Regular listeners and readers know by now that Financial Autonomy is about gaining choice. Maybe that choice is retiring early (eg. the FIRE goal that’s popular in the US), but it could just as easily be the choice to work in a different career, start your own business, work fewer hours or days, or the choice to take a job closer to home, even though that means taking a paying cut.
So whatever your Financial Autonomy goals is, what are the common strategy options that you could use to make progress from where you are today, to where you want to be in the future?
I should mention at the outset that there’s no need to take mental or physical notes, you can grab that checklist by clicking on the image below.
If you are to gain choice in life, a prerequisite is that you not be under financial stress. The more easily you can meet your and your families living costs, the more options you have.
1 Pay down debt
A good strategy option to start with is to pay down debt, and avoid most new debt. Start with your most expensive debt – perhaps a credit card or a personal loan, and focus your energy on getting this cleared. Then move onto the next.
If you have a home loan, this is not likely to be something you can have paid off in a year or two. But if you have paid off your other debts, it does make a lot of sense to then focus on reducing this debt as quickly as you are able to. This will result in you building up equity in your home, which then gives you several options that will help in pursuing your Financial Autonomy goal.
For instance let’s say you want to re-train in a new career and need to go back to school for a year. If you’re well ahead on your mortgage repayments, you may be able to reduce repayments to the minimum for 12 months, or go interest only, to reduce your ongoing expenses. You may even have re-draw capacity that you could live off if need be.
Or what about if your Financial Autonomy goal is to start your own business? Through a focus on paying down your home loan, and building up equity in your home, you have financing options to get your new business off the ground.
2 Can you reduce your housing costs?
In most households, putting a roof over your head is the largest expense. Whether you are renting or paying off a mortgage, it’s not uncommon for 30% of income to go towards housing, and I’ve had people come into the office who spend over 50% of their income just on having somewhere to live. Given the size of this expense, even minor savings here are likely to be more impactful than many other savings measures that are more in the “penny pinching” realm.
With an awareness that housing is a major expense item, can you think of any way to bring this cost down?
When I bought my first home, a small 2 bedroom flat, I rented out the spare room. That rent was really helpful for me in being able to make the budget work, and it came with the bonus of having someone around to talk to.
I heard of someone just recently who was able to buy a fairly low cost house that was in need of some love. He spent a few months fixing it up, then moved into the smallest room and rented out the other 2 rooms. The rent he received from his two housemates was almost enough to cover his mortgage repayments, and so the cost of putting a roof over his head with close to zero. Plus he could share the utility bills with his housemates, further reducing his expenses.
If you’re renting, could you move to a lower cost option? Could you share with others?
3 Could you reduce your transport costs?
If housing is the biggest expense, transport costs often come in at number 2 or 3. The last car I bought was a year old and still had 4 years of warranty left on it. In comparison to buying the same car new, I saved a third, about $10,000, of the new car price. So as a starting point I’d suggest you never buy a brand new car.
Most of your transport expense is getting to and from work. Is there any ability to negotiate with your employer to work from home some times? I know that won’t work for a nurse and many other professions, but there are some roles where that is possible. Could you change to a role closer to home? Or if you’re renting or about to buy, is it possible to live closer to work? Maybe you could get close enough to walk or ride your bike to work and do away with a car altogether. For the annual cost of registration, insurance, fuel, maintenance, and depreciation, you could afford to pay for plenty of Uber trips.
4 Save and invest – generate passive income
The first three strategy options are I guess the foundations for you gaining Financial Autonomy. Now let’s assume you’ve done all that you can on those fronts, what next?
It’s time to build some passive income. Passive income is income to flows to you without you having to get out of bed. There are 3 typical sources – interest on your bank deposits, dividends from your shares, and rental income from an investment property.
Now it’d be great to have a bit of all 3, but I’d suggest initially you focus on the second option – share dividends, and then perhaps move to property investment as your financial position strengthens. I talked about my thoughts on shares vs property back in episode 35, so I won’t repeat myself here. Suffice to say property investment involves bigger numbers and bigger risk.
In order to invest you need savings and that’s where the first 3 strategy options are so important. The lower your living costs, the more potential that you have to save.
To explore this area more, I recommend you take a look at:
The Sharemarket – a beginner’s guide – ep 15
Early Retirement – the multi-phase approach – ep 23
I can’t buy a home, am I financially doomed? – ep 19
5 Develop a Side Hustle into something that can support you
So if one strategy option to achieve Financial Autonomy is to build up passive income through investment, an alternative way to go is to build up a business on the side that generates additional income in the first instance, and perhaps in the medium to long term delivers your Financial Autonomy dream.
For instance if your Financial Autonomy goal is to be able spend the bulk of you time involved in music, something that you are passionate about, then if you could start up a small side hustle business in this space, perhaps in time you could develop that into a full time gig that gives you the life you seek and deserve.
Even if that isn’t where your Side Hustle leads, it could produce the extra income to pay down debt or build passive income through investments, and it could be something that is saleable down the track to provide you with more options.
Check out episode 21 – The side Hustle – your ticket to Financial Autonomy? for a deeper look at this strategy option.
Perhaps the choice in life that you seek requires a change in occupation. Think about what re-training you could do to position yourself for a new phase in your working life. In some cases there might be training with your current employer that you can undertake to make this possible. In other cases a clean break is needed.
I caught up with some friends last week who have both made significant career changes. Tony had worked in a bank in a 2IC type role for many years and was deeply unhappy. But with 3 children and a mortgage, simply pulling the pin wasn’t an option.
So he stuck at it until eventually an opportunity came to get a redundancy package. That redundancy money, in combination with his wife’s income, made it possible for him to go back to school and study to become a primary school teacher, a role he was perfect for.
He graduated last year and did some fill in work. This year he has his first permanent class, and whilst he’s finding it exhausting, he’s the happiest I’ve ever seen him.
Then I spoke to his wife, Jane, who, after seeing the change in her husband, decided she’d leave her role in the defence force and move into the police force instead. She’s currently going through all the basic training and starting right back as a junior – a big drop in pay. But they were able to do it because they’d done things like paying down debt in past years, and I’ve no doubt she’ll have an incredibly successful and impactful career in the police force in phase 2 of her working life.
Along these line, you might also be interested in episode 10 – Is your ladder against the wrong wall.
And before I wrap this one up, just a final thought – get clear on your goals. What prevents most people from achieving Financial Autonomy is buying the Jet Ski, the $300 pair of shoes, or the brand new car. If you have clarity around where you’re trying to get to in the medium to longer term, you can avoid these missteps and keep your eye on the prize.
Resources & Links
- Podcast Version
- I can’t buy a home, am I financially doomed? Episode 19
- The side hustle; your ticket to Financial Autonomy? Episode 21
- Is your ladder against the wrong wall? Episode 10
- Investing ; How to Get Started Episode 35
- The Sharemarket ; A beginner’s guide Episode 15
- Early retirement; the multi-phase approach for Australians Episode 23