Over the past 2 years of post-retirement, we’ve met dozens of people who had either reached Financial Independence themselves or were well on their way there. And something we noticed over time was that while many of them had similar views to money as we did, not everyone necessarily agreed with us on everything. And not everyone took the exact same path to get there. Some bought investment properties, some started businesses, some invested in individual stocks, which on the surface contradicts everything we talk about on Millennial Revolution. Some weren’t even millennials! *gasp* The horror.
Yet these people still made it to FI? How?
Well, as it turns out there is no one single pathway to FI. Instead, there are three. But before I explain what those paths are, let me introduce…The Money Triangle.
The Money Triangle
Check that baby out. I whipped it up in PowerPoint myself, in case you can’t tell. Patent pending, bitches.
Anyway, this is how I like to show people how personal finances work. Like most triangles, this has 3 corners.
The first corner represents Income. This is money you earn at a job, your business, whatever.
The second corner represents Expenses. This is money you spend on your day to day life.
Finally, the third corner represents Investments. This is money you get from investing your existing money.
So here’s how this works. Your finances are in the middle of that triangle, and for your finances to be stable, all 3 corners of your Money Triangle have to be stable. If any of those corners collapses, it doesn’t actually matter how strong the other 2 corners are. Your Money Triangle collapses and your finances are left in ruins.
For example, if your Income collapses, then it doesn’t matter how well you control your expenses or how good you are at investing. Your finances will never be stable since you don’t make enough money. You can’t invest money that you don’t have. An example of this is someone who never gets out of minimum wage work, or someone who just can’t hold down a job for whatever reason.
Likewise, if you can’t control your Expenses, then it doesn’t matter how much money you make, nor does it matter how good you are at investing. Your can’t invest money if you don’t save, and you can’t save if you can’t control your expenses. These are the people who may have high-paying jobs, but keep blowing it all on fancy bags or sports cars or whatever and then complain that they never seem to have any money.
Finally, if you’re terrible at Investing, then it doesn’t matter how much you make or save, because you’ll keep throwing it away on bad investments. These are the problem gamblers and amateur stock-pickers.
So in order for your finances to be stable, you have to be OK at all 3 things:
- Income – Have a decent salary, which I define as an average family income for whatever country you live in. For the US, this is about $60k per year, according to the US Census.
- Expenses – Keep your expenses relatively well controlled. No credit card debt, reasonable living expenses, and able to save a small amount (~10%) each year.
- Investments – Be OK at investing by using low-cost Index-hugging ETFs. Conservatively, you should be able to get a 6% annual ROI over 15+ year periods.
So this person who’s pretty average at all 3 things can expect to have an average financial performance. This person can expect to be working for about 40-45 years, starting in their 20’s until they retire at the “normal” age of 65. Add in Social Security and that is the “normal” career path of an average American household.
The FI Triangle
Now here’s how the Money Triangle works for FI people. FI people are OK (average) to Pretty Good (slightly above average) on at least 2 out of those 3 corners, but Exceptional (WAY above average) on that third corner. Which corner they excel at changes from person to person, but what that corner is determines their pathway to FI.
And those pathways are:
Path #1: The Hustler
The Hustler is an expert at making money. The Hustler falls asleep with business ideas swirling around in his head and wakes up with a fully-fleshed out business plan. The Hustler may be a full-time entrepreneur or have a regular job, but either way the Hustler typically works 60+ hours building businesses and side hustles.
Common things I hear from Hustlers:
- Why clip coupons when you can make more money?
- You’ve got to get out there and PUT POSITIVE ENERGY out into the Universe!
- At any given moment, you need to stop and ask yourself: Am I adding value to my business?
Hustlers are the people making more than $200k+ a year and often have multiple businesses running at the same time. Hustlers are the people who are always bouncing around with seemingly limitless energy all the time. Hustlers also tend to be extreme extroverts and just love being around other people. It makes sense, you can’t be a serial entrepreneur without liking people as well.
