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CHAPTER 9

ACHIEVING FINANCIAL INDEPENDENCE

It is difficult to get a man to understand something, when his salary depends on his not understanding it.

—Upton Sinclair

Whose bread I eat, his song I sing.

—Charlie Munger

Truth is hard to assimilate when it is opposed by interest. You cannot really understand how the world truly works unless you have financial independence. Once you achieve this state, it changes everything. It enables you to look at reality in a truly unbiased manner. Aim to achieve financial independence at the earliest time. That is when you will start seeing the world as it really is. It is difficult to think and act long term unless you are financially independent. Financial independence doesn’t mean you don’t work, just that you don’t need to. It removes the internal distraction of unpredictable employment.

The goal of financial independence is to stop depending on others (bosses, clients, a schedule, a paycheck). True wealth is measured in terms of personal liberty and freedom, not monetary currency. Money alone does not signify independence. Control over time does. The only definition of success is to be able to spend your life in your own way.

Is there a way for us to achieve financial independence?

As it turns out, there is indeed a simple way to do it.

It’s simple but not easy.

It requires a lot of hard work, sacrifice, discipline, and patience.

When I was young, I read The Richest Man in Babylon, which said to underspend your income and invest the difference [emphasis added]. Lo and behold, I did this and it worked.

—Charlie Munger

The first step to financial independence is to live within your means. In Charles Dickens’s classic David Copperfield, he wrote, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”¹

This was written in 1849, and it is just as true today—and will remain so forever.

Underspend your income to the maximum extent possible. Avoid taking on any debt for discretionary consumption. Cook at home. Buy clothes only on sale. Learn to cherish frugality. Read The Way to Wealth by Benjamin Franklin, The Richest Man in Babylon by George Clason, The Millionaire Next Door by Thomas Stanley and William Danko, and Rich Dad Poor Dad by Robert Kiyosaki. Always pay yourself first. Spend on yourself only what is left after you have made an investment. Never depend on a single source of income; make an investment in yourself and learn a new skill to create a second source. Avoid get-rich-quick schemes. Invest wisely by learning from the great investors. When you finally achieve financial independence, you will truly appreciate the value of money because of all the sacrifices you made in the past.

Building wealth over time has less to do with your income levels or investment returns and more to do with your savings discipline. As Peter Lynch says, “In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.”² Wealth is the accumulated savings, over time, that is left over after you are done spending from your income. Because you can build wealth without a high income but have no chance without any savings, it is pretty obvious which one deserves a higher priority.

To me, money represents freedom and independence and not a means to engage in conspicuous consumption. Spending beyond a modest level of materialism is mostly a reflection of one’s ego. One of the most effective ways to increase your savings is to raise not your income but your humility. A friend once asked me, “Why make all that money so you can save it?” to which I replied, “Why spend all that money so you need to earn it again?”

If money were the true measure of wealth, every rich person would be happy. But we know this is not true. Money can’t buy a loving family, good health, integrity, ethics, humility, kindness, respect, character, or a clear conscience. The most important things in life are priceless, and, in my view, those are the true measures of wealth. Lasting happiness is achieved by living a meaningful life—a life filled with passion and freedom in which we grow as individuals and contribute beyond ourselves. Growth and contribution are the bedrocks of happiness. Not stuff. In his book The Geometry of Wealth, Brian Portnoy describes wealth as “funded contentment,” that is, the ability to underwrite a meaningful life in which purpose and practice are thoughtfully calibrated.³ Wealth derives its real meaning from a personal definition of our inner values.

Savings is a hedge against life’s inevitable setbacks. Savings confers on us options and flexibility, the ability to wait, and the very possibility to participate in the rare superlative opportunities that may present themselves during one’s lifetime. But the most important reason for saving is personal freedom and control over time. This allows us to devote more attention to the meaningful aspects of our lives, such as relationships, creative pursuits, health, and philanthropy.

Personal freedom allows us sufficient time to think. Making good decisions requires quiet time alone in our heads to think through a problem from multiple points of view.

Uninterrupted personal time is life’s most valuable limited resource. Several notable creators, including Bill Gates and Mark Zuckerberg, regularly take “think weeks” to invigorate their thinking and to allow their minds to wander. They often advocate the value of taking time off specifically to relax and clear one’s head. Taking a whole week off to focus on our thinking process may sound like a farfetched scenario, but this is possible once we achieve financial independence. Only then can we engage in frequent pauses, self-reflection, and a calm distillation of thoughts, patterns, and wisdom. (This is essential. As investors, we tend to spend too much time reading about what others think or are investing in. As a result, we spend too little time on introspection.) Quiet freedom is exotic. Freedom is like income that cannot be taxed. Value investors who achieve financial independence in their thirties or forties spend the rest of their lives doing something that they love: learning more about the world.

