Any fool can learn from their own mistakes; it is the wise who learn from other peoples’ mistakes.

Having been plugged into the FI community for close to a decade, I’ve seen many people work towards FI. It’s a long road, and along the way there are a few mistakes people make over and over again. Mistakes that cost them time and stress – or even derail their FI journey altogether. The good news is that with awareness, these mistakes are completely avoidable.

Burn Out

You’ve seen the studies – crash diets almost always fail. It’s more sustainable to adhere to a set of guiding principles – like get enough protein and eat whole foods – and to lose weight slowly over time. The same applies to FI. I get it; we are excited by the idea of FI and want to commit fully to accelerate the timeframe. So we make huge cuts in our spending – I can survive on beans and rice for 5 years, no problem! – that aren’t realistic to stick with, because, you know, we also want to enjoy our lives now. There is not a one-size-fits all answer here of course. It may take some iterating to find the right balance. But that’s just what you should be aiming for – balance.

So how about instead of slashing all of your entertainment subscriptions – Netflix, Hulu etc- and planning to spend your downtime staring at the wall, you keep your favorite one around. Or if going out to dinner is something you really enjoy, you put it in the budget to do on occasion. A good way to find a sustaining balance is to get clear about the spending that brings you real joy. Then, cut the rest.

Going It Alone

There is an African proverb – “If you want to go fast, go alone. If you want to go far, go together”. We just established above that FI is more of a marathon than a sprint, and takes a longer view perspective to achieve. Well, that means it will be very motivating and helpful to have a community to support you along the way. The benefits are numerous – you can share tips and ideas, hold each other accountable, and have someone to complain to when you’ve eaten beans and rice for the third month straight (just kidding, don’t do that).

There are communities that already exist that you can join – the Bogleheads or a Mr. Money Mustache meetup. However, I think the best way is to build your own. Personal finance can feel like a taboo subject in American society, and for some it certainly is. If you put yourself out there and give it a shot, I think you’ll be surprised at the reception it’s likely to receive. We talk about finances in depth with our close friends, and now they all talk about finances with each other too. The acronym FIRE is fitting – this idea spreads easily.

Analysis Paralysis

There are a lot of opinions out there on the internet, in podcasts, in books and interviews. Combine that with the fact that finances are already an intimidating matter because we lack experience and expertise. Then add in high stakes – with these decisions affecting our very livelihood…and you get stuck. It all feels over your head and so you freeze, preferring to delay action until you “have more information” or “understand it better.” And yet this never seems to quite materialize.

Our advice? Don’t overcomplicate it and do what you can with what you’ve got. The key word here is do. Assess your current financial situation and take the next rational step. I guarantee that things will fall into place and the next move will become clear once you start. It’s like driving in the dark in the rain with your headlights on – you know there is a road there, but you can only see 10 feet in front of you. Just worry about those 10 feet. That’s much more likely to work out for you than to attempt to chart the whole trip in advance and catalog every scary corner and pot hole. Don’t worry – we’ve already got it covered for you on where to start.

The Post-FI “Now What”?

This isn’t a mistake in terms of affecting your trajectory to FI, rather it’s to prevent a crisis in meaning once you’re there. Are you running from something to get to FI (a crappy job, location constraints, stress) or towards something? What do you want your post-FI life to look like – as in the nitty gritty.

A helpful exercise to help flesh this out is to imagine your perfect day – from the moment you wake to turning out the lights at night. What are you doing? Who are spending time with? I’ve seen people who have reached FI underestimate the purpose work gave them or the social connection it provided. Then, once living in FI Valhalla, they end up feeling unfulfilled and isolated. Yikes. I chose to continue to work in a part-time capacity with a lot of flexibility on projects that I care about with people that I like. That, mixed with ample time to hang out with friends and pursue hobbies like rock climbing, has enabled me to create a fulfilling and balanced daily rhythm.

Did any of these mistakes resonate for you? If you think you have a handle on what to avoid, let’s take a look at where to double-down and jump start your journey to FI.

The post Four Mistakes on the Way to FI – And How to Avoid Them appeared first on A Way to FI.

1. Tap into your competitive spirit

You may be naturally competitive. Were you always striving to be top of your class, the best athlete on the team, the one that got into the ivy league university?

If this resonates with you, then I would suggest harnessing that inner fire to crush your personal finances. One way to determine where you fall on the bell curve is using the Millionaire Next Door Calculation for Net Worth. You’ll get a raw look at how you’ve managed the money you made in your life.

Basically, it works like this:

Expected Net Worth = (Age * Taxable Income)/10 – inherited wealth

For example, a 35-year-old with an earned income of $90,000 plus $5,000 investment income, would have an expected net worth of $332,500 ($95,000 X 35 divided by 10). If her net worth is actually lower than this, she is considered an under accumulator of wealth (UAW); if higher, then she is a prodigious accumulator of wealth (PAW).

So, where do you sit? Have you been wise with your money and are a PAW or on your way to becoming one? Not quite? Compete with yourself to see just how much money you can save!

2. Embrace the nerd in you

For some, spreadsheets are a love language. They want to see all the data and in every which way, slicing and dicing to their hearts’ content. If that’s you, then good news! There is ample data to organize and track, and projections to explore. Here’s where you can start.

Build your montage of spreadsheets. The main bits to track are your income and expenses (income statement), and your assets and liabilities (balance sheet). You can use tools online to easily gather the data (I like Mint for this as you can import all of your accounts) and find template spreadsheets. I suggest getting some ideas from others’ templates and then building your own. After all, if it’s your creation you’re more apt to actually use it!

Once you have gathered the last few months of data (6 months to a year is best) you can start to run the numbers. What are your average monthly expenses? How much is “left over” at the end of each month and where is that money going? If this piques your interest but you still don’t know where to start, let’s set up an FI coaching session and I’ll walk you through it in detail!

3. Don’t let go of those hard-won dollars

Studies show that the pain of losing something is twice that of the pleasure of gaining something. We can leverage this tendency to set up our future selves for a stable financial life by considering the power of compounding interest. This is especially important for those bigger expenses, like rent, a car, or an expensive vacation. What is the true cost of your decision? 

One of my biggest financial regrets is buying a BMW in my early twenties. It was used, but still $10,000 more than another reasonable alternative, a VW Golf. I fell for that sleek black color, heated leather seats, and the allure of luxury to the tune of $20,000. A short two years laters, I ended up selling the BMW for $12,000 after tiring of the stress of owning a nice car. I was always worried about it getting “damaged” (ever parked in the back of the lot to avoid other careless drivers dinging your doors?) and loathed the expensive repairs and maintenance.

Now, had I bought the Golf instead and invested the $10,000 difference what would that money be today, 12 years later? Well, at 8% growth it would now be $25,000 and in another 10 years it’s $54,000. A handy rule of thumb to do this math is that when invested, on average, your money will double every 10 years. Do the math upfront for bigger purchases and decide if it’s worth it! That BMW sure wasn’t for me.

4. Put it on the chopping block

We all want to be happy. And sometimes we believe that buying stuff will get us there. Maybe it does temporarily give you a dopamine hit that leaves you feeling great. But I’ll bet that moment passes pretty quickly and you’re soon looking for what’s next. 

I’ve certainly been there. For me it was impulsively buying a cheap shirt from H&M. I rode feelings of elation at the incredible deal all the way to the counter… and then soon after getting home and hanging my new prize alongside my other shirts in my overstuffed closet, I became deflated and wondered why I just spent hard earned money on low-quality stuff that I didn’t really need. Never mind the ethical implications of fast fashion.

One way to address this impulsivity is to spend time thinking about the money you have spent that has truly made your life better. Is it a trip to a new city? That gym membership where you kicked your butt into shape? Drinks out on Friday night with friends? Are there things in your life where you can happily say, “Oh, I would gladly pay double for that if that’s what it costs!” because it’s just that important to you?

Spend your money there and ruthlessly cut the rest. You’ll be happier and wealthier for it.

5. Keep your eye on the prize

Having a singular focus can be an incredibly powerful accelerant. Imagine if you were to make every decision based on the answer to “does this bring me closer to my FI number?” If you were to truly adhere to that, I bet you would shorten your journey to FI by years, if not decades. 

While that’s a pretty extreme method, it’s a useful thought experiment. And though you may take the choice that won’t bring you closer to FI, running decisions through this lens gives you more awareness and improves your decision-making on the whole. Which brings us to…

The common denominator

All of these approaches will build awareness around your financial life. And awareness is almost always the first step towards positive change! Which of these resonates with your personality? Have you found other hacks to be successful in jump starting your way to FI? Let us know in the comments below!

The post 5 Hacks to Jump Start Your Way to FI appeared first on A Way to FI.