Afford Anything - The 7 Steps to Financial Independence + 7 Rules of Investing, with JD Roth

Episode Date: March 10, 2021

#305: Financial independence is a continuum, a spectrum. How do you know where you stand? In this episode, financial writer JD Roth discusses the seven stages of financial independence, the seven rules of investing, the formula for calculating your lifetime wealth ratio, and the importance of managing your career as though it’s an asset. For more information, visit the show notes at https://affordanything.com/episode305 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything. You just can't afford everything. Every choice carries a tradeoff. And that is true not only for your money, but also for your time, your energy, your attention, any limited resource that you need to manage. And that opens up two questions. First, what matters most?

And second, how do you align your daily decision-making to reflect that which matters most? Answering those two questions is a lifetime practice. And that is what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast. And when it comes to the management of money, the framework that I like to think about is F-I-R-E.

F stands for Financial Basics. I for investing, our real estate, e-entrepreneurship. These are the four pillars of fire. And today, we're going to focus on the first of those four pillars, financial basics. If you or someone you know is new to the world of personal finance or the world of financial independence, this is an excellent episode to start on. In today's episode, we'll be speaking with financial writer J.D. Roth about the seven steps

to financial independence and the seven rules of investing. We'll talk about the formula for calculating your lifetime wealth ratio and the importance of managing your career as though it's an asset. J.D. Roth is one of the most well-known writers in the world of personal finance and financial independence. He is the founder of Get Rich Slowly. And recently, he partnered with both Audible and The Great Courses to create an Audible great course on financial independence. Here he is J.D. Roth to discuss that first of four pillars of fire, financial fundamentals. Hi, J.D. Hey, Paula. How are you?

I'm great. How are you doing? I'm doing awesome. Jady, you wrote 10 lessons about financial independence. Let's dive right in with the establishing question. What is financial independence? How do you define it? Well, I define it like most people in the financial independence movement do, and that is financial independence means you have saved enough that you are able

to live on your invested assets for the rest of your life. So the money you have in your retirement accounts or in your investment accounts or the income you're generating from your real estate properties, for example, you have enough that if you wanted to, you could stop working now and just live on that income for the rest of your life. How does that work in an environment and in a life in which expenses naturally fluctuate across a person's lifetime? The short answer to your question is when most people plan for financial independence, so they plan for early retirement, they don't plan for fluctuating expenses. And I think that's a mistake. And so it's an interesting point that you bring it up.

Most people plan for kind of flat expenses over time that gradually increase with inflation, perhaps, or maybe because they expect health care expenses to increase with time. but they don't plan for the fluctuated expenses. I think this brings up an excellent, excellent point. So you asked me about my definition of financial independence, and I gave it to you. But in reality, I don't think that financial independence is one specific point or one specific place or one specific event. Yes. Financial independence is a continuum. And along this continuum, there are all sorts of milestones.

but it's not like you just magically reach a certain amount of savings and angels sing and acquire from on high and your life has magically changed. That's not how it works. You gradually achieve financial independence, even at a young age, when you're no longer reliant on your parents' support for, say, tuition or for housing, that's a degree of financial independence. When you no longer carry any sort of consumer debt, no credit card debt, no car loans, that's a degree of financial independence.

If you have a mortgage and pay off your mortgage, that's another degree of financial independence. So there are all sorts of different degrees. It's a continuum. It's a gradual process, I guess. But, you know, most people want that quick and easy definition. Right, right. So I'm glad that you brought that up. So I'm going to jump ahead to a question that I wasn't planning on asking until later.

It's that spectrum that you wrote about. the seven stages of financial independence. Let's go through those seven stages. Okay. The first stage, as you mentioned, is complete financial dependence, like the kind that we experience when we're all five years old. Exactly. Most people, as they grow up, they kind of break out of that dependence, this financial dependence on their parents, right? Some of us do it in high school. We get jobs in high school, and we start saving money for college or saving money for a car, saving money for an apartment. For some people, including me, this dependence lasts a lot longer. Financial dependence also occurs if you're taking out debt to

support your lifestyle. So in my case, when I went out to college, I was no longer dependent on my parents for money. I had scholarships and I was taking care of college myself, but I developed a bad habit with credit cards and then other forms of consumer debt. So I was still in this first stage of financial freedom or lack of freedom, actually, because I was dependent on other people, in this case, the credit card companies, to support my financial lifestyle. And that's why stage two is solvency. Yeah. Solvency is when, okay, I am able to meet my financial commitments myself without anybody's help. This occurs when your income is greater than your expenses, right?

So you're no longer taking on additional debt. You still might have some. debt that you need to pay off, but you're not adding additional debt to your workload. To me, this gap between what you're earning and what you're spending, this is the fundamental piece of personal finance. It took me a long time to realize that this is the most important thing, but it is. And I think you call it the gap or something like that. I do. Yeah. I do. Mind the gap, grow the gap, invest the gap. Yep. That gap is absolutely by far the most important thing. There are other things that are important, no question, but that gap drives everything. So how does solvency differ from stability?

With the solvency stage, you still have this high-interest debt. So you're no longer taking on any new debt, your income exceeds your expenses, but you're still working to pay down those credit cards or those high-interest loans, right? In stage three, which I call stability, you've repaid that high-interest consumer debt. And you've started taking other constructive steps towards building a sound financial life. So that means you've established an emergency fund, for example. You're paying down what we term good debt oftentimes, like college loans and mortgages and so on. But you've eliminated everything else, all this other high interest stuff, and you're building a buffer to protect yourself from unfortunate events like, you know, a pandemic.

This is when you're stable. It's like you have this, you're building this firm foundation to support your financial future, your early retirement or your financial independence or whatever other goals you might have. So a person matures out of complete financial dependency. They go into being solvent. And then from solvency, they go into really achieving financial stability. So at that point, they've got no high interest consumer debt. They've got some emergency savings. they're continuing to save.

You know, maybe they've got some low interest loans, but for the most part, they have financial stability. Now, after that, in the fourth stage, they flourish into agency. What happens in this new wrong of the ladder? Well, agency is very, very exciting. So at this point, you don't actually have financial independence yet. You don't actually have enough saved that you could quit your job

and just live off your investment returns, but you do have enough saved that you have the ability to say no to certain things or to say yes to other things. So when I say you have agency, it's like you have free agency. And if, for instance, you decide you hate your job, which many people do, when you're in the fourth stage, when you have agency, you have what is commonly called FU money in the financial independence community. You can say, screw you to your boss. I am out of here because I have so much money saved that I don't care if I lose my job. Yes, it's going to be a pain in the butt, but I know that I have enough saved to support myself while I go out and find a different job. So the agency stage means that you're able to make decisions. You have enough saved

that you can make decisions that would otherwise be unavailable to you if you were reliant on your income for day-to-day living. And F-U money for people who are new, for people who are encountering this for the first time, is the point at which you have not enough that you could retire forever and support yourself off of your investments in perpetuity, but it's enough that if your job really sucks, you could tell your boss FU and walk away, and you'd be okay for maybe a few months while you look for other work. Yeah, and an example that I'd really like, you and I are both friends with J.L. Collins, he's the author of The Simple Path to Wealth. He has a great definition of FU money, and he actually has a great video about FU money.