Benjamin Franklin frequently wrote about the virtues of frugality and a strong work ethic. He was aware that “lost time is never found again,” and he pursued financial independence to make sure he gained back as much time as possible. He testified that more than 90 percent of his writing was “the gleanings I had made of the sense of all ages and nations.” Franklin studied the past so that he could gain more freedom in his present.

By building a print shop into a successful business, Franklin was able to retire at the age of forty-two. What is truly inspirational is his attitude toward building wealth. Here was a man who accumulated a vast fortune by the age of forty-two, but he didn’t concern himself with accumulating money for money’s sake. In a letter to his mother, Franklin wrote, “I would rather have it said, ‘He lived usefully,’ than, ‘He died rich.’ ”

Franklin lived usefully and put himself into the position to give away his fortune throughout his life.

The Way to Wealth, published in 1758, is a summary of Benjamin Franklin’s advice from Poor Richard’s Almanack, published from 1733 to 1758. It’s a compilation of proverbs woven into a systematic ethical code advocating industry and frugality as a “way to wealth,” thereby securing personal virtue. Franklin’s advice is just as relevant today as it was more than 260 years ago. He advocated work ethic, industry, and enterprise in one’s daily affairs: “But dost thou love life, then do not squander time, for that’s the stuff life is made of.”

Franklin believed everyone should contribute to society and that we should enthusiastically approach each day as we make those daily contributions. In his eyes, life embodied a community of people working together for the common good. It is why he believed in “We, the people” and advocated that “if we are industrious we shall never starve; for, at the working man’s house, hunger looks in but dares not enter.”

The eldest Founding Father of the United States was also a firm advocate of the virtues of frugality: “If you would be wealthy…think of saving as well as of getting: the Indies have not made Spain rich, because her outgoes are greater than her incomes.”

For Franklin, frugality and a strong work ethic were necessary character traits for building wealth.

Benjamin Franklin was able to make the contribution he did because he had [financial] freedom.

—Charlie Munger

During his interactions with the audience at the University of Michigan’s Ross School of Business, in 2017, Charlie Munger shared an overview of his early years and how he personally achieved financial independence before really getting involved in business with Warren Buffett. In a blog post, Jonathan Ping discussed how Munger emulated his role model Benjamin Franklin’s virtues:

• Munger was not born into exceptional wealth. He wanted to go to Stanford as an undergraduate, but his father encouraged him to go to the University of Michigan, because it was still an excellent school but was more affordable. Munger dropped out after only one year, in 1943, to serve in the U.S. Army Air Corps.

• Military service, then law school. After World War II, Munger took college courses on the GI Bill and eventually went to Harvard Law School. He got accepted even though he had never earned an undergraduate degree.

• Successful law career. Munger successfully practiced real estate law until he achieved about $300,000 in assets. This equaled ten years of living expenses for his family at the time (he had a wife and multiple kids). At this point, he started doing real estate development at the same time. When this took off, he stopped practicing law.

• Successful real estate development. When Munger achieved about $3 million to $4 million in assets, he wound down his real estate development firm. He was now “financially independent.”

• Decision to become a “full-time capitalist.” This last stage is what led him to his current status as a billionaire philanthropist. Along with his work with Buffett at Berkshire, Munger was the chairman of Wesco Financial, which also grew to be a conglomerate of various wholly owned businesses, along with a carefully run stock portfolio. Wesco Financial eventually became a wholly owned subsidiary of Berkshire Hathaway.

Using Munger’s life as a blueprint, we can observe a pathway toward achieving financial independence:

• Work hard, get an education, develop a valuable skill. Munger didn’t start Facebook from his dorm room or trade cryptos in high school. He served in the military, earned a law degree, and went to work every day for years. At this point, work means exchanging your time for money, but hopefully at a good hourly rate.

• Use that work career and save up ten times your living expenses. Munger dutifully saved as much as he could from his salary, while supporting his family and kids. You probably won’t need ten times that amount if you don’t have a family to support, but you should still plan for the future and target this level of savings.

