The Most Important Thing to Get to FI is…

The most important things for those dreaming of financial independence (FI) is manage your cashflow.  In the beginning people often get too bogged down in worries about if they have invested right or tax considerations or how much money they need, when in reality managing your cashflow is much more important.

You see in the beginning you likely have a small amount of investments so optimization of your investments and related taxes is a minor issue.  A 1% lower rate of return on $50,000 is a mere $500 a year or equal to about $42/month.  So you could either do a ton of research and self learning on taxes and investments to get that extra 1% return or just stop buying a coffee everyday on the way to work.  Guess which one is much easier to do?

So that’s why I’m suggesting don’t worry about everything else in the beginning.  Your first priority is to start using frugal ideas and reduce your spending to increase your amount of money for debt repayment and future savings.  You start with the big stuff of paying off your credit card debt and work you way down to $2/month savings here and $5/month there.  Every dollar counts so look at everything and ask yourself does this make me happy for the dollars I’m spending on it or do I require this.  Not “would like” or “kindda enjoy it” but rather “I love doing this” and “I need to eat something to keep breathing” kind of thing.

In the beginning you will likely go over kill and cut back too much.  That is fine, once you find those areas you really miss spending on go back and put some cashflow back in.  Afterall FI is a nice goal, but no one should be misrible on the way to getting there.  Life is a once through processes so you might as well enjoy the ride.

In the end you will find out how much you really need to spend to make you happy which then you can use to build a real estimate of how much you need to get to FI.  Also after this much time you would have likely had some time to slowly learn a bit more about investments and taxes so now you can go back and investigate doing better there.  Just don’t try to take on too much all at once, it is recipe to fail to get anything done.

That’s my thoughts on what’s most important when starting towards FI.  What did you focus on in the start and did it work for you?

4 thoughts on “The Most Important Thing to Get to FI is…”

  1. Always been a big fan of this concept. Managing cashflow (ie. spending less than you earn), is the first and most important thing to get straight, and can really drive net worth increase in the early years.

    It is of far less importance to agonize about Fund A or Fund B, and worry that you only got 8% when the TSX got 10%. On small portfolios, this difference is peanuts.

    There is however a danger in focusing for too long on getting the cashflow management down to a science, and delaying the cultivation of investment knowledge. The years they pass, and one needs to start making the effort to learn at some point.

    To play devil’s advocate a bit, it might well be better to learn as much about investing when you have no money, and get your hands burnt learning the hard lessons when you’ve got little to lose, rather than waiting until you’ve got tons of money and can’t afford to lose it, or the mistakes are amplified.

    Somewhere in the middle lies the happy medium.

  2. This is definitely something I concentrated on at the start, after reading about David Bach’s “Latte Factor” in the Automatic Millionaire.

    Besides that, my most important lesson so far is: “Pay yourself first”. It’s definitely the best way to get yourself living within your means. If you can’t do that, you’ll never be financially independent!

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