I'm going to butcher this story, so sorry, Jim. He tells a story about when he was younger, he wanted to go on a trip to Europe. He wanted to take some time off from his job to go to Europe. but his boss wouldn't let him. But J.L. had enough saved that he could actually afford to quit, go take that trip to Europe, and then come back and look for another work. And he said, he told his boss, this is what I'm going to do. I'm going to go do this.

I'm quitting my job. And his boss said, oh, oh, never mind, we'll save your job for when you come back. And again, I might have that story. I might have butchered the story. So sorry. But that is the core idea. You're able to make these decisions without having. to take the job into consideration. You're able to make the decisions based on other things that are

important to you. Right, right, exactly. And I can tell you, I've talked to a handful of people in this community who have come to me and said, hey, I'm having this problem. My job is toxic. It's just a toxic work environment. And it's absolutely crushing to my mental health for me to stay. Every day that I go to work is like fingernails on a chalkboard. And that's just, that's no way to live. And so I've heard from a lot of people, you know, they'll ask, hey, should I wait for another seven years until I reach financial independence? And I'm like, no, no, no, no, no, no, no. As soon as you reach agency, as soon as you have that FU money, that screw you money, quit your job, walk away and take three months or six months to look for another job. Exactly.

That's exactly right, Paula. Just to look ahead briefly, I will say that the same principle applies to those who are nearing earlier at times. I talk to a lot of people who are getting close to early retirement, but they're worried about, oh, maybe I need another $50 or $100,000 saved. I'm not completely happy right now, but I think I need a little bit of more money, so I'm going to stick it out for a couple more years. My advice is very similar to yours in that situation. My advice is, no, just go ahead and pull the plug now because you will find ways to generate that extra $50 or $100,000 over the next 20 years. Right. So let's talk about stage five.

The first four stages of financial freedom, you are transitioning from being a complete beginner, being 17 years old or 18 years old, and going out into the adult world for the first time. You know, you're transitioning from that into getting to a point where you have some autonomy and agencies. That's what happens in those first four stages. So now that those four stages have been established, we move on to the final three stages, and that starts with ascending even above agency into something that you refer to as financial security. I guess this is what I would call lean fire. Yes, exactly. So I'm not wholly familiar with the lean fire and fat fire terms.

I'm aware that they're out there, and I see people use them all the time, but I don't know what the actual definitions are. So in my head, I think of the next step after the fourth stage or agency is financial security. And financial security is when, just as you described earlier when we were talking about lean fire, you have enough accumulated that you could generate passive income to support your basic needs for the rest of your life. The way I look at it, so Paula knows this. I'll tell your audience also. I grew up poor. My family lived in a trailer house in a rural Oregon and often we had to go to the church for assistance to get food.

We didn't have a lot of money. So when I think about financial security or lean fire, I think about being able to have enough saved that I could live that lifestyle I had growing up without ever having to work again a day in my life. So to me, financial security is having food, shelter, and clothing. I have enough saved that I can take care of that. I can't, maybe I can't indulge myself in some of the things I like to do, but the basics are taken care of. And, you know, let me add that there is a big, big gap between the fourth stage that I'm calling financial agency or free agency and the fifth stage of financial security.

It takes a long time for most people to go from the one stage to the other. And it's a struggle. It's a grind. and people, they stress about it. And I think this is the time we just need to enjoy life and maybe loosen up a little and recognize that, oh, it's okay to enjoy myself while also pursuing early retirement. It doesn't have to be either or. Right. Exactly.

Plan for tomorrow, but don't live in it. Oh, I like that. Oh, thank you. Did you just invent that? I invented it a few years ago, probably three, four years ago. But I liked it enough that I remembered it. It's remained in a file in my brief. ever since. Let's go to stage six. Okay, stage six is standard financial independence. That's pretty

much the question that you led off with to start the show where you're asking me to define financial independence. This is where you've reached that crossover point where your investment income is enough that it would cover your current standard of living for the rest of your life. And of course, we have to assume some things about inflation and investment returns and withdrawal rates. But based on these assumptions or whichever assumptions you choose to make, you have enough saved to cover your current expenses for the rest of your life. Beautiful. And then let's talk about the final stage, which is financial abundance. Yeah. Now, financial abundance, this is what I dream of. I'm never going to get there because I've decided I don't want to work. Never say never, J.D.

No, okay, that's true. Never say never. Here I am doing this course for Audible. The final stage of the road to financial freedom is financial abundance. And this is, well, using Vicky Robbins terms from your money or your life, this is where you have enough and then some. That means your income from all sources, your passive income is enough to not only sustain your current lifestyle, but to let you do almost anything you could dream. of doing within reason. I think that this stage is commonly called fat fire in the financial independence and early retirement community. This is the stage where people can afford to take whatever trips they want to take, when they want to take them. They can buy whatever house they dream

of. It's basically, as long as they're not like out, I can't think of an extravagant example, but as long as they're not being extravagant, they can do whatever they choose to do. You can live in luxury. So zooming out, the premise behind these seven stages is the core idea that financial independence is not one fixed static point, but rather a spectrum. Absolutely. I think of it as like a roadmap, basically. You know where you want to go further down the road. A core part of my curriculum, as you know, is getting people to think about their purpose. Why is it that they want to retire early? Why do they want financial independence? Why do they want? Why do they want financial independence? Why do they want money in the first place? And so you have that end in mind. And as long as you keep that

end in mind and you make smart financial choices, you will travel along this road. You will go down this continuum and reach these different stages of financial independence. And for some people, depending on what their goals are, they might not actually want to get to, say, financial independence or financial abundance. I said just a moment ago that I don't want to work anymore. So I don't care about that final stage of financial independence. I don't care about being fat fire. I'm happy where I am. And I just had a phone call with my brother over the weekend. And he's not even in stage three. He doesn't have FU money, or I guess that's stage four. He doesn't have enough money to quit his job. But he's very, very happy. And honestly, Paula, that is what I think this is all about.

is figuring out what is it that makes you happy and then getting to that stage on the road to financial freedom that allows you to have that happiness. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business.

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That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Another concept that you discuss is what you refer to as the lifetime wealth ratio. Let's talk about this calculation. Let's do it. This is actually something that I learned from your former podcasting partner, Jay Money. Oh, nice. Your lifetime wealth ratio is kind of a fun number.

