Teachers can reach financial independence and it is important that they do. Do you know why?
Every day that I pull into my schools parking lot, I take a deep breath, look in the mirror and smile. I know when I walk through the doors, 3 out of 5 days a week, I am going to run into someone that is burnt out and exhausted. They are frustrated, feeling defeated, and looking for something tangible to say its all worth it.
If I don’t take that moment and look in the mirror, its easy to get sucked into that negatively. It’s not their fault, they are fighting the good fight and feeling like they are losing. They aren’t. We aren’t. But, some days its pretty dark being a teacher. Especially when its dark when you get to work, dark when you leave, and we are in the midst of a pandemic.
I love teaching. I love my students. Teaching social studies to middle schooler kids is fun. It’s never an easy day, but it’s usually a good day once the kids arrive. But, I am not immune to wondering “is the grass greener on the other side?”
There’s plenty of days were this negativity gets to me, or I am negative myself. I find myself sitting down for lunch wishing I was in a corporate job where at least I would think I am getting better pay because I’d be such a great, valuable employee. Am I likely to ever leave teaching for a career switch? Nah… well, probably not. I did almost leave for a finance position at a small firm this past March. But I chose not to pursue it.
THIS IS POWERFUL. Knowing you can make a switch if you need is powerful. Knowing you are employable and would be fine if you left teaching is powerful.
That deep breath and the smile in the morning? That’s a moment of self-reflection and reminder that I could do it. Not only am I employable and know EXACTLY where I could go work, I also know I am in GREAT financial shape.
This is why financial independence is so important, not only for teachers but for everyone!
The Power of Financial Independence (FI)
Financial independence is powerful. It isn’t necessarily always a “door opener” but a “door multiplier.” It gives you more avenues and options to your life. It eliminates stresses and reasons why you can’t from your life. While it may not instantly make you a happier person, or get you into an amazing social group of friends. Financial independence (FI) allows a deeper lifestyle design and more control over your life.
Before financial independence you are often chasing the almighty dollar. You have to trade time and labor for money to trade for things you need or want. Unfortunately, a good chunk of those earnings gets taken by Uncle Sam. Some for basic living expenses. Then, for many Americans, debt repayment.
Financial independence is the state of having enough assets, a high enough net worth, or enough passive income streams to be able to feel free of financial stress and obligations. Financial independence may look different for different people. A general rule of thumb is that you have saved/invested over 25x your yearly expenses to reach financial independence.
“A general rule of thumb is that you have saved/invested over 25x your yearly expenses to reach financial independence.“
Teachmoneylife.com
This 25x rule is based off the 4% safe withdrawal rule. In its simplest form, if you can invest your assets and at 4% withdrawal rate you should be able to safely maintain your nest egg unless there is a major economic depression.
Others see financial independence as debt-free living. Having all your obligations paid off, and enough cash flow in your budget (and savings/investments) to weather the storms!
As teachers, we sometimes have a leg up on this 25x rule. If you are lucky enough to have a decent state-run pension fund that you contribute to and are going to qualify for, you might be cutting into that 25x more than you think!
Obviously, a pension can’t really be accessed early for retiring early, but it absolutely can count towards knowing where you stand for FI and retirement planning. A pension can reduce the amount of money you need to have invested prior to retiring in order to retire early if you choose to.
For example, let’s say you estimate your 25x expenses to be $1,000,000. If you know that you are only going to be retired early for five years prior to accessing your $2,000/month pension, you can assume that you’d realistically only maybe $600,000-700,000 while increasing your withdrawal rate for first 5 years. Or maybe you supplement your assets with a part-time job or substituting after retiring early.
Why Teachers need FI
As a teacher myself, I can attest to the difficulties of the job. It’s a rewarding calling but a demanding career. Teachers are asked to play the role of so many different people in their day-to-day jobs. The stress is high, society often blames them, and administration often doesn’t understand them or express their appreciation. Teachers have to find the small moments to celebrate and keep themselves going.
And this is why, in addition to a million other reasons, that teachers burn out. It’s why my walk into school each morning can become quite gloomy as I greet the teachers who had stress dreams all night, who graded until 2am, who got a bad evaluation from an admin who doesn’t get the classroom environment, and teachers who spent an hour last night with a disgruntled parent. They drove in this morning thinking of all the other things they wanted to do last night, the board games they wanted to play with their kids, the sports game they missed for a parent-teacher meeting, or the fact that they just now found their cold coffee mug from yesterday morning (still full, of course).
It’s a tough profession. It’s not for the faint of heart for so many reasons. But it can be easier.
Financial independence is not only a possibility for teachers, it’s a must. Let me explain how and why.