The biggest danger for the Hustler is to not watch his spending and lose it all. Hustlers understand that sometimes it takes money to make money, so there’s a temptation to over-extend their finances in pursuit of an even higher payoff later. If they give into that temptation, I’ve seen Hustlers like this get blown up and wind up broke. But if they can control that urge, their income upside is potentially unlimited.
Notable Examples: Grant Sabatier.
I met Grant in person for the first time at FinCon and MAN, this guy is a fuckin’ bundle of energy. He’s the founder of Millennial Money, and will talk your ear off about SEO and keyword densities and all sorts of digital marketing terms I still don’t understand myself. He also saved $1M in just 5 years.
And I met him at a talk he was giving, titled “How I Grew from 1k to 250k Monthly Visitors in 6 Months, Got on NPR, and Landed a Book Deal!” And remember when I said that Hustlers can sometimes lose track of their spending? At his talk he recounted how one year he just blew through $200k on wine. On WINE! IN ONE YEAR! I threw up in my mouth a little when I heard that.
Since then, Grant and I have gotten to know one another and I would describe him as a really fascinating bundle of energy. Every time I Skype him, it’s like he just drank 4 pints of Red Bull or something. Guy literally can’t sit still. But the guy knows so much about blogging and digital marketing and email funnels and whatnot that every time we talk to him it feels like we’re brand new babies in this blogging world. Comparatively, I know NOTHING about marketing compared to this guy.
Path #2: The Optimizer
The Optimizer is an expert at optimizing their spending. These are the people who LOVE clipping coupons, LOVE poring over spreadsheets, and would sooner cut off their pinky rather than pay an ATM fee. These people have no idea what the interest rate on their cash-back credit cards is, because they’ve never ever missed paying a bill on time. They WILL, however, be able to tell you exactly how much they spent on coffee last week, or how much to the PENNY they spent in any given month.
For the Optimizer, tracking their spending isn’t work. Tracking their spending is FUN. It’s actually relaxing and comforting to them, because it allows them to exert control over a chaotic and unpredictable world. If a waiter or cashier asks an Optimizer whether they want their receipt, the answer is always YES, at which point the Optimizer will carefully place that receipt inside a special compartment of their wallet/purse until such time that expense can be inputted into their spreadsheets and analyzed within an inch of its life. Optimizers tend to be introverts, and are more comfortable spending time with their spreadsheets than actually interacting with people.
Common Things I Hear from Optimizers:
- Quiet! I need to be with my spreadsheets right now.
- I just bargained 25 Baht ($0.75 USD) off that shirt! Now I can get a whole smoothie!
- You can’t control how much you earn, or how well the stock market does. But you can absolutely control how much you spend. It’s a chess game that you can’t lose.
Optimizers are the ones who get to FI by being ruthless with their spending. Their earnings may be OK to Pretty Good, but the thing that makes them stand out is their insane savings rates, usually in the range of 70-90%. Optimizers are often misinterpreted by others as misers or “cheap” and this intensely annoys Optimizers because they see their behaviour as extracting the maximum value out of each dollar spent. An Optimizer doesn’t see their behaviour as minimizing cost and are acutely aware that buying cheap crap costs more in the long run. As a result they are more focused on value and getting good-quality items for as little as possible.
The biggest danger for the Optimizer is being too conservative in their Investments. Optimizers are naturally risk-averse, and believe that the key to controlling costs is to reduce risk. However, when time periods are long enough, the risk of losing money to inflation outweighs the risks of investing in low-cost Index-hugging ETFs.
Mr. Money Moustache. And FIRECracker.
That’s MMM, FIRECracker, and Paula Pant in one picture. It was pretty epic.
ANYHOO, it should surprise nobody to learn that FIRECracker is absolutely an Optimizer. The detail in her spreadsheets is INTENSE, and that meticulous spending tracking is the reason she’s able to produce the accurate numbers she does in every Friday Travel Post where she details exactly what she spent on each category in a particular city. She didn’t record those numbers to make the blog posts. She recorded those numbers because she’s CRAZY.
