Financial Enlightenment Part 4: The Missing Link to Financial Independence

The Prairie FIRE Canada family has been on this journey to financial independence (FI) for just over a year now. It started out with some tough lessons, restless nights, depression, and anxiety for the future. Now things are different. I am not embarrassed to say that before my journey to FI, I was ignorant (willfully so), naive, uneducated, and I made a lot of mistakes. Sure I had an idea about budgeting and saving for a rainy day, but there was something missing.

Financial Enlightenment

This post is the fourth installment of a five part series describing my path to “Financial Enlightenment.” Here is what I’ve written so far about my journey and experience:

**Click on each tab for more details**

The Financial Enlightenment of Mr. Prairie FIRE

I shared with you the hard work I did when it came to self-reflection, understanding my relationship with money, and discovering that I needed to change my consumer habits and mindset to an investor mindset.   Click here to find out more about my financial enlightenment

Net Worth: You Are the Ultimate Asset

In this post I covered the basics on what it takes to create and track your net worth. I also share with you my enlightenment on how you are the ultimate asset when it comes to building your wealth. Don't forget to invest in yourself! Click here for a full description of how to calculate your net worth

Budgeting Can Be A B!*¢h

I broke down the sometimes painstaking process of creating and tracking a budget. As the title suggests, sticking to your budget can sometimes be a B!*¢h. Click here for a full description of how to create and track your budget

In each post, I cover what I went through to move into a state of Financial Enlightenment. I suggest you take a read of each post to truly understand how each stage has influenced my journey and freed me from my ignorance around personal finance and helped me better understand myself.

Connecting the Dots

What I want to share with you next is how I connected the dots from what I have been learning from the FIRE Movement; specifically making the link between our day-to-day living (living below our means) and growing our wealth (collecting assets).

In the personal finance world, I was able to find tons of posts, podcasts, tips and tricks, and other resources focused on the dark arts of budgeting. I also found a smattering here and there about net worth and the importance of tracking it.

A budget and net worth are very important because they each have their function to guide you in understanding your finances.

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The key message in the personal finance world is that a budget will help you take control of your spending and prevent you from getting into debt. I agree, but the true purpose is to help you create room for SAVINGS (Income - Expenses = Savings)         Click here for a full description of how to create and track your budget
Your net worth is a snapshot in time of how well you are doing at building up your wealth. With enough snapshots you can get an idea of how well your wealth is growing over time (Assets - Liabilities = Net Worth).         Click here for a full description of how to calculate your net worth

The process of creating and tracking a budget and my net worth started me off on the right foot and helped me stick to my plan to reach FI.

The Missing Link

In my wild and crazy journey in discovering the FIRE movement, I was inspired to create and stick to a budget, and I began tracking my net worth over time. By doing this over a year, I discovered something that was so obvious that I think many bloggers and personal finance gurus take for granted.

I call it the “Missing Link.” What I finally discovered was that your net worth is totally savings dependent. The fastest way to FI is to manage your budget well and use your savings to either purchase assets or pay down debt (preferably both).

 

As the diagram above illustrates, your net worth is fed by your savings. Without it, you cannot move the wealth needle forward.

Savings Rate

The path to FI is solely dependent on your ability to save. A key concept in the FIRE movement is a term called “savings rate.” This is a simple calculation of your total savings divided by your total income within a period of time (e.g., monthly or annually).

For example, if your household has $100,000 coming in annually, and at the end of the year you are able to save $25,000, then you have a 25% annual savings rate.

Another way of putting it: for every $1 earned, $0.25 goes into savings.

Don’t Starve Your Net Worth – Feed It!

The biggest challenge for most of us is staying on the path of tracking our budget, reducing expenses, and maintaining or increasing a savings rate. What’s important is not to starve your net worth by getting caught up in the lifestyle inflation trap and trying to keep up with the Joneses. The best thing you can do is feed your net worth by increasing your savings rate.

The Big Picture

It took me quite a while to connect the dots and to get my mind right when it came to personal finance and getting my house in order. When it all came together it really allowed me to see the big picture. Our day to day living as a family has a direct impact on building our wealth and reaching financial independence.

The personal finance world does have it right. Budgeting is key because it gives you the ability to control your day to day living and create savings every month. What was missing for me was the reason to save in the first place and what to do with it.

During my first year, I’ve come to  understand that financial independence is mostly about controlling your spending, creating a good savings rate, and collecting appreciating and/or cash flowing assets. This collection is your portfolio. I no longer save just for the sake of saving to spend it all on things I like to buy. Instead, I save up money to convert into assets. You can do the same if you are able to connect your spending, stick to your budget, and track your net worth.

All the best dear reader, and feel free to share with me your thoughts in the comments or reach out to me personally on social media.

Sincerely,

 

 

Mr. Prairie FIRE