It doesn't really mean much, right? But it's a fun like yardstick to use to compare yourself to other. people. So it compares how much you have today with how much you've earned during your years of work. It's basically a way to look at how much wealth you've managed to create and hold on to and compare it to how much you've actually generated in your life. So how do you make this calculation? To calculate your lifetime wealth ratio, you have to crunch some numbers. The first number for me is pretty easy to find, and I think for you would be pretty easy to find, but maybe for some of your listeners, it's not. The first number you need is your net worth. To compute your net worth,

the basic formula is you take your assets and subtract your liabilities, and the result is your net worth. So everything you own, minus everything you owe, whatever's left over is your net worth. That's the first number you need. The second number you need is how much you've earned over the course of your lifetime. And most people don't keep track of that. I don't keep track of that. I don't think you keep track of that. Nope. So you have to make a best guess. In my case, the best way I found to make a guess at this is to go to your Social Security account. The U.S. government social security site is excellent. And if you create or if you already have and you log into your my Social Security account, you can look at your lifetime earnings, your lifetime Social Security

earnings. And for most people, that's going to be a really good gauge of how much you've earned. Just total those numbers up, look at those numbers, total them up, and that'll tell you how much you've earned in your lifetime. Now, if you do contract work or you have other income that falls outside Social Security, you're going to have to play with the numbers. Right. And also, if you're part of a couple, there's going to be, since the Social Security.gov website only shows you your individual earnings, if at any point you had combined earnings with a partner, then the years in which you did that, you know, those numbers need to be combined. Yes, absolutely.

Like I say, it's kind of a less concrete number than your net worth, but it's still fun to play with. So net worth, easy to compute, lifetime earnings, a little more difficult, but I think your listeners get the idea of what we're going for here. You're just trying to figure out how much money have you earned in your lifetime. Right. To compute your lifetime wealth ratio, you, divide your net worth by those lifetime earnings. I'll use myself as an example. Currently, I have a net worth of $1.45 million. That's how much I've managed to accumulate over the course

of my 51, almost 52 years on this earth. Oh, happy almost birthday. Thank you. So if I go to the Social Security website, if you divide my net worth of $1.45 million by my life. Lifetime earnings of 1.28 million, I get this lifetime wealth ratio number that's 1.13. Now, that's just kind of an arbitrary number, right? In order to actually know what that means, you've got to be able to compare it with other people. I don't actually have a good source for where you can go to compare this with other people, but it's an interesting number to keep track of. For me, it's been interesting to watch it grow over time because it has grown. And if People are curious about it. Jay Money wrote about it originally.

At Budgets Are Sexy, I'm sure the article is still up there. And also Joe Udo from Retire by 40 has an article about the subject. And, you know, I would almost argue that rather than compare it to other people, tracking it yourself and monitoring the way that it changes over the course of your own life. Yes. That allows you to set goals for personal bests and to compare yourself to yourself, which is, I think, the ultimate barometer. You know, are you improving?

100%. I think that's absolutely right. And it's not the kind of number that you want to look at every month because it's not going to change from one month to the next very much. But you might look at it annually or even more meaningfully would be to look at it every five years. On the topic of formulas, you also advocate calculating a profit margin for your own life very much in the way that a company, the leader of a company, might calculate the profit margin on their business. Can you describe how a person would do this? Yeah, so profit margin. Well, first of all, when we're discussing personal finance, I like to talk about profit as opposed to savings. When we talk about the gap, as you put it, the difference between what you earn and what you spend, that money is savings. But savings is really dull. When you hear about savings, you think about your grandfather or your grandmother trying to encourage you to put money in a bank account. savings often is just deferred spending there are many in the financial independence community who chafe against this idea that savings is sacrificed because you're not really sacrificing anything you're just delaying you're deferring gratification so savings in the personal finance world is the exact same thing as profit in the business world right if you run a business and you earn more than you spend, you have a profit. We just happen to call it savings in the personal

finance world, and that's boring. So when I talk about a personal profit margin, personal profit margin is the exact same as a business profit margin. I talk a lot about how if one person saves $5,000 a year, that sounds great. I save $5,000. But is it really great? It really depends. If your income is $25,000 a year and you save $5,000, well, that's pretty good. I think we can all recognize that that's pretty good. But if your income is $250,000 and you're only saving or you only have a profit of $5,000 a year, well, that's not very good at all. At least not in my book.

Using the example I just mentioned, if you have a $5,000 profit on a $25,000 income, if you manage to save $5,000 after earning $25,000, then you divide that $5,000 into a $5,000. $25,000 and you get 20%. You have a 20% profit margin. Or, as we say in personal finance, that is your saving rate. It's really this saving rate or this profit margin that drives, it's like the engine that drives all of the financial independence movement, all of the early retirement movement. And honestly, even if you're not interested in financial independence or early retirement, it drives everything else that you're able to do in your life, how quickly you're able to achieve your financial goals is this notion of a personal profit margin.

Right. So essentially, in your framework, profit margin is interchangeable with savings rate. But by using that terminology and applying that terminology to your own personal life, it helps you be the CFO of your own life. Absolutely. From my experience, and this is in talking with hundreds of people, maybe thousands of people over the past decade about personal finance, people find savings rate really boring. They're like, yeah, whatever, whatever. But if I start talking about profit margin or begin talking in terms of treating your personal finances as if you were a business, as you said, being the CFO of your own life, they change their mindset. I see it in their face. They go

from being bored to being excited. Now, shifting gears a little bit to discuss the concept of saving in the conventional sense of that word, saving defined as a reduction in spending. You make the point that there are two iterations that this can take. It can come in the form of everyday economy, such as how to cut back on consumer discretionary purchases, restaurants, movie theater tickets, cutting down on your utility bills. And these are small wins that are unintimitating and tend to demand most of the focus of Internet financial literature. but what is less discussed and arguably more important are the big wins, those few big ticket items that make an 80-20 impact on your budget. Can you discuss those big wins?

Sure, you bet. I think that frugality is absolutely a terrific skill, is an essential skill, and it helps people save money, by which I mean to accumulate more money. And that's the stuff that you're talking about with the small wins. So yes, that's important. But it's even more important to get the big wins right, the big things. And I think of there being three essential big wins. The first one, not in terms of size, but as in terms of how easy it is to tackle, is transportation.

Transportation, generally speaking, makes up about 17% of the average American household budget. And this is according to U.S. government figures. So if you can economize on your transportation, you've got a lot of room there if it's making up 17% of your budget. If you cut 10% of your transportation budget, you freed up a large amount of money there. So the average American family, I'm going to use some approximate numbers, makes around $50,000 a year. So if your transportation budget is 17% of that, then it's about $8,500 per year. If you can cut that by 10%, you're able to free up. up about $1,000. That's a significant chunk of change. Compare this with economizing on, say,

household items. Even if you cut that by 10%, well, first of all, you've got to cut 10% over and over and over again, but you're not going to have nearly as big an impact, according to government figures. The real trouble with cutting back on transportation is the forms that we talk about cutting back on. There's a lot of resistance to that. And I think that's unfortunate. So we talk about cutting back from two cars to one car, giving up cars completely. You and I both have friends that advocate leading bike-centric lifestyles using more public transportation. I'm not arguing that people should cut out their cars. I like my car too. I just bought a new one last year. Oh, what'd you get? I got another mini cooper, believe it or not. Ah, that does not surprise me at all. I like my mini-coopers.