Mr. Money Mustache is also one of these people. He famously spends $24k a year, which is impressive even by our standards, considering we spend $40k CAD, or $32k, or 33% more a year! And in true Optimizer form, despite the fact that his net worth is now worth multiple times what he retired with, his baseline spending hasn’t really increased. Which just means his money will continue to go up and up and up. Not a bad problem to have…
Path #3: The Investor
The Investor is the one who knows how to turn money into even more money. This person takes many forms. Sometimes they’re stock-picking experts who have consistently beat the S&P 500 for a decade or more. Sometimes they’re real estate investors who own houses all over the country. Sometimes they’re literal professional poker players who somehow live off their poker earnings. In whatever form, these are the people earning 10%, 15%, even 20% on their money year over year and are somehow able to live off of those earnings.
Common Things I hear From Investors:
- You can get a mortgage at 2.5% APR? That’s practically free money!
- That property was HOW much? How do I get in on that deal?
- Working’s for suckers. Money works harder than you ever could.
I’m not gonna lie. A bona-fide skilled Investor is exceptionally rare. I’ve met people who’ve profited off of luck, timing, or a hot streak. But a year or two later, they’re destitute. The biggest danger for the Investor is overconfidence that they, in fact, know what they’re doing. Investment success is so easy to be mistaken for luck, and when luck gets misattributed to skill, bad things happen. This is ESPECIALLY true for real estate investors, who get so often suckered into thinking a real estate investment’s a good idea simply because the counters look nice and “real estate always goes up.”
But when we peel back (as we often do) the math behind people’s understanding, it becomes obvious that almost everyone who invests in real estate doesn’t have a clue what they’re doing. So while it’s possible to achieve FI using this path, this is the easiest path to get lured down thinking you know what you’re doing, when in fact you totally don’t.
The (successful) people in this group are also unique in that they share traits with the Savers AND the Hustlers. Namely, they tend to be introverts AND comfortable with debt. Quiet yet comfortable with risk. A person like Warren Buffet, regularly placing multi-million dollar bets while simultaneously avoiding the spotlight. It’s a REALLY odd pairing.
Notable Investors: Paula Pant
I met Paula Pant for the first time at Chautauqua Ecuador, and again at FinCon where she gave an absolutely BRILLIANT keynote speech on how to be a thought leader to your audience. And if you’re not familiar with Paula Pant, she made her money with Real Estate, something I absolutely loathe. But if you were to talk to her or read her site AffordAnything.com, you’d realize that she knows so much about real estate it’s not even funny.
She understands how to evaluate the TRUE value of a property, and not just what some idiots in a bidding war think it is. She understands the impact of carrying costs/interest rates/leverage have on a property’s cash flow, and why that even matters. And she’s the one who taught us the One Percent Rule, which is how we figure out whether a real estate deal is worth investigating or not.
Choose Your Own Adventure
So there you have it. The three paths to Financial Independence.
The funny thing is, it took us over two years to understand that these paths even exist, because while on the surface it might seem that people who pursue FI would naturally have a lot in common, Hustlers, Optimizers, and Investors don’t necessarily jive with each other since our personality types are such polar opposites.
But as I think more about it, that knowledge gives me hope. You, the reader, may not agree with everything we write on this site. Our complete disgust of housing as an investment is one big example. But just because you disagree with us doesn’t mean you can’t reach FI yourself. In fact, it’s more of a Choose Your Own Adventure.
Every one of us who makes it to FI ends up choosing one of these 3 paths. We may add our own twist to it, but ultimately it’s one of these paths I’ve outlined. And the ones who make it end up choosing the path that most closely matches their personality. FIRECracker made it using the Optimizer Path so quickly because it matched up so well with her personality, and as a result she was able to save money like nobody’s business. But if she were forced to go down the Hustler’s Path or the Investor Path, that would have been a TERRIBLE fit for her since she’s naturally so risk averse, and as a result she would have take much longer to hit $1M and retire, if she managed to there at all.
So the question for you is, now that you know what paths are available for you, which path will you take? Let us know in the poll below: