Financial independence, and the mindset to make it happen

Before I hop into this article, I think I should clarify something:

What does financial independence mean to you?

In a sense, it's sort of a "buzz word" that bankers and financial planners endeavoring to earn commissions off of your investments throw around, as if working with them is your best shot at achieving it.

Many people would say, "well RC, duh, it means 'being able to live without needing to work, and still pay for what you want'".

I don't think that's all it means.

Financial independence is not achieving the one-dimensional goal of going through the normal motions of stashing some cash in a basic way (i.e. only when you have extra cash, or as part of a basic IRA or 401(K) plan).That is piecemeal approach masquerading as a holistic panacea. It implies that if you're saving some cash on the side, you've done everything you could possibly need to do in order to have financial independence. It also implies that financial independence is only something that can happen in the future, not now.

I would define financial independence as currently living with a low amount of financial pressure and a high degree of flexibility, with the ultimate goal of lowering or eliminating the importance your job has towards ensuring your lifestyle and financial security.

I won't spend this article preaching to you the values of saving and cutting expenses as the keys to financial independence, because that's obvious, and we all know it. The problem is we just can't seem to make ourselves do it. I think that, by understanding the former issues in a new light, we can better motivate ourselves to make decisions that help ensure financial independence.

It's the overhead, stupid.

I think most of our financial woes come from overhead. Though many of my friends would chide me for using the word without regard to its cost-accounting provenance, I here define overhead as expenses we think "just won't go away" or "don't matter".

Just remember, people all over the world are getting by just fine with a lot less money than you have. I've seen it all over the place, all over the world. I saw people in China who made less than $10,000 per year living decent, albeit frugal lives. So if you really think your overhead "just can't go away", I doubt it highly.

There's a few different types of overhead that really get my blood boiling. Let's talk about them here:

Fixed overhead that is very difficult to remove.

Some of these are probably legitimate and should rightfully exist, such as expenses related to raising children, and having a place to live. But a lot of these items are things you actually do to yourselves. For example- I know tons of people who live 1/2 hr-1 hr away from where they work. Given the explosive cost of gas, their direct cash expenditures are through the roof. And let's not forget the accelerated wear and tear on the vehicle. And that 1-2 hours of driving per day takes away from time that could be spent more usefully, such as making money.

I know people that needlessly live in expensive cities. They could easily relocate to less expensive locales without losing a valuable job or other consideration. But they don't, due to the "nightlife".

The problem with this sort of overhead is that it's hard to get rid of once you have it. It's not easy to just move back to town, or closer to work. So the solution is to plan ahead, and include these costs in your calculations when evaluating your options. So when considering a new job, consider the additional cost in gas, in time, and in opportunity cost, rather than just the nominal dollar value of your salary.

Overhead that you barely notice when it occurs, but that eventually comes back to be a pain.

Things like buying copious amounts of Starbucks or iced tea (my personal favorite) fall in this category. It's easy to think of something like buying a refrigerator as expensive because you spend $700 on it at one time, and to think of Starbucks as inexpensive because it cost only $3. But the problem is that your Starbucks runs are a habit, not a singular occurrence, and as a habit, they inherently become an annuity of which Starbucks is the beneficiary, and you contribute to. With the refrigerator, you can get 7 years of utility from a singular purchase. If you divide the cost of the refrigerator over the 7 years of its life, you realize it costs you 27 cents per day. Starbucks costs you $3 per day. Now, which is more expensive; your appliances, or your coffee?

Overhead that you don't really understand exactly how much it is costing you (even though you see the dollar amount when it happens).

I think all overhead--and anything you spend money on, for that matter--falls into this category. The point here is to see the cost of things as more than the dollar amount you spend at a singular point in time. That extra money you spend on going out, buying whatever it is that you want; all comes at an opportunity cost. Money spent now could be saved and invested now, or used to start a business. Expenses are the loss of money now that could have been used to produce more money in the future. So a Louis Vuitton purse that cost you $1,200 now actually cost you a lot more than that. $1,200 invested at an 8% rate of return, compounded annually for 20 years is equal to about $5,400.

There's no need to be so dramatic about every little thing you would ever spend money on. But it's useful to keep this concept in mind, so you can better understand the true cost of what you buy.

Realize how much things you buy actually cost to produce, and start feeling ripped off that you're spending so much.

I think hanging out in China is what really helped me with this one. Before I went, I was thoroughly convinced that the items I purchased at stores were "worth" what I was paying for them. Paying $70-100 for a shirt, on a regular basis, was acceptable to me, because I felt that was a reasonable price. And paying $13 to eat out was a reasonable price, too.

Upon going to China, I realized things were cheaper--a lot cheaper. Equal quality food easily cost half the price. Clothes were extremely inexpensive. Even Coke Zero, my personal favorite second to iced tea, cost about 75 cents for a bottle that cost $1.70 in the United States.

Of course, there are a lot of macroeconomic and other monetary issues that make China cheaper overall than the United States, and it's not my point to try to address that here. The point is that I began to suspect that things in America were more expensive...just because they were.

A useful thing to do is look at the 10-K filings of public companies in the retail business. Look at their top-of-the-line gross profit(sales minus the cost to make the goods); and then look at their final net profit (after overhead, taxes, and other expenses have been paid). Notice how huge the gross profit is compared to the net profit. What you realize is this: the cost to actually make that shirt you bought was next to nothing, and you paid many times what it cost to make. You were actually just helping the retailer subsidize their expenses. Sure, that's the way business has to work. But doesn't that make you feel at least a little bit ripped off? You are basically paying for, in addition to your shirt, your demand that it be displayed to you in an air-conditioned store (I bet you could buy it online), and most notably, your demand that the store spend tons of money marketing the shirt to you in the first place.

But we still have to buy stuff, right? The point is to make you aware that the items you buy, in fact, are nowhere near "worth" what you pay for them. If that is the case, why not more aggressively pursue deals and better pricing? Stores such as Ross, Marshall's, and the Dillards outlet stores are excellent ways to accomplish this goal.

So the main point of this article is simple: look for ways now that you can work towards financial independence! Who knows, with these few changes, maybe you could be more financially independent as of tomorrow.