Review Of Four Pillar Freedom's Book "Elements Of Freedom"
“Think of money as a tool you can use to buy your freedom, which will ultimately give you the means to live a rich and meaningful life on your own terms.”
Zach’s first book “Elements Of Freedom” was launched May 27th.
The personal finance blogger community is connected and extremely supportive of one another, so when Zach offered a sneak peek of the book I jumped at the chance to get my hands on it and to offer my thoughts.
The blog Four Pillar Freedom was a huge inspiration for starting my own blog journey, and I’ve read all Zach’s 600+ blog posts (twice!).
Zach also hosts the great site Collecting Wisdom, which offers the best personal finance articles around the web. If you want more followers for your own blog, start sharing your own posts on his site.
1) The field of psychology has identified three big things that make people fulfilled and happy: (1) freedom over their time, (2) mastery in a field of work they find meaningful, and (3) strong relationships & connections with others.
2) If you can buy (1) your freedom, you can gain the ability to (2) pursue work you find meaningful and (3) spend time building meaningful relationships.
3) The best way to buy your freedom is to gain control over your finances. The more financial flexibility you have, the more you have the ability to control your time and say “no” to a work situation that you find meaningless and time-consuming.
This book is organized into four pillars, which form the inspiration for the name Four Pillar Freedom:
Pillar 1: Philosophy – Identify your “why”
Pillar 2: Psychology – Reduce spending
Pillar 3: Work Ethic – Increase income
Pillar 4: Finance – Grow wealth
Why are you searching financial independence?
I guess that since you are reading this blog, you somehow want to get out of the rat race.
Your reason may be different than mine, but we both want to be free.
Free to spend our 168 weekly hours excatly as we want it.
Unfortunately, far too many people don’t have completely freedom over their time.
That’s because so much of it is spent getting ready for, commuting to, sitting at, commuting from, and unwinding from a job they likely don’t love.
Thus, the total time spent involved in work-related activities in a typical weekday is likely closer to (1 hour getting ready + 1 hour commuting + 8 hours at work + 1 hour winding down) 11 hours per day.
Assuming you sleep 8 hours per night, that leaves 5 hours of free time each day during the week.
For many people, this 5 hours is spent on household chores, grocery shopping, running errands, and all of the other small tasks that come with everyday living.
The solution is to buy freedom
You need a source of income to survive.
We all need income to cover our lifestyle expenses: housing, transportation, childcare, internet, utilities etc.
But in the western world most of us spends way to much on unneccessary items.
How much do you really need to reach financial independence?
It depends on how much you spend.
Let’s make an example:
Income after tax: $80,000
Starting amount: $0
Interest rate: 7 %
Using the 4 % rule it’s easy to see that it takes 15 years to reach financial independence with the assumptions above.
In other words: If you invest $40,000 for 15 years you will end up with 1 million dollars.
If you spend $40,000/year you’ll have to work 15 years before you eventually retire.
Any level of income can always be cancelled about by an equally high level of spending.
This is why it’s important to keep your spending at a reasonable level.
The less you spend, the less you need to save and earn to gain your freedom.
Remember the example where you were earning $80,000/year, but you spent $40,000/year.
What if you reduced your spendings from $40,000/year to $25,000/year?
You would reduce your time to financial independence from 15 to 8,7 years!
Look for yourself in the figure below.
However, the end goal isn’t to spend as little as possible, but rather to spend the right amount on the right things.
You should be on a mission to maximize the joy you receive from your expenditures.
Let’s dig into how you can reduce your expenses.
Reduce Your Spendings
According to the most recent consumer expenditure report from Bureau of Labor Statistics, the average consumer unit spent a total of $60,060 in 2017.
Here’s the breakdown of that spending:
As you can see housing accounts for 33 % of total spending.
Housing, transportation, and food alone account for 62 % of total spending.
So, if you can get a grip on these big three expenses, you’ve largely figured out how to keep your spending to a reasonable level.
As Zach writes in this post: “The most powerful tool I have come across that has drastically reduced my expenses is practicing gratefulness”.
Gratefulnes isn’t meant to deprive you of the stuff you want to buy, it’s meant to make you aware of how fortunate you are and how you probably have far more than you already need.
Questions you should ask yourself to optimize your expenses
Is it possible for you to live in a smaller house?
Whether you choose to live in a small or large home, you’ll adapt to it surprisingly quickly. This is why it’s important to only buy as much as you need.
Can you eventually move to a cheaper town?
Do you really need the newest and fanciest car?
Just as you will adapt to your home surprisingly quickly no matter how large or small it is, you will also adapt to your primary vehicle surprisingly quickly no matter how new or flashy it is.
Is it possible to bike to work instead of using a car/metro?
This is win-win.
You’re both reducing your expenses and you get in a better physical shape.
Do you have to eat out three times a week?
