THE SIX STEPS THAT GOT ME TO FINANCIAL INDEPENDENCE BY 42—WITHOUT BEING ANNOYINGLY FRUGAL

The Math Behind Buying Used Cars Is Amazing

If you buy used cars consistently, you will wind up with hundreds of thousands of extra dollars in your life after a couple of decades.

Say you buy a used car for $10,000 rather than buying a new car for $50,000. This might sound like a dramatic difference, but I see people all around my neighborhood (which is a normal neighborhood) driving $50,000 cars. I can guarantee you that about 90 percent of these super fancy cars were financed.

That $40,000 difference would require you to earn roughly $50,000 at a job in which you are in the 20 percent marginal tax bracket for federal taxes. For many of my readers, it would require even more than $50,000 because they are in a higher marginal tax bracket than 20%; they also often pay state taxes.

How many months of work does it take you actually to save, after taxes, $40,000. For anyone not making above $500,000 per year, this is a meaningful amount of money. Where else can you make a tweak to your lifestyle that boosts you financially so quickly for so little loss?

Using this calculator, we can quickly figure out that $40,000 compounded at 7% (assuming the savings was invested and earns a decent rate of return) for 25 years yields $217,097.31. And for someone who buys a new car every few years to shift over to holding onto a used car for ten years or so, the math would skyrocket even higher over 25 years--to well above $500,000 in savings. I suggest you put as much of the savings in an IRA if you are going to invest it in the market so that you minimize taxes on the growth. How many kids could you get through college with that money?

The key reason people don't want to buy used cars is status. Somehow we have gotten into the habit of signaling our success in life based on the fanciness of our cars. Honestly, this is pretty hilarious if you think about it. It's just steel, plastic, and leather…. If that's your thing, have at it! For the rest of us, we are going to build such a massive financial buffer that we have way more flexibility in our lives.

If you feel that your social circles won't allow you to get a fairly modest used car, then at least buy whatever you are going to buy a couple of years old with low mileage. No one will know the difference. And I encourage you to think hard about whether you really need to conform. My sister lives and works in an affluent area. Her colleagues are driving Teslas, Range Rovers, etc. She is driving a 15-year-old Honda Accord (it looks and runs great). She takes a lot of flak from her colleagues about her car, but she holds the line. Oh yeah, she could probably retire right now and never work again if she wanted. Wonder what her colleagues' finances look like….

I don't know if you are the same way, but I actually find owning new cars sort of stressful. For those first few months, I'm sort of worried about scratches and dings or little spills inside the car. When I buy used cars, even those in quite good condition, I'm way more mellow about this and just use the car for what it is--a useful tool. So buying used may actually cause less angst in your life.

Oh, yeah, keep that car you buy for a long-time. Like eight or more years….

Step #5: Don’t Try to Purchase Status - Or At Least Be Clever About It

The urge to signify success and attractiveness is quite human and normal, in my opinion. Yes, people can blow it way out of proportion and become obsessed with their Instagram accounts--modern day incarnations of Narcissus, mesmerized and trapped by our own reflections. But I'm not talking about that. I'm talking about just being cool and successful and someone people admire and want to hang with.

The problem with purchasing status is simple: it will slow down the speed with which you accumulate assets, build an emergency fund, then a financial buffer, then the life of your dreams. Not good.

Strategies to Help You Project Status While Building True Wealth

• Get in shape. In modern western countries, nothing conveys success like being healthy and in shape. Indeed, if you pay close attention, class markers are increasingly breaking down along those who are taking the time to eat well, avoid cigarettes, and keep themselves in shape and those who aren't. It is actually quite inexpensive to eat well. I'm not talking about Whole Foods, I'm talking about brown rice, beans, squash, salads, etc. Simple foods, that will keep you fit and healthy.

• Be a bit alternative in style. A ten-year-old Patagonia fleece on someone who is in shape conveys success and a certain class better than a fancy suit. Similarly, running shoes and well-fitting jeans are going to do the trick just fine--no need for $300 suits. Check out David Brooks Bobos In Paradise if you don't believe me, a hilarious book by the way.

• Be confident. This should probably be the first bullet. At the end of the day, most people will go right into sync with thinking about you as you think about yourself. If you project confidence, joy, and a sense that you value yourself, so will others.

• Be super well-informed. When you know more about current events, investing, your work responsibilities, or whatever it is you are into, you naturally take the pole position in situations and people respect you. Basically, be a true expert at what you are doing.

• Related to several of the above bullets, be so good at what you do and so confident (without necessarily being arrogant) that you just don't care what others think of you much because you just know you have it together. At this Zen level, you end up in charge because you just know you should be.

For your purposes, the key is to avoid trying to purchase status and coolness. It's just going to slow down your financial success way too much…..

Step #6: Avoid Bubbles and Fad Investments

A crucial skill as one works towards financial independence is identifying and avoiding bubbles. Spotting bubbles is not as easy as one might imagine, but here are a couple of indicators I have noticed over the years:

Massive hype around an emerging technology that is reshaping society. Yes, the changes wrought by such a technology will likely be real. Nevertheless, the stock of any particular company may collapse during the process.

Acquaintances with only passing interest in technology or investing become irrationally excited about the trend.

The press trumpets the technology and companies as earth shaking; the press sees no end to the trend (whatever it is). (The press is in reverse mode when certain sectors or commodities collapse.)

There is a book that will help you learn to spot bubbles. Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds explores speculative manias that transfix entire societies.

A Substitute Step: Invest in Real Estate

Did you notice something that was missing? Real estate. Yep, I have never owned my own home or condo. In fact, the longest I've lived anywhere since I graduated from college was Croatia--for three years. I was just moving too fast to purchase real estate and then try to deal with managing renters when I moved thousands of miles away. The great thing is that you could easily substitute real estate for one or more of the above moves. In particular, you could substitute being savvy about real estate for being an expat (which is not going to be a common choice). If so, I suggest buying as large an apartment building as you can pull off as soon as possible and manage it yourself initially. Or, buy a house and the have roommates. Or, buy a triplex unit, live in one, and rent out the other two.

Final Thoughts

So there you have it. The six key steps that allowed me to "retire" at 42. I was frugal, but not nightmarishly so. It's also crucial to stay healthy and avoid debt like the plague.

P.S. I didn't "retire." I plan to keep working forever....