escaping the rat race

Setting yourself up for financial independence does not have to be a painful process. You just need to change your mindset and treat it more like a game. Just like the game of ‘Monopoly’. As you move around the Monopoly board, you are doing the best you can to avoid spending unnecessarily and buying up assets in order to grow your wealth.

I am going to cover how I approach my personal finance and what I am currently doing to build my wealth and escape the rat race that most Americans live in.

_{Disclaimer: I am not a financial advisor. I am simply sharing what I do with my finance. Please do your own research before investing your hard-earned money.}

Tracking your Income and Expenses

The first step that I highly recommend everyone does is track their income and expenses.

I use an online wealth management website that lets me sync all my bank accounts, investment portfolios, credit cards, and other income/expense related accounts. This website is called Personal Capital.
(Feel free to sign up as my referral and we both receive a $20 Amazon Giftcard if you meet the criteria! — Note: I am not affiliated with this company. I use this tool.)

Personal Capital has allowed me to see absolutely everything in front of me. It’s a clean dashboard and shows how you are progressing with your savings and investing. I recommend this because visually seeing your portfolio and net worth growing right before your eyes will motivate you. They even have a mobile app!

The biggest thing to keep track of is your expenses.

What is your monthly average “burn rate”? That’s what you need to find out.

First Goal: For the next three months, live your life like normal. Spend money the way you typically spend money. At the end of the three months, you will know what your average burn rate is. That’s the burn rate that you are comfortable with.

Now that you have your burn rate number, think back on those three months. Do you feel there are certain things you can cut off to lower that number? Check out this article I made for saving money to better understand what I am asking.

Second Goal: For the next three months, see if you can make some changes to help lower your burn rate. At the end of this “money saving” three month run, you will now know your new average burn rate.

Emergency Fund

Life is full of surprises. You must prepare for unexpected events like losing your job, car repairs, hospital visits, and much more. You should have a Savings account and see it as an emergency fund. Most financial experts recommend that you hold cash that could cover at least 3 to 6 months worth of expenses.

Your emergency fund is your health bar. Do the best you can to avoid tapping into this health bar for unnecessary expenses. If any money does leave this Savings account, you must replenish the health bar back to 100% with your next paychecks.

Third Goal: Now that you know your average monthly burn rate number, multiply it by 3. That’s how much you need to have in your emergency fund. If you want to play it safe, multiply your burn rate number by 6. Your goal is to have an emergency fund. A fund that protects you. Your monetary health bar.

Handling Your Money

You are now tracking your income. You know your average monthly burn rate. You now have a strong emergency fund in place. What now?

Well… the fun part starts now! It is time to put your money to work.

Fourth Goal: Pay yourself first! Every month, you must follow through on making sure you give yourself a specific amount of money that you will deploy into assets that will work to make you more money. Calculate your average monthly cash flow.

Your monthly cash flow is the money that is left remaining after you deduct all of that month’s expenses into that month’s income.

For example, in the entire month of November, you earned $3000 and you spent $2100. The cash flow for that month is $900.
Note: Personal Capital does a great job tracking this for you.

Now let’s say you decided that you will pay yourself $500 every month from your monthly income. You must stick with this goal! Stay consistent and always pay yourself first. If you do not have the $500 from the $3000 you earned, you most likely spent too much in that single month and you need to watch how you are spending. What I personally do is if I overspend and I am missing $100 on my $500 investment, I take the $100 out of my emergency fund to keep my monthly goal intact. Of course, next month, I need to make sure I replenish the $100 I took from my emergency fund.

You are wondering about the leftover cash. So you earned $3000, you spent around $2100 on your normal expenses, you dedicate $500 to your investments, what is the $400 cash for?

I call that the “cushion”. Let me explain…

Your monthly expenses aren’t always consistent. You might buy gifts for friends, buy coffee for a whole week while you repair your coffee machine, buy new clothing, treat yourself to a new gadget, the list goes on. This cushion is extra money that helps you from breaking your “pay yourself first” promise. At the end of the month, if you still have cushion money remaining, consider splitting the money into different budgets. Some go into your traveling budget, some go into your “new computer” budget, and whatever you have remaining is addition to your investment! You do what you wish with your remaining cushion money.

What I personally do is save 25% of the cushion money into my traveling budget (I have a separate savings account for this) and the rest of the 75% is additional investment money. My goal is to reach financial independence as quickly as possible so whatever helps me invest additional money, I will take that route.

Build Your Wealth

There are many different assets you can buy with your hard-earned cash, but to keep things simple, I am going to talk about the big daddy of them all… the stock market.

It is now easier than ever to start building your wealth in the stock market; unfortunately, a very large majority of Americans do not seem to understand the stock market. I recommend watching this Netflix’s Explained video that gives a solid explanation of what the stock market is, its history, and how you make money from it:

Ready to get started? I recommend beginners to sign up to Robinhood. I personally use it because I love their User Interface and they keep it simple. It is very easy to buy and sell stocks with this platform.

