How to Make Financial Independence Inevitable

People say you have to do this and do that to get to financial independence. But if you're a high school student, undergraduate student, grad student, or have just entered the workforce (<5 years), it is far more important to focus your efforts on not doing certain things, rather than doing things that favor financial independence, like earning more money or engaging in a side hustle.

The truth of the matter is that the material-minded world is so behind in their progress that simply focusing on avoiding their common mistakes will already put you far ahead of the population. Fortunately for you, the list of mistakes is quite small, and also very easy to avoid -- as long as you're aware of every single one of them. Avoid these nine common pitfalls, and you too can have a very solid chance of becoming financially independent in less than 15 years of working. It might even become inevitable if the markets act in your favor.


1. Do not spend more than 50% of your after-tax income

This is the most common mistake people make. Their lifestyle doesn't match how much they earn, or worse, their expenditure is larger than what they earn which is unsustainable. If you save and invest 50% of your income every single year, you will become financially independent in roughly 18 years. So if you start working at 22, that means you will be free by 40. A lot of people today aren't financial free by the time they hit 65, so you're already 25 years ahead of the curve. Think of your job (i.e. financial dependence) as prison, and financial independence as early parole for being a good, model citizen and spending far less than you earn.

2. Do not graduate with more than $20-30k in college debt (unless you're planning to become a doctor or lawyer)

You have to perform a cost-benefit analysis of your degree before you agree to pay for it. Contrary to popular opinion, many degrees are useless in the professional world and do not constitute as an employable skill. I can teach you random stuff as well inside a degree and charge you $100k for it, which is what is happening in America today. Think of a degree as something you would also buy at a supermarket: would you pay a thousand dollars for a toaster?

If you graduate with more than $30k in debt, it will become incredibly hard for you to become financially independent in less than 20 years since you're already starting off from inside a hole. Besides, you will also be liable for all the interest payments on that loan which is a drag on your savings.

Mrs. Frugal Hacker and I went to college in Canada, where education is heavily subsidized by the government, allowing us to graduate debt-free. It's really important to graduate nearly debt-free so you don't end up wasting time and money repaying debt during your prime working years. Your prime working years (i.e. your 20s) should be your prime saving years, not your loan repayment years at the prime rate.

Did you know that Americans can go to college in Canada too! And I know this because some of my friends in college (back in Canada) were Americans. Sure, you don't get the absolute lowest fees because you still have to pay the premium for international tuition, but it's still way cheaper than the good schools here in America, especially given the current favorable exchange rate.

3. Do not let your savings sit idle in a checking/savings account

All your savings must first go into your employer sponsored 401(k) plan, then into your IRA. Saving on taxes (legally) is critical to achieving independence sooner since taxes are such a big chunk of your paycheck. The government is giving you free money, so why not take it? This means you should plan to max out every single tax-advantaged retirement account there is, every single year, right from when you're allowed to do so.

If you have more money left-over in savings, put them in a taxable account like Vanguard, Betterment, or Wealthfront. If you don't know what to invest in, and you're young, just keep buying the Total Stock Market Index fund for a few years until you've educated yourself on what to buy.

4. Do not miss out on a single dollar in employer 401(k) match

Employer matches are free money, do not throw it away! This could easily be thousands of dollars of tax-free money every single year depending on how much you earn. Every year that you don't take advantage of the employer match sets you back a few months in the long run.

The average square footage these days in America is almost 1050 sq. ft. per person!

5. Do not rent/buy more square footage than you need

The maximum square footage per adult person that you should be willing to pay for is 600 sq. ft. Anything more than that is just wastage and you're probably just letting a lot of square footage sit idle. It's like buying groceries from the grocery store and taking them straight to the compost room. Ideally you'll be in the 475-550 range. The average these days in America is almost 1050 sq. ft. per person! New US homes today are 1,000 square feet larger than in 1973 and living space per person has nearly doubled. Isn't that insane? That's basically cash down the drain every single month.


6. Do not spend more than $500/month in total car expenses

One of the most common mistakes people make is to buy a fancy car as soon as they have the money for its down payment. Bad idea as this could easily add years to your financial prison sentence (aka job). If you can manage in your city without a car like us, that would be the most ideal situation. A lot of dense cities have decent public transport, at least near the downtown area. If nothing else, at least consider living close to work so you can walk, bike, rollerblade, skateboard, hoverboard, or segway to work.


7. Do not pay a single penny in credit card interest

Credit card interest rates are through the roof, no matter what they say. If you're finding yourself unable to pay off each month's balance in full, it probably means you over-spent that month. If you've been diligent about not spending more than 50% of your take-home pay, then you should have no problem paying off your credit-card statement in full month-over-month.

If you find yourself unable to avoid balances, I'd highly recommend canceling all your credit cards and switching to a debit card for all purchases. The credit-building worthiness of credit cards pales in comparison to the loss you incur by paying credit card fees and going into debt.

Mrs. Frugal Hacker and I haven't paid even a single dollar in credit card interest in our lives so far. In fact, using credit cards has been a net profitable arrangement for us thanks to all the sign-on bonuses, etc.


8. Do not buy too expensive of a house

Your home value at purchase should not be more than 50% of your net worth. Furthermore, your house value should not exceed twice your family's annual income (before taxes). If either of these conditions isn't met, it means you're buying/bought too much square footage, or you bought a house in too fancy a neighborhood. Time to look for a small house in a cheaper neighborhood. If your house is too expensive, you will end up spending a lot of your income on mortgage interest and property taxes -- valuable money that should be invested in the stock market instead. Sure you get to take the mortgage interest payment as a deduction on your tax return, but you still have to pay the interest in full first. And if you lose your job and can't make interest payments or property tax payments temporarily, you lose your entire house, including all principal payments you've made so far.

Real estate returns generally don't compare to stocks returns in the long run. Stock returns through index funds have spit out 7-10% reliably year-over-year in the long run. People tend to overestimate the potential for real estate returns. It's mostly anecdotal like oh that guy made a million dollars on a property he bought 30 years ago. But that gain as an annualized return might not be as impressive. compared to an index fund during the same 10+ year period. You'd be lucky if you got 5% on your real-estate property (with inflation).

9. Do not have more kids than you can afford

Flash news: you get to choose how many kids you want to have. 0 and 1 are definitely options as well. Kids can also get rather pricey, especially if you want them to have the best of everything, and only new stuff. If your family makes below $30k, you should reconsider if you should be having kids at all, and if you can support them fully in your city within 50% of your after-tax income. 2 kids should probably be your maximum unless your family makes more than $300k / year. Of course, these are very general guidelines and will vary drastically based on your specific city and cost of living. The bottom line is that kids cost you money every single month for almost 20 years, just like your car. So you should do the math on what effect a new kid is going to have on your finances, before you decide to have said kid.


And that's it! All you have to do is avoid these nine common pitfalls, and you'll be well on your way to financial success. Notice how I didn't talk about making more money here at all. It's because that shouldn't be your primary focus in your initial working years. Avoiding the common mistakes and forming the right financial habits early on in your life will already put you far ahead of many folks and save you a lot of pain in the future. Once you have the basics nailed consistently for at least 4-5 years, you can then focus on increasing your earnings. And what should you do with those increased earnings? Put half into investments, and the other half in your pocket (if you want to).

Which of these financial no-no's are you currently engaging in that you'd like to get rid of? Let us know in the comments.

Mr. Frugal Hacker

Born in India. Grew up in Dubai for 15 years. Studied and lived in Canada for 8 years. Backpacked in Europe for 2 months. Lived in Toronto for 1.5 years. Working in San Francisco for the past 4 years. Runner, cyclist, software engineer.