Financial Independence—Baby Steps

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Financial Independence

Baby Steps to Pretirement

Could you cover an unexpected $400 expense?

According to a report from the Federal Reserve Board, four in ten Americans can’t. Those who don’t have the cash on hand say they’d have to cover it by borrowing or selling something. Our readers tend to be in the other 60% group, but this article is meant for those that are truly starting from ground zero. If you are in that 40% group, then this article is for you. First, don’t despair, everyone has to start somewhere. Let’s start with an emergency savings plan.

1) Save two weeks' worth of income. This is important. This money is not for trading or anything other than emergencies. Having two weeks of income safely stashed away provides you with a little breathing room. Most common illnesses and unforeseen accidents will put you on the sidelines for less than two weeks, so having enough money to compensate for unexpected missed work gives you some space to recover without falling behind on your bills. Most unexpected expenses such as a car break down can also be paid for with this emergency stash. It is a perfect place to start. If you haven't been saving, now is the right time. Pay yourself first! Out of each check, the moment you get paid, take at least ten percent and put it aside. One way or another, you will find a way to make the remaining 90% work. If you can do more, great, it will speed up the entire process.

2) Pay off all high interest debt. This includes credit card debt. Write down all of your debt, along with the interest rate. Make the minimum payment on the low interest rate stuff, and pay off the high interest loans as fast as possible. Once your highest interest debt is paid off, start on the next one until each debt is paid in full. This is pretty intuitive, but something a lot of folks overlook. If you have a 0% loan on your car, it makes no sense to start paying that off early. But 18% credit card debt? That has to go.

3) Save three months' expenses in an emergency fund. This is a huge step that puts you in a rare group. The two weeks of income was for emergencies like a car breaking down or a child breaking their arm. This fund is for more major life events like losing a job, or needing to relocate to take care of a family member. Not many Americans have three months worth of savings. This one will take a while, but having enough money put away to live for three months, plus having all of your high interest debt paid off puts you on a solid foundation. Not only will you no longer be in the 40% at risk group, but you will be in an exclusive group that can remain independent for a few months no matter what happens.

4) Start a trading fund. Okay, so your high interest debt is paid off, and you have solid emergency savings. Congrats! That is huge. Now let’s work towards becoming a trader. Open an account at your chosen brokerage, and deposit as MUCH of each check as possible into it. How much is as much as possible? For those of you who are serious, We’re talking 20-50% of your after-tax paycheck. We know this is a lot, but it's worth it. Trading for income is an awesome gig, but it takes money to make money. By reading and learning about trading, and practicing with a small amount of your trading account, you will learn the necessary skills required before the account gets large enough that the mistakes become too painful. Starting a fund with a small amount of cash and slowly building it is akin to learning to walk before you run.

That’s it! Follow these four steps, and you will be miles ahead of most of your neighbors. You will have a solid savings to fall back on should things go wrong, and will be well on your way to replacing or supplementing your income through trading. One last thing—read everything you can get your hands on about trading. As glamorous as trading may sound, it is a craft like any other career, and it takes time to gain knowledge and hone your skills.

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Roatan wanderer digital nomad life

Living and traveling on a boat means for a few months each year we have to wait out hurricane season. This year we did that in Guatemala, and have had a great time. But it still feels great to untie the docklines. We were due to set off a couple of days ago, but in typical fashion, after months without any boat problems, our water lines began to burst the morning of departure. Turned out to be a problem with the accumulator tank—not a huge issue—that took two days to work out. Finally, Saturday afternoon we were on our way. We said our goodbyes and pulled out of the marina with an exciting season of cruising ahead of us. This year will take us—assuming our plans actually work out—from Guatemala to Honduras, the Grand Caymans, Jamaica, the Dominican Republic, and finally Puerto Rico. As I write this I'm anchored in front of a 1600s Spanish colonial fort built to defend against pirates. It's still astounding to me that I can sit on my boat at anchor in foreign lands, trading the stocks of companies located around the world, and communicate with all of you at the same time. The uniqueness of this life is not lost on me.

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