Food expenses tend to be the third largest expense for most families, which makes it the third and final “big” expense to keep an eye on.
By cooking most of your meals at home, you don’t have to feel guilty when you do choose to dine out for group gatherings or special occasions.
Remember, the goal isn’t to spend as little as possible on food, but rather to spend the right amount on the right occasions.
The easiest way to reduce spending is to realize that most of the stuff that brings you joy is free – family, friends, creating things, and spending time in nature.
There is a limit to how much you can cut your spending.
There isn’t, however, an upper limit on how high you can increase your income.
Generally speaking, there are four ways to increase your income:
1. Increase your salary or hourly rate at your day job.
2. Use income from your day job to buy assets.
3. Build your own assets.
4. Provide a service.
The book is loaded with tips and tricks to increase your income.
Here I’m gonna touch on a few of my favorites from Zach’s book.
Increase your salary or hourly rate at your day job
Do you want a raise at your current job?
The only way to get it is to ask for it.
Your manager wont automatically give it to you.
Those who asks for a higher salary has naturally higher probability to get it compared to those who remain silent.
Check out this detailed guide (7000+ words) I used to increase my salary 40 % in three years here.
Not possible to increase your salary at your current job?
Apply for a new job.
If a company rejects you, you’re in the exact same place you were before you applied.
If they offer you an interview, you gain a chance to land a new job with a higher pay.
Use income from your day job to buy assets
If you want to have freedom over your time, you should buy income generating assets.
Assets are things that pay you simply for owning them. Examples include stocks, bonds, REITs, websites, or anything else that puts money in your pocket simply for owning it.
For most people I would say that this advice is the most important for reaching financial independence.
As Zach writes in his book: “Suppose you earn $4,000 per month after taxes. If you use $2,000 to buy shares in a stock index fund with a 3% dividend yield, you will get paid $66 each year just for owning those shares. That’s $5.50 each month.
Now, instead of earning $4,000 per month, you will start earning $4,005.50 per month. The more assets you own, the more dividends you’ll receive. If you continue to buy assets each month using income from your day job, your monthly income will continue to increase”.
For every month your wealth will increase due to compound interest.
Check out the figure below and Four Pillar Freedom’s great article to understand more of the concept about compound interest.
Investment returns matter most when you have a significant amount invested.
In the early years, it’s unlikely that you have enough money invested for returns to move the needle. In the later years, however, investment returns matter a lot.
Notice for example how investment returns account for 86 % of net worth growth when you move from $900k to $1 million (assuming $10k annual savings, 7% annual investment return).
The fourth pillar is about wealth building.
This part is so extensive and good that it’s worth reading the book alone only because of this chapter.
When you’re able to cut your spending and increase your income simultaneously, the natural result is an excess of cash.
Ideally you want to put this excess of cash in places where it can grow all by itself.
But where do you invest it?
There are different opinions on this.
Both my and Four Pillar Freedom’s advice is to stick with index funds.
Research has shown that in the stock market, a handful of stocks experience astronomically high returns over time.
Your odds of picking these stocks are slim.
Luckily, you don’t have to pick them.
You can invest in low-cost index funds that hold hundreds of individual stocks and naturally capture the returns of the massive winners.
For the average investor, index funds offer the following advantages:
-Index funds minimize risk while maximizing diversification.
-Individual stocks can (and do) go to zero while index funds never have before.
-Index funds outperform nearly all active investment strategies over the long haul.
Living Like A Student Has A Massive Impact On Wealth
The amount you spend in the early years of your life sets the psychological bar for how much you think you should spend in the following years.
If you only spend $20k in your first year out of college, then spending $36k per year a decade later will seem like a nice upgrade.
Conversely, if you spend $36k in your first year out of college, you’re setting the bar much higher for what is a “normal” amount to spend.
Each dollar that you save and invest in your early years has the ability to compound for several decades.
And while compound interest won’t make you rich in the short-term, it has the potential to generate incredible wealth over the course of several decades.
To understand this, look at the graph below.
By saving 50% of his income each year, Ralph could become a multi millionaire over the course of 30 years.
By contrast, if he only saved 10% of his income each year, he would accumulate less than $500k over the same time horizon.
The financial benefits over the course of the years are tremendous.
Zach’s book “Elements Of Freedom” is a great book if you want to take control of your financial situation.
The book gives you loads of tips on how to reduce your spendings, increase your income and how you should invest your money.
The book even gives you the right philosophy mindset about financial independence, and in my opinion that’s why the book (and the blog) is such a huge success.
You can read everything about financial independence, but as long as you don’t change your thinking about the concept, you wont change.
Because, why are we even searching for financial independence in the first place?
I think angel investor, Naval Ravikant describes it best when he said:
“The purpose of having money is so that you don’t have to be at a specific place at a specific time doing anything you don’t want to do.”
If you’re serious about financial independence and have a long investing time horizon, I would definitely give the book a try!