Here is my referral link: https://join.robinhood.com/alexc2371
(If you sign up under my referral link, we both get a free random stock! Win win!)

There are two ways to earn money in the stock market:

Stock appreciation and dividends.

Stock Appreciation

When you buy a stock in a company, you own a piece of the company. You are officially a part owner. Congrats!

You buying stocks from a company shows you are willing to invest into it because you believe that this company will grow into bigger and better things in the future.

Which means, the value of your stock will grow. As the stock price goes higher, you have the choice to sell off your stock for that sweet sweet appreciation profit. Or, if you truly believe the stock price could go even higher, you hold onto it some more and wait for a better time to sell it off.

Dividends

The #1 reason why I love investing in the stock market. The one thing that truly opened my eyes to investing in the stock market.

Dividends are a sum of money that is paid regularly, typically quarterly, by a company to its shareholders out of its profits and/or reserves.

There are thousands of matured companies that pay dividends to their investors that simply hold onto the shares of their company. That’s all you have to do. Buy up shares of a company that pays dividends and every quarter (or month), they will pay you a certain amount depending on how many shares you own in that company.

Dividends are what is considered “passive income”. You do not have to work at all for that income. You park your money into stocks on companies you believe in and these companies do the hard work to make sure they continue to expand and profit so they make their investors happy by handing out dividends and increasing the payout every year. That’s right, you even get RAISES on dividends, depending on how well these companies are doing. Make sure you pick the right companies. 🙂

I have a stock portfolio with Robinhood and I call it my Freedom Portfolio. This is the portfolio I’ve been aggressively investing into to buy up shares of companies, purely for the benefit of earning dividends every month, to reach my ultimate goal of financial independence. I want to earn enough dividends every month so that it covers the cost of all my expenses (monthly burn rate) and provides me with additional cash for safety / cushion.

In November 2020, I received my biggest dividend payout: $209.92

Imagine waking up in the morning and you see these notifications on your phone:

I did not do anything to receive those dividends, other than buy up shares with my saved cash and let those companies do the work. So you might be asking, “Wow, $96.71 in one day… what did you do with that money?”

Now here’s my thought process and it should be your same thought process, as well. Do I really need that money? Sure, I have the option to put my Robinhood debit card into an ATM and pull out $96 in cash that I woke up to and spend it on a brand new pair of sneakers. Just the thought that I am practically getting these sneakers for free is just so appealing…

Well… I’m not going to do that. I am going to use that money to buy more shares.

And that, ladies and gentlemen, is how you build your wealth.

I’ve stayed consistent with investing a certain amount every month and reinvesting all the dividends I’ve received into stocks. I’ve been slowly increasing my holdings, knowing that if I stay the course, I will build a big enough portfolio that pays me monthly dividends that will cover the cost of my living. That’s why investing is powerful. That’s why I love dividends.

That’s why you need to take this seriously because using money as a tool to unlock your freedom is better than living in a rat race where you just keep consuming most of the money you are making and having to be forced to work at your job for 3-4 decades until you physically can’t do it anymore. Don’t get me wrong, I love my job and I wouldn’t mind working that long, but I love imagining that someday I will have the freedom to decide if I want to keep doing what I am doing or go into something else that I am more passionate in and never worry about money being the deciding factor. If I get tired of working, I can retire far earlier knowing that my portfolio is giving me enough dividends that I can live off it without ever touching the principal.

Conclusion / Material

Tin-foil hat time: I truly believe that the reason why schools do not teach basic personal finance is because they want you to be groomed into being worker ants that consume, consume, consume. That’s how companies become richer. They benefit when everyone is not saving and using their money properly and they benefit when they can keep their valuable employees working for them for 30-40 years. Don’t be that person.

Funny thing is that since learning this a couple years ago, I have not really noticed much of a difference with my lifestyle. Yes, I am a lot more careful with how I spend my money, but to KNOW what you need to do with your money is such a powerful feeling. You have full control of your money and what needs to be done to build your wealth.

If you’d like to start learning about dividend investing, I highly recommend this video course on Udemy:

https://www.udemy.com/course/how-to-value-dividend-stocks/

It covers exactly everything you need to know about the stock market, how to properly invest into dividend stocks, things to keep caution on, and a lot more. I personally went through this course and it was great learning all the basics. It is worth paying for a course because you are investing in yourself.

If you do not want to pay for a course, you are welcome to follow an amazing Youtuber that I personally follow:

https://www.youtube.com/channel/UCbta0n8i6Rljh0obO7HzG9A (Joseph Carlson)

I’ve learned so much from this guy and I recommend starting from his first video and binging the rest. If you do not get addicted in investing after watching, I don’t know how else I can convince you.

I will continue to add more personal finance articles on my blog that will go into specifics on investing, saving money, and much more. After all, we are all waiting for this COVID vaccine to come out so I can get back to travel photography.

Happy investing!

Want to learn more about the dreaded rat race to further motivate you to be better with your finances? Here are a couple videos: