be publishing a step-by-step guide to reach financial independence. That is this week’s letter.

A few points for context to start:

• The purpose of this guide is to give normal working people steps they can take towards their own financial independence. There is a difference between someone looking to get rich by other means (like starting/owning business) and someone working a full-time job that wants to manage their finances towards financial independence. This guide is for the latter group. Many people understand the importance of working a stable job and advancing their career. I want to provide suggestions to that group about the equal importance of managing their money. After 10 years of working and following these steps, I believe how you handle your money is often more impactful that how much you make.

• There is more than one way to do this. This guide includes the steps I have taken personally that I know worked for me and others. However, part of taking ownership of your finances is doing your own research, testing ideas and comparing approaches. Everyone’s situation is different. I believe the principles behind these steps can benefit almost anyone, but the ownership is on the individual as to which path they want to commit to in order to achieve financial independence.

• Financial independence. These steps are aimed at moving you closer to financial independence as you progress through them. I define this as: establishing income from assets that pays for all your expenses, allowing you to work (or not work) on what you choose, when and where you choose it. I prefer this aim over the traditional retirement mindset.

• Target audience. I sincerely believe these steps can benefit anyone. However, these steps will be most beneficial for individuals or couples (often millennials) with household income from $100K-$300K. Most people in this range have the means to work towards financial independence. However, the common struggle for people in this range is that as income increases, so does spending. Americans have a problem with debt and overspending. These steps will help those in this range shift from debt and liabilities to investments and assets.

• Setting expectations. Some of these changes are immediate and you will see some progress immediately. However, this process is aimed towards long-term financial independence. It takes time to see the return.

I started these steps at 22, making little money and in debt to student loans. As I progressed through each step, I gained more peace of mind. I hope these help you do the same.

7 steps to financial independence

Step 1: Build an emergency fund

You need to have 3-6 months of living expenses in cash. This will allow you support your family if you lose your job or have to handle health, car or other emergencies that affect your immediate wellbeing.

This will give you peace of mind and breathing room to execute the rest of the steps. On this journey, this is one of the only places where it’s ok for money to sit still. In most other places going forward, your money is going to work for you.

Step 2: Pay off credit card debt

In this step, you are plugging the biggest hole in the boat before you can start rowing. 61% of Americans are in credit card debt. This is a completely self-inflicted wound and it is totally avoidable.

If you are in credit card debt, you are likely paying over 20% interest on that money. That’s an insane amount of money to throw down the drain monthly.

Also included in this step: if you have student loan debt over 10%, consider attacking it here after credit card debt. Student loans are covered in step 5, but some high-interest loans can be treated like credit card debt.

This one is exciting because it is your biggest opportunity for change. Nothing else in this process will allow you to save or earn 20% or more on your money, so you are hitting the highest leverage activity first.

Step 3: Reassess major liabilities

These liabilities are specifically homes and cars.

This can be a tough one, but it needs to be said. It is the next big hole in the boat before you start moving. Homes and cars are a place where people tend to overspend emotionally. If you can detach from the feeling of needing a dream home and expensive cars in the short-term, you will be able to accomplish it in the long run and have the thriving finances to support it.  

Here are the guardrails for your home and cars:

Here are some common scenarios to consider:

• Are you considering overreaching for your “dream home”? Going back to our definition of assets and liabilities, owning a home is a liability because you cannot count on it to make money. I see many in the 25-35 age range reach for a large home purchase when they realize it is possible to buy. But, possible doesn’t mean it is beneficial. Banks will give you a loan for WAY more than is financially responsible to take out for a house or car. It is in their best interest that you take out large loans with them. It’s in your best interest that you keep your loans within these guardrails until you are fully financially independent.

• Do you have more drivers than cars? Or if you’ve overspent on a car or cars, can you consider downgrading to bring this within the guardrails?

 Step 4: Tax-advantaged accounts: basic level

This is where your boat starts moving forward.

• If you don’t know your employer’s match, this is the time to learn. This is prioritized over other investing because the match is guaranteed return on your money. Almost nowhere else will your money be guaranteed a certain return.

• This money will also reap the tax benefits of the $401K account. This means you will pay far less tax on this money in the long run.

• This is the first stage where your money starts working for you. Steps 1-3 get your boat afloat because you are limiting liabilities (cash outflows). This is your first real step forward because it starts building your assets (cash inflows).
  

Step 5: Attack remaining debt, student loans specifically 

There are two ways to approach this. You can be successful with either, as long as you select your path intentionally.

Some (like Dave Ramsey) recommend paying off student loan debt ASAP. That’s what I did. I left college with over $20K in student loan debt. My wife and I threw everything we had at it and paid it off in under one year. More on that in future letters – it takes discipline, but it’s possible.

Step 6: Tax advantaged accounts: advanced level 

If you have completed steps 1-5, you are on the path to financial independence. However, as I mentioned in the Millennial Retirement Guide, you need more than the first 5 steps to achieve full financial independence. This step will be the first big jump for most.

In this step, you will max out your annual contributions to your $401k and Roth IRA accounts.

The 2024 contribution limit for your $401k is $23,000 and your Roth IRA is $7,000.

This is a challenge, but if you are reading this, you are likely someone that wants to tackle challenges to build your financial future.

Completing this step is entirely possible for most working in professional jobs. If you do, you will already be in the top percentile of investors in the US.

Vanguard showed that only 15% of retirement plan participants contributed the maximum amount to their $401k in 2022.

For a benchmark, if you are a household with $150k+, both the $401k and IRA limits should be met for at least one person.

This is a major step and it’s important to understand that this money is not just being “put away”. This is being intentionally invested into an asset, that will grow in value indefinitely over time as mentioned in Money is Like Water. If you take care of this asset now, it will take care of you later.

Step 7: Additional contributions

I include this section based on two premises:

• After 10 years working in the professional world, I see the increase that comes to those who work hard at their craft over time. People earn raises, bonuses, promotions, stock plans over time, etc. The problem is, most Americans spend much of their increase without considering how to leverage it for their financial independence.

• If we are really going to build our own financial independence, we must be more intentional with this increase because we need more than what steps 1-6 provide. Reference again what is required in The Millennial Retirement Guide.

Billionaire investor and entrepreneur Grant Cardone says you should invest 40% of household income.

There is a major trend among millennials, which is that as income increases so does spending. Now, I think spending should increase. It would be silly for it not to. However, millennials are not prioritizing their financial independence as these increases come. Often, they go right to new houses, cars or vacations.

Before you spend on that new house, this is where you have to take the reins. Use a compound interest calculator to determine your financial independence number and how much you need to contribute now to reach your goal.

Here’s an example: I set up an automatic weekly purchase of low-cost index funds. It is automated, so I hit my investing targets without fail every month without taking any manual steps.

Bonus Step: Spending

There is not a step that tells you to cut your Starbucks coffee. This process is about taking the steps that have been neglected and moving them to the top of the priority list. It will re-orient you to spending on priorities. Then, you spend what’s left on what you choose. You will need to cover your living expenses of course, but most people will find that there is still room to enjoy some luxuries in the process.

Conclusion

Each of these steps has its own world of detail and nuance. I plan to write more about each and perhaps build a course in the future.

Before I started this process, it was sometimes daunting and overwhelming. However, when you make it to the other side, you will realize how possible it was all along. All you have to do is jump in.

P.S. I am not a financial advisor and this is not financial/investment advice.

To connect with me further on these steps, I’m on X: @TylerAdelsen