So for people who are listening to this as background, many years ago, J.D. actually got up at a conference and he made an impromptu short little speech in which he said, so in conclusion, money cannot buy happiness unless you're spending that money on a Mini Cooper, in which case it can. I don't even remember that line, but it sounds exactly like something that I would say. That's hilarious. But it's true. And so my Mini Cooper makes me happy.

And I'm all about this deliberate mindful spending or conscious spending, as Remeet Safety puts it. And so I know the Mini Cooper makes me happy. Again, I'm not arguing that people cut out cars from their lives. I'm just hoping that people will put them in the correct place if that makes sense. Find some ways to reduce transportation costs, maybe walk to the grocery store a couple times a week or take the bus to work a couple times per week. That's one way to achieve big wins.

The best way to achieve big wins on spending is to reduce your housing costs. That's where I come in. That's right. That's what Paul is good at. Yep. That's the school of Paula Pant. The school of Paul Pant. By far, the biggest expense for the average American household is housing. And that makes up 33% of the average household budget according to the U.S. government again. And there's so many reasons for it. We've been led to believe we need big houses, the banks and the mortgage companies and the real estate agents all push people towards this big a possible house, that's because it's in their best interest for you to buy a big house.

They make more money if you buy a big house. It's not in your best interest, though. So I really urge people to try to buy as little house as they need, not as much as they can get away with, but as little as they need. I think that's the smartest move. And I practice what I preach in this regard. As you know, I've purchased a small home here. It's not rural necessarily, but it's just outside the city limits.

And it's a deliberate choice to reduce my housing expenses, which is ironic since I have so much money tied up in this house that it's actually causing problems. But my intentions were good. What problems is it causing? Because for people who are listening, J.D. bought his house in cash, and then you renovated it in cash. So what problems is that causing? So this is going to bring up an interesting real-life example of financial independence. and the considerations. In my case, in 2017, when I went to purchase this house, I was financially independent by all forms of the definition. I put $450,000 into this house, and then I spent

another $150,000 to renovate it, and there are still problems with it. So by putting all this money into the house, it's no longer part of my liquid net worth. Which means you can no longer draw down on it. Correct. So I put myself in a situation where I have $210,000 to get me the next seven and a half years until I can access my retirement accounts without penalty. So that gives me just roughly $30,000 a year in spending. My expenses are more than $30,000 per year. So technically, I am no longer financially independent. I'm not stressed. I'm not worried. I'll figure it out. but it's an example of what happens when you spend too much on housing. And it's ironic because I'm using this small house as an example of spending less on housing

because that's what I was trying to do. I was trying to spend less. Right. Well, I mean, and arguably, you know, you've made use of that money insofar as you don't have a P&I payment on your home. You know, you don't have a principal and interest payment. You only have to pay out of pocket for property taxes and homeowners insurance. So tying up that money creates a reduction in expenses.

But were that money to be in the market generating returns in excess of the interest rate on a mortgage, you could draw down on a portion of those returns and have more to live on? Yeah, exactly. Again, I'm not too stressed, but it's an interesting case study of how cash flow is actually pretty important when you're doing the financial independence calculations. And, you know, my net worth is fine. And worst case scenario, I sell the place. free up some cash, take out a mortgage for the house instead of paying in cash, and skate by for the next seven and a half years that way. But I'm hoping to find other creative ways to not have to worry about it. What other creative ways are you thinking about? Well, writing more books, for example. Oh, interesting. Pursuing other passions that I actually think that for my own mental health, because like

Paula, I'm a solitary blogger who sits alone in his underwear, just like Paula sits alone in her pajamas. We just sit alone all day and we do our thing. You do it with your podcast. I do it with the writing. I need some more human contact. And oh, it turns out I need a little bit more cash. So I'm like, I could work at Starbucks. I think this is almost the definition of barista fire or lean fire. I was about to say, you sound to me like your lean fire, you're lean fire for your basics and then barista fire for everything else. Yeah. The real thing I'm doing, though, this year, for example, in 2021, I'm doing a spending moratorium. I'm still buying the necessary expenses, but I'm not buying books. I'm not buying movies. I'm not buying furniture. I'm just focusing on the basic expenses. I want to see what are my actual expenses. And maybe they're lower than I think. And I don't have to come up with these crazy creative ideas. Interesting. So you're basically trying to assess through a real-world test what your lean-fire number is by instituting the spending moratorium.

I hadn't thought of it in that way, but that is exactly what it is. Wow. Fascinating. What have been the preliminary results? You know, I don't know. We are recording this on Monday, March 1st, 2021, which means today is the day that I would normally do. my personal finances in Quicken, but instead I'm talking with my friend, but I could manage my money if I didn't have to record this podcast. I should add that there's a third and final big win that's not actually related to the spending side of the equation, but to the income side. And that big win actually is your income. So a lot of people, in fact, most people, when they're looking to increase that gap between their earning and spending, they focus.

exclusively on the spending. That's great, but there's only so low that you're going to be able to get your expenses. I mean, you and I just talked about how I'm experimenting with what my lien fire number is, right? So once you've got that spending as low as you can go, the only other place you can look to increase the gap is your income. I think not enough people in the United States and elsewhere pay attention to managing their career. as if it's an asset. They don't ask for raises, they don't learn how to negotiate benefits, they don't experiment with trying to find better jobs or higher paying jobs outside their current niche. I think there are a lot of different things that people can do to increase their income.

J.D., you also write about a wealth snowball. Now, many people have heard the term debt snowball before, but what is a wealth snowball? Well, the wealth snowball is. taking the same ideas that apply to the debt snowball and using them to build your financial future. From my experience, my personal experience, and my experience talking with other people, a lot of times those folks who choose to do the debt snowball to pay off their debt in this gradually accelerating manner, they get their debt paid off, they reach the end and they're like, well, what do I do now? All right. And quick time out for the people who are brand new and do not yet know what a debt snowball is, can you in one sentence quickly define it? Yes. Well, maybe not in one

sentence, but one paragraph, one paragraph. Sure, in one paragraph. A debt snowball is when you put your debts in any given order, different people use different methods, and then you choose one debt to tackle first. It could be the debt with the highest interest rate. It could be the debt with the lowest balance, whatever you choose. You pay the minimum balance on every debt, except for this one that you're focusing on. You pay it off as quickly as you can. Then, once that's paid off, you take all this money you were throwing at that first debt and you throw it at the second debt. So you're actually paying the minimum balance plus all this extra amount. And then once that's done, you go to the third debt and the fourth debt. And it just, it really does act like a snowball.

