This is the fourth of a five-part series about the “stages” of personal finance. First, I described the zeroth stage of money management, in which I was fumbling in the dark, spending compulsively and accumulating debt. Next, I described the first stage, in which I finally saw the light and began to repay my debt. Last week, I shared the the light at the end of the tunnel: what happened after my debt was gone and I began to save. Today, I share the current state of my personal finances as I begin to explore the third stage of personal finance.
In February, I wrote that I was entering the third stage of personal finance. The first stage, I said, had involved repaying my debt and learning to control my spending. The second stage focused on building savings and developing smart money habits. Now that I had mastered these two steps, I wondered aloud what came next.
Several readers quickly noted something I had forgotten: The ultimate goal — the eventual fourth stage of money management — is Financial Independence, the condition of having saved enough money that you can do whatever you choose. When you reach Financial Independence, it doesn't matter whether or not you elect to keep working — you have enough saved and invested to follow your dreams.
Once I remembered that my ultimate goal was Financial Independence, the purpose of the third stage became clear to me: it's the long, slow process of utilizing everything I've learned in order to enjoy life while building wealth so that I am truly financially free.
Although I now know my destination, I'm still a little in the dark about the journey. All I know is that what I've been doing seems to work, so I'll continue down this path. Here's my current roadmap:
- Kris and I have refinanced our mortgage, and we continue to make accelerated payments on it. We've weighed the arguments for and against this, and have concluded that for our circumstances and our goals, we want the house paid off as soon as possible.
- I'm continuing to contribute to my retirement as much as I possibly can. It's my top priority, and as soon as I've paid my taxes, I'll bring my contributions up to date for the year.
- I use credit, but I use it responsibly. I never buy anything for which I could not pay cash. I don't buy frivolous things with credit. I pay my credit card in full every month.
- When I spend, I spend consciously. I've learned to prioritize things. Television isn't important to me, so I don't pay for a deluxe cable package. Instead, I use that money to fund my comic book habit. Making choices like this is the heart of frugality: spending on the things that are important while cutting back on the things that aren't.
- I'm saving for my Mini Cooper. I still haven't decided whether I'll buy new or used (again, I know the arguments for both choices), but I do know that I'll pay cash when I purchase it.
- At the urging of several GRS readers, I've begun to explore charitable contributions. I was not raised with an ethic of giving, so the notion is difficult for me to embrace. But it's something I'm trying to explore. I find myself more interested in personally providing financial education, though. I feel like this is Good Work over which I have more control
- I continue to manage my business. That's right: Get Rich Slowly really is a business, and as a result I have many business decisions to make. How can I increase my income? Which advertisers should I accept? Do I lease an office so that I can separate work from home? What about hiring an employee to help me with research and e-mail? I think about all of these things and more.
- I find that I'm much more interested in the stories of others who have been successful. It took me a while to get comfortable with the notion, but now I love to take people to lunch to pick their brains. One thing that's intriguing about the third stage of money management is that concepts and skills that used to seem hopelessly out of reach now seem like distinct possibilities.
- And, of course, I'm allowing myself a budget for fun. During the first two stages, I tightened the screws on my spending. I pinched pennies. I haven't become a spendthrift by any means, but I now allow myself a certain amount for “wants”. I don't come close to spending what I set aside for this, but that's fine. Just knowing that it's there, that I've given myself 30% of my income to spend on things that bring me joy allows me to not feel guilty for indulgences. I know that I can afford them.
These are the things I'm doing now, but there are others I'd like to do in order to help me along the path to Financial Independence.
For one, I plan to learn more about investing. Right now, I'm putting my money in index funds. But over the next year I plan to spend a lot of time reading books and speaking with smart people, trying to discover other options. It may be that I decide index funds are the best choice for me. I want to explore my options, though, to see what else is out there.
So, to answer my own question, “what next?” is more of the same. It's difficult to argue with this steady progress that I've made. I'm willing to continue down this path for many years to come.
I feel extraordinarily fortunate to be in this position. Just five years ago, I was deep in debt and struggling. Today I am debt-free (except for the mortgage), have a job that I love, and make a good income. I've learned to curb my urge to own things, and have even purged some of the stuff I bought before. I have a great wife, a great life, and a great future.
I do not yet have Financial Independence, and I may never reach that goal. That's okay. I'm grateful just to have reached this third stage of personal finance.
Note: This series is intentionally less “polished” than most articles at Get Rich Slowly. It's a chance for me to think out loud, to explore the stages of personal finance with you, the readers.
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.