Teachers who reach financial independence, or are on the path (like myself), can be free of some of the day-to-day stresses that we all feel in life. By eliminating money stress from our lives, it makes the other mountains of emotional baggage easier to bear.
FI can also give a level of protection and security that even the coveted tenure cannot. It ensures a teacher that they can indeed walk away, or survive budget cuts, or retire earlier than planned. They can say NO. They can say no to extra duties. No to coaching, to tutoring, or to second jobs. Or to being on committees, or covering other teacher’s classes when they are absent. This power of NO significantly lightens the load AND the stress.
FI just packs in a ton of benefits to teachers.
Pension? With FI, you could build your own pension, or supplement your existing one so you can retire earlier. Want to get another degree or increase your credit hours? FI can make that a possibility. Contract cut back on your health benefits? Don’t worry, you are financially independent. New admin not going well? Switch districts and have a buffer in case you don’t land in a new position immediately.
What is there not to like?
You’ll feel free once you’ve made it out of the fog that is consumer, paycheck to paycheck culture.
Photo by Dziana Hasanbekava on Pexels.com
But How is it Possible? 5 Steps to Get you on the Way to Financial Independence
With a plan.
It’s truly that simple. You will need to make sacrifices, and it won’t be easy. But it is do-able for the majority of teachers. I am going to walk you through some steps to preparing your financial independence plan.
Step #0: Financial Independence Number and Your Why
You may not be able to get your financial independence number without knowing your expenses (step #1), but you may have a decent idea already what it will take. For a rough estimate, take what you THINK you spend and multiple it by 25x. This will give you an idea of roughly how much you will need to have invested to be considered FI with this rule of a thumb, and a spot to start planning from.
If your expenses are really high this will show you the importance of cutting back where you can to help reach your goal.
But, even before you start to plan for reaching financial independence, its important you have an idea of WHY you want to reach FI. It’s this motivating factor that will push you to make the changes you need. Don’t move forward without an idea of why you want to reach FI, and what you will do if you do reach FI.
Step #1: Track Spending
In order to reach financial independence you need to know what your expenses are. If you have no idea how much money you outlay each month, you are no where in the realm of financial independence. You don’t need to have it down to the last penny, but a good ballpark to start is important to getting in the right direction.
However, despite saying you should at least have a ballpark, that is the bare minimum, and realistically is not where I want you to stop. I want you to be ultra successful in this attempt. So, let’s really get our expenses down to the last penny for the 30, 60, or 90 days. Whatever you can feasibly do.
Try using an app like Mint, to help you track your spending going forward.
Without knowing your yearly expenses, its very hard to use the 25x rule and identify how to get there. So this step is a must.
Step #2: Set-up the Budget
Now, I am going to give you a basic run down on how to budget and why its important. But in all reality, this section, I want you to go over to Mr.JamieGriffin and check out his budgeting posts and if you want to definitely be successful, pick up his budgeting tools that you can find on his site as well. Once you’ve look over his site, come back and I’ll run you through our next steps.
The basics of budgeting are very simple. It’s knowing that you spending your money on and how much of it goes out to each category you set up. We break our budget down into two main sections- fixed expenses and variable expenses.
Fixed expenses are known amounts and dates at which you will pay for a service or product, etc. This includes our mortgage or rent, insurance, and cable bills. These costs rarely change, and often come on the same date each month. This are the easiest to plan for. Take them out of your budget first (essentials only).
Variable expenses are things you will spend money on at unknown times or known times, for unknown amounts of money. Sounds confusing- I know! But think of it simply, it’s things like groceries, gas, eating out for dinner, and shopping. There is rarely a set day you will make these expenditures, and you’re unlikely to spend the exact same amount each time. Some of these expenses can be curtailed when trying to save money.
Once you know what you spend and what categories you want to divide your spending into, now it’s time to allocate your money.
Step #3 Identify and Allocate your Income
The next step in this process is determining how much you make, both gross income and net income (before taxes and after taxes). Once you have your income numbers, we are going to use our monthly net income to make our allocation of money. BUT FIRST- a hidden step!
Step #3.5 Pre-Tax Contributions
Before you finish calculating your income and what your net income will be for the budget. Make sure that you have a plan for paying yourself first. Whether this comes in the form of pre-tax contributions to a qualified retirement account like a traditional IRA or a 401(k) or 457(b) or 403(B) or post-tax contributions to a ROTH IRA or 401(k) or to a taxable investment account, its your choice.
But its important you stop right now and figure out how and how much you are going to pay yourself first and create an automatic system that places that money in your account each pay period, or at least each month.
Pre-tax contributions will impact your net income less than post-tax, but you will have certain withdrawal rules, penalties, and the fact that you will need to pay taxes at withdrawal (unlike a Roth version). So, it’s important to factor this in now.
Ideally, you should be aiming for at least 15% of your income invested each month. So, play around with the numbers and figure out how much you can reasonably put aside and still have your expenses covered. Remember- we know how much you need (without trimming the fat) based off Step #1: Tracking your spending.
Step #3 CONTINUED…. Allocating your income
Once you’ve got your FINAL net income per month, it is time to figure out where that money will go.
The first thing we are going to do is allocate your income to ESSENTIAL fixed expenses. These are things you MUST pay each month on time. Debt, rent, insurance, and internet (if you work from home), are essential.
Next, we are going to allocate money to variable expenses that we need to survive. This is going to be the start of our survival budget.
In our survival budget, we are paying only our obligations and for things we need to survive at a bare minimum (not starving yourself- but no more 2am ice cream cones).
After we have our survival budget (write this number down somewhere- you may want it later), we can add the other expenses that aren’t exactly essential, but that we deem a priority and worthy of our money and time. This is where we can also add a bit more to certain categories like food, that we might have cut back a bit in our survival version.
What you really want to focus on, is small changes to your intial budget based off your spending that you tracked. If you felt you wayyyy over paid on eating out last month, let’s say $400, try cutting it back to $300 next month. This will avoid super shocking your system (if you don’t want to! But sometimes I suggest doing exactly that!) and it will help you create more of a gap between income and expenses. Find what is left over after you allocate your money (hopefully there is some- unless you aggressively paid yourself first).
Step #4 Cash Flow
Now that your budget is finished, we need to identify our cash flow, and hopefully, its cash flow positive.
Cash flow is the difference between your net income and your monthly expenses. It is what is left over after all is said and done.
Cash flow is going to be our main tool to helping us reach financial independence. We are going to want to stretch out our cash flow as far as we can. Because cash flow is going to correlate with our savings rate and paying down debts (if applicable).
Step #5 Pick your Route
Obviously financial independence is a complex beast. There are dozens of different ways to reach financial independence. Once you’ve tackled steps 1-5, you are already well on your way if you stay consistent, stay focused, and are in it for the long-haul.
Your route could be one that involves investing in a S&P 500 ETF with 15% or more of your remaining income into taxable investment accounts.
It could be that you start an online or physical business that you scale up to increase cash flow and create an income stream that could sustain FI (or use the cash flow to buy other traditional assets).
Maybe you start a rental property empire. Buying up more and more doors until you’ve amassed a “passive” income that you consider reaching your FI number.
However you do it, its just important that you start. Waiting around or hyper analyzing for the best possible route isn’t going to get you there faster, if at all.
My Plan for Financial Independence
My wife and I are actively pursuing financial independence ourselves. We aren’t really attempting to supercharge our pursuit, but are more or less cruising to it. We have a goal and are consciously moving ourselves towards that goal through budgeting, cash flow, investing in index funds, and avoiding lifestyle creep.
Now that we have our first child, and another one on the way (YES- I said it, for the first time in writing!), we aren’t as willing to trade our time for pay that isn’t worth what we would be sacrificing. If a part-time job or side gig isn’t giving us $20 per hour or better, it’s not exactly worth the trade off currently.
Our goal for financial independence is:
- Reach a savings rate of 35% of our gross income
- Have a 6 month emergency fund
- Pay off all student loan debts
- Have 15+ years of teaching (25% of final average salary in pension)
- $500,000 in our Retirement Accounts
- $20,000 in additional income streams per year (optional- but optimal!)
Right now, we are just trying to get net worth positive right now. We’ve made $30,000 in positive progress with our net worth (not counting our cars!). Our current plan in action is as follows:
- $500 per month in traditional IRA (invested in $VTI)
- $25 per month in our son’s 529 (invested in low-cost target date fund)
- $250 per month in my 457(b) plan (invested in low-cost target date fund)
- $500 per month in emergency fund
- $200 per month in our secondary savings account (home improvement, travel, bonus emergency fund)
- $140 extra per month on our home’s principal
So far in 2020, we’ve seen our investments grow significantly. Some timely investing (all luck) with our son’s 529 has shown a 50% return since opening in 2018. My wife’s IRA is up 17% on the year. My 457(b) plan is only up 8% YTD.
In a future post I will lay out our specifics more clearly, as we are making some adjustments to our plan as we speak. Stay tuned and subscribe to our newsletter to stay up to date on our newest content.
Conclusion
In conclusion, financial independence is possible for a teacher. It is 100% something that 100% of teachers should be striving to achieve. In a career where we invest so much into others. It’s very important that we invest in ourselves and our future.
Just remember, there is single, only way to become FI. There are multiple and you get to choose your path. Don’t wait around for the best path to present itself. Just get started now.
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