I did this for myself when I was getting out of debt. The basic idea is as you work through your debts, you're gradually creating this huge wave of momentum to pay off the debt. It is a powerful thing. It's like a force of nature, like an avalanche. So with that wealth snowball, this is my idea that instead of like after you've paid off your debt, instead of flailing around, looking for something to do with your money, or instead of resuming your money, or instead of resuming your money. or instead of resuming your old bad habits, which is what I started to do when I paid off my debt. My initial inclination was to start doing some of the same things

that had got me in debt in the first place. Instead of doing those things, why not use this money and use the ideas that you already know from the debt snowball? Use these ideas to build a wealth snowball. To start with, you might, for example, once you've paid off all of your high-interest debt, decide to use the money to build a larger emergency fund. And then once you've got a larger emergency

fund set aside, you might then tackle your retirement savings. As time goes on, as your income increases, as you become more disciplined with money, you'll have more cash to throw at your wealth snowball and to contribute to your retirement accounts and then eventually to non-tax advantaged investment accounts. So what you're saying is if a person has a variety of financial goals, rather than spread themselves thin and contribute a small amount to a long list of goals, they should contribute the minimum acceptable amount to every goal and then direct the fire hose of the bulk of their effort and focus and power at one goal and do that until it's done and then move.

to the next. Paula, I wish you could see my face right now. I have a big grin, because that is not what I was saying, but I love that. That is a much better way of phrasing things and as structuring it. That's amazing. Wow. Well, thank you. Yes. Basically, the idea with the wealth snowball is you're wanting to use compound interest, take advantage of compound interest and compound investment returns by throwing as much money as you can into your account so that your wealth grows more rapidly with time. But I love the idea of making minimum contributions to most of your financial goals, but then choosing one to, as you said, turn the fire hose on. That's amazing. I love that idea. That's another approach. I love it.

We'll return to the show in just a moment. The topic of investing. And on the topic of growing wealth, you've also written out seven rules for investing. So let's close out with these seven rules for investing. And rule number one, quite simply, is just to get started. Yeah, absolutely. I think you and I both know that it's easy to put off getting started. There are so many other things putting demands on your money. Plus, investing seems so complicated to so many people, even though it doesn't have to be. Investing doesn't have to be complicated. And so people put it off. And yet the number one thing you can do to secure your financial future is to start investing as soon as possible. On the topic of getting

started, I vividly remember a conversation that I had several years ago when I lived in Atlanta. I had a roommate who was an elementary school teacher and she was also taking night courses to get her master's degree. So she was very busy. When I asked her, or not she invests, her response was, I don't have time to learn about investing. Essentially, her answer was that she doesn't have time to actively trade. And she equated active trading with investing. And I say that because that's a lead in for rule number two in your seven rules of investing, which is to think long term. Right. Investing is a long-term game. I know that recently we've had some stories of people who are quote investing unquote and I say that with

disdain in my voice in things like GameStop and Bitcoin where they're trying to make quick bucks but that's not investing that's speculating that's gambling before people send me angry emails and tweets I will say JD does not speak for me and I have a slightly more nuance to view on that but go on my view is not new if you are buying GameStop stock to try to make a quick buck, that is not investing. That is speculating. Investing is fundamentally a long-term game. You're putting your money into an asset that you believe, for good reasons, will grow with time. Now, I'm not opposed to speculating, and so I'm not opposed to people trying to take risks with things like GameStop. But I think they should only be doing that with money they can afford to lose, and I don't think

they should fool themselves that that is investing, that is speculating. Investing is a long-term thing. The stats show that over the long-term, stocks, common stocks, have produced the greatest average real return, so inflation-adjusted return over long periods of time, say decades. And that's why, for me, when I'm recommending what people should invest in, I want them to think about things like stocks and bonds, these asset classes that have proven through time to provide good returns. Now, obviously, history is not a guarantee of future returns, but we don't really have anything better to go on, right? Right.

But, you know, there's a fundamental problem investing in just a few stocks. Take GameStop, for example. If you really thought GameStop was going to be around for a long time and you were choosing to invest in that, if you're investing in only one stock, then you're investing in, you your returns are tied only to that one stock. Sure, you might experience some large gains, but you're also putting yourself at risk to see huge losses. So my third rule of investing is to spread the risk whenever possible.

And by that, I mean, to diversify, which is, you know, one of the fundamental investment principles, I think. How does a person know if they have spread the risk enough? Because there are certainly some people who will amass a portfolio of 20 or even 50 individual stocks and they believe that they're diversified. What is the barometer for knowing that you are adequately diversified? I don't have a good answer to that question. For me, I know that in order to build a portfolio of 20 to 50 stocks, I would say 50 stocks is probably pretty diverse, but in order to research and identify 50 solid stocks that I think will perform well

over the long term, that would take a lot of time and effort. And I don't feel qualified to evaluate, say, 100 different businesses in order to come up with 50 stocks that I like, or 200 businesses. So one way that most people spread the risk is through the use of mutual funds. As you know, mutual funds, there's collections of investments. They let people like, you and me, pool our money to buy small shares or small pieces of companies all at all. once. So we might buy a mutual fund that owns, say, a hundred different tech stocks plus a few bonds. So mutual funds allow people to achieve diversification without having to take the time to do their research themselves and to make all these individual purchases. They spread the risk

for you. They're a great way to achieve diversification. Right. And in the example that you gave, you said a mutual fund might have a hundred different tech stocks. But if you're a, you look at some of these funds, and you mentioned in your Audible Great Courses course, the Fidelity balanced fund, just as a random example, that one owns over 2,000 different companies inside of that fund and almost 1,000 bonds as well. So there's pretty significant diversification, you know, but between the stocks and bonds, we're talking about holdings of almost 3,000 different underlying assets. Absolutely. And you don't, as an individual investor, have to do all this research, somebody else has done it for you. The drawback is you pay for that

expertise. And in the past, it's getting to be less common nowadays, but in the past especially, mutual funds could be very, very expensive because you were paying somebody else to exercise their expertise. So my fourth rule of investing is to keep costs low. That means if you're picking out a mutual fund, or if you're investing in individual stocks, you need to do your best to look at what expenses are involved in making the transaction or what expenses the mutual fund itself carries. And they provide paperwork that allows you to examine what kind of expenses are there. And try to pick mutual funds that have lower costs because actual research studies show that mutual funds with lower costs tend to provide higher.

returns in the long run because less of their returns are being eaten up by the expenses. And for context here, an index fund is a type of mutual fund. So index funds technically are referred to as index mutual funds. Yeah, you're right. An index fund is a broad base, passively managed mutual fund with low costs that is totally diversified and generally speaking is invested in the entire stock market. So your costs are kept low with index fund. They're just about as low as you can get with an index fund. And you're getting the diversification.

