A Simple Guide to Financial Independence
Tech industry workers are amazingly lucky. Great income with a (generally) healthy job market? It's time to take advantage of that luck.
Disclaimer. I don’t provide financial advice, and I’m not a financial advisor. I’m providing information on what I’ve done, but this is not intended to be advice on what you personally should do. There is inherent risk in any financial decision. If you’re interested in taking control of your life and finances, I have some book recommendations here. I also don’t know your personal situation, so any opinions I state may or may not apply to you personally. In other words, YMMV.
Welcome to the Scarlet Ink newsletter. I'm Dave Anderson, an ex-Amazon Tech Director and GM. I quit my job at the peak of my career because I felt like it, and my family could afford it (see article below). Each week I write a newsletter article on tech industry careers, and specific leadership advice.
This week will be a little different. I’m going to discuss personal finances when you have a tech industry career. More specifically, how I think about personal finance, and why my family was able to become financially independent when I was 40.
Personal finance is not terribly complex, in my opinion, but that’s true of many things in life. When my car makes a bad noise, I think, “That rattling thing is… rattling.” Our lives are filled with enough complexity that we’re liable to ignore as many things as possible.
Except that there are scarcely any things in life which are more important than money. What are the big things in life? Your health. Your family and friends. Your money.
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If I decide to ignore how cars work, it might cost me a few thousand dollars in repair costs over the life of my car. If I decide to ignore how money works, it might cost me literally dozens of years of my life in the office.
My audience is mostly tech workers. Even the lower paid workers in the tech industry tend to make a good amount of money. If you’re making minimum wage and barely covering your monthly bills, I wish you the best, but this article is not for you. I’m also in the United States, so your country may be in a different situation, so take what I say with a grain of salt.
My goal is to make you think a little bit. About what money means to you, why you should care at least a little bit about how personal finances work, and perhaps help you step one foot onto the path towards long term financial health.
What is Money
Money is a representation of value. You’re probably familiar with money. But an important part of personal finance is philosophical, so let’s briefly talk about how to think about money.
When you get money, it sits around in a bank account or a safe or under your bed, until you use it for something. There are two ways to use money.
You can consume it
You can exchange money with other people or organizations for things of value, like electricity, pizza, fancy shoes, a Tesla Model Y, or your mortgage. This money exchange is also called your expenses (a term I’ll talk about later).
Some things you consume are gone quickly (consumables) like pizza / gasoline / internet, and other things are various lengths of durable like cars / houses / Hoka running shoes.
Almost all durable things you consume decrease in value over time. Cars famously lose 10% of their value when you drive off the lot. Computers and phones slowly become obsolete. Due to my running volume, my shoes are worthless 6 months after I buy them. These durable things are often called depreciating assets. They’re assets which decrease in value over time.
A house is a special case durable asset because it is frequently an appreciating asset, as it goes up in value over time. I point out this because I’m going to mention it later.
You can invest it
You can use the money to make more money. Investing can mean a wide variety of things. Many people’s portfolio (basket of investments) include more than one category of the below.
You can let someone borrow your money, and if things go well, they’ll later give you back your money plus a bit more. This is what bonds are. Usually, the rate you get is inversely related to risk. In other words, the US government might pay you 3.5% to borrow your money because we’re pretty sure they’re good for it. Joe Handyman flipping houses in California might pay you 15%, but that’s because your money is at serious risk. For the most part, bonds are considered the low return but stable portion of your investment portfolio.
You can purchase parts of a company. This is what stocks are, a representation of company ownership. You get the benefits of their long-term real estate investments, smart workers, future growth, and profits. When Acme Corporation conducts layoffs, and we complain about how they’re doing it to juice their profit margins, your stock investments benefit. And when Enron cooks their books, your stock investments suffer. The general way you make money from stocks is that you either get dividends (parts of their profits they return to the owners) and / or your parts of that company (stocks) go up in value, which you can sell later to someone else. For most people, stocks are the core element of their investment portfolio. Owning parts of companies has been a good thing historically.
You can also purchase assets which generate income. Mainly I’m referring to real estate. You can buy houses or apartments, and rent them out. This can work well, as long as you buy the right property, and have the right person managing it.
It can sit under your bed
Just a quick point to make. For various reasons I won’t explain in this article, all currencies are subject to inflation. This means that every year, a dollar is worth something like 95 cents next year. I remember seeing gasoline at 99 cents a gallon. What you need to know is that a certain amount of money buys less every single year.
Cash is generally safe in a bank account (not sure about your bed), but it is slowly eaten by inflation. Toss a 4-ytear college tuition into a bank account when your kid is born, and it’ll buy them one year if you’re lucky by the time they’re 18.
Every investment has an element of risk, but the reason people invest is that inflation is guaranteed. You are either subject to investment risk, or a guarantee that your money’s purchasing power will slowly disappear. It’s just that inflation feels less scary because that $10k in Chase will be $10k in 10 years. The subtle thing is that $10k will buy a lot less in 10 years.
What is Income
Income is temporary periodic payments of money you receive for your work. Usually, it’s an agreement with a person or company to sell a portion of your life (time) in exchange for money. I want to emphasize this point. You have a very limited life. It might feel like a long time when you’re young, but it goes away quickly. Every hour you spend at your job, you’re exchanging your very limited life for a certain amount of money.
I emphasize that it’s a temporary because you’ll retire someday. That date may be when you’re 65 or 70 or 40, but it’s temporary.
A quick mental exercise. Let’s say that you’re 25 years old right now, and you make $75k a year. You’re going to retire at age 65.
Many 25-year-olds will subtract their expenses from $75k, and spend the majority of the rest. Why? Because they view it as a river. A river doesn’t have a set volume, it has a flow rate. A city along the Colorado River doesn’t ask “how much river do I have left?”, but instead they calculate the flow rate of the river to determine how much they can take every year. And then they take too much because cities (like people) don’t think ahead.
Instead, I think it’s important to think of income more like an asset. If you work 40 years at $75k a year, you’ll make $3 million dollars in total. Your entire life.
If you have $75k a year forever, you might not think twice about buying a new laptop for $2k if you can afford it this year. If you have a limited amount of money ($3 million dollars) for the rest of your life, you might think, “Is this how I want to spend my limited resources?” Because every decision you make to spend means that you can’t spend on something else at another time.
And that’s a key point in my mind. If you view your income as a limited asset coming to you over a period of a few years, you might view spending differently as well.
Spending and Investing
Income is you exchanging a percentage of your time (your life span) for money. And money can be consumed, invested, or put under your bed.
This means that the money from your income is a virtual representation of your very limited life. When you consume your income, you’re exchanging your time for things. For example, electricity, pizza, or League of Legends skins. Those two pizzas for $48 you bought for dinner? It was an hour of your life exchanged for pizza.
When you invest your income, you’re exchanging your time (money) for more time in the future (more money). This is an important point, so I’m going to give you a math exercise again.
If you make $100k a year, you essentially make $50 an hour. Let’s say you’re frugal, and you save $10k by the end of the year. You invest them in stocks, and they make you 10% a year. That’s $1000 per year. Or another way of thinking about it, that $10k is making you 20 hours of free work a year. Interesting!
And by the way, that’s the core understanding behind financial independence. If you invest enough so that your “free work” covers your expenses, you don’t need your salary. Pretty cool.