And best of all, leading up to rule number five, they're very, very simple. If you purchase a good index fund, one that we talk about a lot in the financial independence community is Vanguard's total stock market index fund, which goes by VTSA. If you purchase something like that and you focus all of your wealth snowball, all of your investing energy into this one fund, it's very simple. And yet you're owning the entire stock market without any kind of research necessary on your part. And the fact that it's so simple leads to rule number five, which is keep it simple. In that context, how do you define simple in the context of that rule? Okay, so many financial gurus recommend that you don't invest in anything that you don't understand.

In this case, I believe that index funds, maybe not from the conversation that you and I are having here, but in general, if your listeners were to do a bit of research on them, they're very easy to understand. They are mutual funds with low costs that own the entire array of stocks in the market. giving you broad diversification. And because they're so simple to understand, you can feel confident that you're making a purchase that isn't complicated and isn't going to come back to bite you in the future. They're easy to understand. When I talk about index funds and I try to make the argument in favor of investing in index funds, I often talk about how Warren Buffett himself, probably the greatest investor that the United States, if not the world, has ever seen. He believes that index funds,

are the only investment that the average person needs to hold. And in fact, in his will, he recommends that his wife take the money that she's left with and put it, I think it's like 90% into an index fund and then 10% into a bond fund or something like that. I don't know the exact specifications he's made, but Warren Buffett himself is a huge fan of index funds because they are simple and because they provide exposure to the entire stock market. All right, so index funds are simple to understand. They provide broad diversification at a low cost. As a result, they spare the average investor from having to do due diligence into a small number of 20 individual stocks or 30 individual stocks, which, frankly, most people don't have time for. And so for those reasons, index funds are great options for the average investor. Right. Exactly.

So far, we've talked about five out of seven of the investing rules that you have written out. Rule number one is to just get started because a lot of people procrastinate on that for years, and that procrastination has a severe opportunity cost to it. Rule number two is to think long term. Don't try to dance in and out of the market or make quick gains. Get rich slowly, if you will. Exactly. I like how you think.

Why, thank you. Thank you. The third rule is to spread out the risk, be properly diversified. and then the fourth rule is to keep your costs low. The fifth rule, which we've just finished talking about, is to keep it simple and only invest in investments that you understand. This brings us to rule number six, which I personally might argue is maybe the most tied with the first one,

tied with just get started for the most important rule. And that is to automate it. Tell me about automation. And for people who are listening, who have never heard that word before, what is automation? Why does it matter? automation is setting up automatic investing.

If you have a job and they offer some sort of automatic contribution to a retirement plan, do it through your job. If you don't have a job that allows that, then find a low-cost brokerage. Actually, I have all my accounts with a big name brokerage and they offer, they let me invest for free. But set up automatic contributions every month. or every week or whatever time period you choose to your retirement and investment accounts. And the reason this is so important is that the number one barrier to investment returns is human nature. Study after study shows that we are our biggest obstacle when it comes to investment success. We tend to buy high and sell low, which is the opposite of what you want to do.

we tend to find all sorts of reasons to not invest. What you want to do is take yourself out of the equation. Set it up so your contributions to your financial future are going out there every month regardless of what is going on in your life. And they're going out regardless of what's going on in the market. You're just making the contributions. You're taking yourself out of the equation. and that is one of the keys to successfully investing for the future.

So essentially set it and forget it. Set up the contributions, put it in index funds, and you're done. Yeah. And you know, you and I, we both know, Remeet Sey, and his excellent book, I will teach you to be rich. This is one of his driving tenets of that book is to automate your financial life. Because by automating it, you don't have to think about it. You only have to make the decision once it's done. You can go on with the rest of your life knowing that in the background, you're magically building your wealth snowball.

Let's talk about rule number seven, which is to ignore the noise. And this is a particularly apt discussion to be having right now because there's a lot of noise going on. First, can you define noise? What do you mean by noise and how do we separate noise from actual valuable information? Valuable information is timeless. It's not new. So to me, anything that you might consider newsworthy is not 100%, but 99% of the time is noise. It's just stuff that makes you panic or makes you excited.

It makes you want to make investment decisions or financial decisions based on emotion rather than on logic and rather than on what provides long-term success. So one of the interesting things about index funds is because you're invested in this vehicle, that gives you the entire stock market at once, you're not necessarily, like if Tesla experiences a 50% gain in a year, your index fund's not going to go up 50%. But at the same time, if GameStop drops 50% in, oh, say, a week, you're not going to lose that 50% in a week either. You're going to just get a tiny bit of that because you only have a tiny bit of your index fund is made up of Tesla. A tiny bit of your index fund is made of GameStop, if it's even in there. So what you need to do is do is pay attention to the big picture, the small picture, the daily news, the daily noise.

The reality is nobody, not even the experts, actually understand what it is that's moving the markets from one day to the next. They have conjectures. And if you read papers like USA Today or you watch MSNBC, there's plenty of talking heads on there talking about what they think made the markets move, but they don't really know. And ultimately, it is irrelevant because you are not investing for a day, you're not investing for a week, you're not investing for a month, you are investing for decades. Time and experience has shown us that given decades, the stock market provides an average return of about six or seven percent after you count for inflation. And that's all you're worried about. So this noise is this daily nonsense that you just don't

need to worry about. All you need to worry about is the long term. And, you know, I should add one thing. I'm making the case here for investing in index funds. I admit that there are other ways to make smart investments. And you're a prime example of that. You invest in a real estate. But at the same time, you have a lot of specialized knowledge, and you've taught yourself that over many years, if I'm not mistaken. It's not something that you're just weaning. You're not just making it up as you go along. Not anymore. Ask me in 2010. Or you should have talked to me in 2010 if you could invent a time machine and go back to then. That would be fun to do. Oh, no, it won't. I was winging it back then. So 11 years later, I finally know what I'm doing. Right. But for most people who want to

not have to worry about that and not experience the possible catastrophes. that come from like trying to figure out bad real estate investment. Index funds are a solid choice. They are an excellent choice. And again, it's not just me saying that it's other financial experts like Warren Buffett saying the average person should absolutely be fully invested in index funds. I really do think real estate's a fine investment. It's just, I mean, you and I have talked about it before. I'm curious about investing in real estate. And you, I don't know if you remember this, you actually advise me, don't do it if you're not that gung-ho about it. If you don't have that much of a passion for it, then you shouldn't do it.

You should stick to index funds. Yes, I stand by that statement. I think the worst reason to invest in real estate is FOMO. If you're not really into it, but you feel like you, quote, unquote, should just because everybody else is doing it. You know, you look around at the fire community and you see everybody else talking about the house hack that they've done or the live and flip that they've done. and you think, well, geez, everyone else is doing this. Maybe I'm supposed to be doing it. If that's the motivation, then don't do it.

Yeah. That's also the reason that I don't do credit card hacking. I understand that in the financial independence community, there are a lot of people who are able to do what's called credit card hacking and use rewards points in a profitable manner. And I get that. And I've tried to dabble in it, but I can see that there are a lot of risks involved. And I'd rather not do it. That's not how I want to spend my time and my energy.

Right. So the theme between, you know, real estate and credit card hacking, I think the zooming out, the broad theme is know yourself. Yes, absolutely. There is no such thing as the right way to do it. It's creating a style that that fits you, that fits your personality, your interests, the level of energy that you want to dedicate towards things. The quote unquote best investment is the one that's the right fit for you. Absolutely. Paula, that is true with almost all financial advice. I'm over here like jumping up and down silently, giving you thumbs up because that has literally been my philosophy since day one, it get rich slowly, is do what works for you. Everyone's out there trying to tell you there's only one right way to do something. I'm sitting here trying to tell you that index funds are the best way to invest. There's no one right way to do any of this stuff. There are ways that are often more effective. and you should know that they're more effective and why they're more effective. But if for some reason it doesn't work for you, then it's okay to go with the second best choice. And the debt snowball is the classic example of that. Because the Dave Ramsey debt snowball where you pay off your lowest balance first instead of your highest interest rate first, that really upsets engineers.

You know, people like me who aren't engineering minded and we have bad psychology, it works. I tried for years to use the proper way, the right way to pay off my debt, and it didn't work. So when I use this suboptimal method and it gets the job done, that's the right path for me. Right. So do what works for you on all of this stuff. Right. Absolutely. And I think of the food and nutrition analogy, people can spend a lot of time and debate a lot of various theories around how to construct the quote unquote ideal diet. But if you're not going to stick to it, then who cares? The 80, 20 good enough that you actually stick with is much better than the 99% perfect

that you completely discard in favor of just a bunch of junk because you can't stick with something that's so theoretically perfect. Absolutely. You're 100% right. I just lost 30 pounds over the course of six months by basically heating the advice you gave, putting an 80, 20 thing into practice, and not denying myself anything, but just making sure that I was cutting my calories and 80% of the days doing what was right. Oh, congratulations.

Thank you. Well, let's talk about the eighth and final rule of investing, which is to, you. review your accounts annually? What should that review entail? What should you be doing? Well, I don't think there needs to be any kind of like formal procedure. For me, as much as I advocate setting it and forgetting it as we discussed earlier, I also think it's a good idea. As much as I advocate setting it and forgetting it and as much as I advocate like ignoring the noise, the daily noise, I do think it's a good idea to, once a year, at least once a year, probably once a quarter, to take a look at your account

balances and to make sure that everything is where you want it to be. We talk a lot about asset allocation in the personal finance world. So if you're a person who is focused on a specific asset allocation, meaning you've got a certain amount in stocks, a certain amount in bonds, the end of the year is when you look at that and say, oh, well, maybe I'd need to shift some money around to bring things into balance because they've got out of whack the last year. It's basically a time to sit down and make sure that the way you have your investments constructed is still meeting your goals and leading you to the financial future that you want. Right. And by virtue of that rebalancing, that that is necessarily a contrarian approach. Rebalancing is the act of selling high and

buying low, which is a great way to manage money, but it's antithetical to our impulses. Yeah. I had never thought about it. It is fundamentally contrarian. You're absolutely right. Well, thank you so much, Jady, for joining us. Your Audible course is part of the Great Courses series. What is the Great Courses series?

Well, Audible, of course, is the platform for audiobooks that's now owned by Amazon. through create courses is actually a wholly different company. It used to be called the Teaching Company. And now for decades, it's been providing college lectures. It used to be on cassette tape, then CDs, and now you can get them digitally. They're that old? Oh, yeah. They're cassette tape old?

Yes, I was buying great courses back in the 1990s on cassette tape, and I'm sure they're older than that. So I own dozens of the great courses, and most of them are about history, like medieval Europe. I've been listening to one lately about the history of the United States that I find fascinating. So the great courses started off doing just college lectures and is gradually expanded into an array of other topics. And they've collaborated with Audubles to create some what are called Audible Originals. And my course, how to achieve financial independence and retire early, is one of those courses. When they came to me and asked me if I wanted to create this five-hour course about financial independence, I was like, wow, this is a chance for me. to try to distill all of my knowledge into this one five-hour course. That's pretty exciting.

That's awesome. That's really cool. Audible originals are great, so it's, I think, a huge honor that you were asked to create one. I felt honored indeed. It was very exciting. It's kind of like a dream come true. Excellent. We will put a link to your Audible course on Financial Independence in the show notes for today's episode. Where else can people find you if they would like to know more about you and find your writing and see what you're up to. Well, I'm always poking around at get rich slowly.org, which is my personal finance site. And Paula, you probably don't even know this. I've begun writing again at J.D. Roth.com. But there, I'm just writing about nonsense. I'm writing about cats and computers and comic books, just my daily life. But personal finance stuff

is get rich slowly. Oh, that's excellent. Well, thank you so much, Jady. Thank you, Paula. I've really enjoyed it. Thank you, J.D. What are some of the key takeaways that we got from this conversation? Here are four. Key takeaway number one, financial independence is a continuum. It is not one static point, but rather a spectrum. I think this brings up an excellent, excellent point. So you asked me about my definition of financial independence, and I gave it to you. But in reality, I don't think that financial independence is one specific point or one specific place or one specific event. Yes. Financial independence is a continuum. And along this continuum, there are all sorts of milestones,

but it's not like you just magically reach a certain amount of savings and angels sing and acquire from on high and your life has magically changed. That's not how it works. The financial independence continuum can be divided into seven distinct stages. Stage number one, you are in complete financial dependence, meaning the way that you lived when you were five years old. You are dependent on other people, or in J.D.'s case, he talks about when he was an adult in his 20s and early 30s, he was dependent on credit cards to be able to cover his normal cost of living. He was not able to pay for his basic expenses without carrying balances on credit cards, going into credit card debt.

While he was living like that, he was financially dependent on his credit card companies. So that first stage is financial dependence. The second stage is solvency. And in solvency, you can make your minimum payments and you are not actively adding new credit card debt to the balance. Stage three is stability. In this case, you've repaid your credit card debt. and you have an emergency fund.

Stage four is agency. This is when you have enough money, enough stability, that you have the option to say no to certain things. You have FU money, meaning that if you are in a toxic work environment and you have to get out, you can quit, you can go tell your boss,

hey, FU, and you can't stay unemployed forever, but you could swing it for three months. That is stage four, its financial agency. Now, there's a huge gap between stage four and stage five, but the next stage five is financial security. And this is what some people refer to when they talk about lean fire or lean fi. You have enough investments that those investments could cover a basic cost of living. After that comes financial independence, where you have enough money that you could cover your current standard of living. And that said with the caveat that current

standard applies to a momentary point in time, which leads us back to the original observation that FI is not a static point, it is dynamic. And so stages five through seven, financial security through financial abundance, which is stage seven, security, independence, and abundance, there's often a shift between these. It's essentially the lean phi to fat phi spectrum, where the midpoint of that spectrum is what we would call financial independence, and that means that your investments can support your current standard of living. But that's stated with the knowledge that current standard of living is going to always be in flux. Your cost of living is going to shift every year, every six months.

And that's okay. You don't need to drive yourself crazy adhering to some arbitrary number, so long as you, at a minimum, have lean fire or lean fi. and at a maximum have stage seven financial abundance. Say in financial abundance, you have Jeff Bezos money. You have way more than you could ever reasonably spend even if you tried to. And to be clear, you don't have to be as extreme as Jeff Bezos money. Any amount of way more than you need would be that stage seven.

So that whole spectrum of lean fire through way more than you could possibly ever spend, all of that is stages five through seven. and that's the financial independence side of the spectrum. That's why we say there's that huge gap between stage four and stage five, because that's the gap between having FU money where you can temporarily be unemployed versus having enough money in stage five that you could theoretically be unemployed forever if you wanted to.

So these seven stages from financial dependence through financial abundance, these are JD's seven stages or seven. steps to financial independence. I think of it as like a roadmap. You know where you want to go further down the road. A core part of my curriculum, as you know, is getting people to think about their purpose. Why is it that they want to retire early? Why do they want financial independence? Why do they want money in the first place? And so you have that end in mind. And as long as you keep that end in mind and you make smart financial choices, you will travel along this road. You will go

down this continuum and reach these different stages of financial independence. And for some people, depending on what their goals are, they might not actually want to get to, say, financial independence or financial abundance. I said just a moment ago that I don't want to work anymore. So I don't care about that final stage of financial independence. I don't care about being fat fire. I'm happy where I am. And I just had a phone call with my brother over the weekend. And he's not even in stage three. He doesn't have FU money, or I guess that's stage four. He doesn't have enough money to quit his job, but he's very, very happy.

And honestly, Paula, that is what I think this is all about, is figuring out what is it that makes you happy. And then getting to that stage on the road to financial freedom that allows you to have that happiness. And so that is key takeaway number one. FI is a continuum. Key takeaway number two. Calculate your lifetime wealth ratio. This is a ratio that compares how much you have today to how much you've earned throughout your life.

This ratio compares your net worth against your lifetime earnings. It's not the kind of number that you want to look at every month because it's not going to change from one month to the next very much. But you might look at it annually or even more meaningfully would be to look at it every five years. Now, if you recall, JD and I had a discussion about what exactly would a good answer be? And the fact is there isn't a barometer of a good

answer versus a bad answer, a good ratio versus a bad ratio. The way to make use of this figure, regardless of what your ratio turns out to be, is to consistently track it and see how you compare against yourself over time. So if you calculate this number right now and you calculated again five years from now, have you improved? Are you in a better position five years from now than you are today? So long as this number steadily improves over the span of your life, then you're on the right track. Now, year over year, there may be fluctuations because there might be a recession, the stock market might crash. You could do everything right and watch your net worth go down over the short term. That's the reality of having money in the market.

But over a longer window of time, it should across the graph of your life, track upward. So that is key takeaway number two. Calculate your lifetime wealth ratio. Key takeaway number three. Manage your career as if it's an asset. And I will let JD introduce this idea. A lot of people, in fact, most people, when they're looking to increase that gap between their earning and spending, they focus exclusively on the spending. that's great, but there's only so low that you're going to be able to get your expenses. I mean, you and I just talked about how I'm experimenting with what my lien fire number is, right?

So once you've got that spending as low as you can go, the only other place you can look to increase the gap is your income. I think not enough people in the United States and elsewhere pay attention to managing their career as if it's an asset. They don't ask for raises. They don't learn how to negotiate benefits. They don't experiment with trying to find better jobs or higher paying jobs outside their current niche. I think there are a lot of different things that people can do to increase their income. Building wealth requires growing the gap between what you earn and what you spend. And there are only three ways to increase that gap.

Earn more, spend less, or a combination of both. Spending less is the immediate win. It's the low-hanging fruit. But earning more has incredible upward potential. Developing a side hustle or creating a small business, the entrepreneurship part of FIRE, the last letter, that E-part. That's a great way to earn more. In addition to that, you can also manage your career

in the way that you manage your portfolio. Learn to negotiate. Look for other companies that could give you a promotion or a raise, develop new skills, invest in yourself. I know the phrase invest in yourself has been hijacked by various consumer discretionary industries and used to justify everything from face masks to scented candles, but investing in yourself in a very real sense means increasing your earning potential. Now, like any investment, it must be smart, it must be strategic. You can't just throw money at the problem and expect that throwing money at it will

necessarily have a good ROI, but making a few thoughtful decisions about how you want to invest in yourself and in your education, and I mean that in the broad sense of the word, not simply school education, but your lifelong learning. These are ways that you can manage your career and manage your earning potential as an asset. It is how you manage your own human capital. And so that is key takeaway number three, manage your career and manage your earning potential broadly, as though it's an asset because it is. Finally, key takeaway number four. Here are seven rules associated with investing.

The first is get started. The second is to think long term. The third is to spread the risk or diversify. The fourth is to keep cost low. The fifth is to keep it simple, meaning don't invest in anything you don't understand. The sixth is to ignore the note. Boys, Ahem, GameStop. And the seventh is to review annually.

Now, even though these are referred to seven rules for investing, rules is meant not in the strict sense of the word, not in the letter of the law sense, but rather in a roadmap sense, because J.D. wraps this up with a philosophy that I also share, which is do what works for you. That has literally been my philosophy since day one, get rich slowly is do what works for you. Everyone's out there trying to tell you there's only

one right way to do something. I'm sitting here trying to tell you that index funds are the best way to invest. There's no one right way to do any of this stuff. So those are four key takeaways from this conversation with J.D. Roth. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. If you enjoyed today's episode, please share it with a friend or a family member that's the single most important thing you can do to spread the message of financial independence. You can subscribe to the show notes by going to afford anything.com slash show notes. And you can send somebody a copy of today's show notes by heading to afford anything.com slash episode 305.

Make sure that you hit subscribe or follow in whatever app you're using to listen to this show. And while you're there, please leave us a review. Thanks again for tuning in. My name is Paula Pant. This is the Afford Anything podcast, and I will catch you in. the next episode. Investments that you understand. Oh.

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