• To accelerate wealth accumulation, you can take some risk and start some sort of business. You need something that scales, something that is not paid by the hour or the month. Munger pursued real estate development. If you look at people who got wealthy quickly, nearly all of them owned businesses of some type. Still, there are no guarantees. You need to believe that a reasonably calculated strategy based on sound and sensible principles will work. As Steve Jobs once remarked, “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something—your gut, destiny, life, karma, whatever.” In short, you need to have faith.

• At some point, your investments will earn enough passive income to support your living expenses. This is when you achieve financial independence. It doesn’t matter what you do during the day, because you earn enough money while you are sleeping. Many people choose to continue along one of the paths above: (1) employee-based career, (2) active business management, or (3) actively managing their investments.⁴

Munger’s life teaches us that just showing up every day and chipping away at it, one small block at a time, eventually yields great dividends. Dogged, incremental progress over a long period of time is the key to success, and this, in essence, is what compounding is all about.

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts…. Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.

—Charlie Munger

We can learn a lot by observing Munger’s actions. He was not a huge risk-taker. He grew his wealth gradually and never exposed his family to possible ruin. He worked hard for a long time and became extraordinarily rich and famous only later in his life. He primarily wanted to be independent, “and just overshot.”

The Journey to the First Million

Making the first million dollars is often considered to be the hardest, because you don’t know how to do it and because you don’t know if you can do it. Once you have made $1 million, you know you can do it and you even know how to do it. This is why a self-made millionaire who loses all his money because of an unfortunate event can become a millionaire again.

Many people who are considered successful don’t accumulate a million dollars, and it is not because they don’t earn enough to do so. It is simply because they lack discipline. Society glamorizes a consumption-laden lifestyle, and most people follow this path, spending on non-necessities that drain earnings, leaving little in the form of savings. The journey to the first million starts with the very first dollar in savings, and then another, and so on. It is not the first million dollars that is the hardest, it is the first dollar. The most difficult part is getting started.

During my savings and wealth accumulation phase, I was willing to work as hard as I could, for as many hours as I possibly could, to reach this important milestone of the first million. I was trying to save every single dime that I could during this endeavor. I never lost sight of Benjamin Franklin’s teaching: “Beware of little expenses; a small leak will sink a great ship.”

More important, I was constantly investing in myself. I was ferociously intense about learning as much as I possibly could, every day. Once a certain level of critical mass in portfolio value was achieved, compound interest took over and proceeded to amaze me with its magic.

Today, even after achieving financial freedom, I continue to work in a job because I want to, not because I need to. I do it because I just love the work I get to do every day, and I feel a sense of joy in doing what I love and loving what I do. Today, I get a deep sense of fulfillment when I look back at the memories of my challenging times and sacrifices in the past, which eventually helped me earn my first million dollars of profits from investing.

Benjamin Franklin laid down the way to wealth for all of us when he said, “The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both. Without industry and frugality nothing will do; with them, everything.”

Resist Stepping on the Hedonic Treadmill

I saw that it was the artificial needs of life that made me a slave; the real needs of life were few.

—William James Dawson

Great wealth often inflicts a curse on its owners. It’s called the “hedonic treadmill,” and its function is to continually move the goalpost of your financial dreams, completely extinguishing the joy you thought you would get from having more money, once you attain it. People are constantly running on the hedonic treadmill; as they make more money, their expectations and desires rise in tandem, which results in no permanent gain in happiness.

Economist Richard Easterlin measured the life satisfaction of Americans in 1946 and 1970 and came to the conclusion that material progress was not reflected in increased life satisfaction. This revelation was termed the Easterlin paradox. Once one’s basic needs have been met, incremental financial gain contributes nothing to happiness. This is because, in our minds, wealth is always relative, not absolute.

A research study posed the following question: Which new employee would be happier, the person making $36,000 in a firm where the starting salary is $40,000 or the one making $34,000 where the average is $30,000? Almost 80 percent said $34,000 would make them happier.⁵

We want what we want until we want some more. A process called “hedonic adaptation” determines that we quickly become accustomed to most things in our lives. As a result, experienced happiness is often fleeting. We may have x and think this should be sufficient to live a happy life, but when we see others who have 2x, we think that would make us happier. And then we raise the bar to 3x, 4x, or 10x. This is a sure path to lifelong misery, even if one eventually becomes monetarily rich. Very often, as Dave Ramsey points out, “We buy things we don’t need with money we don’t have to impress people we don’t know.”⁶ We want to look good over doing good. Consequently, we make choices based on optics, defensibility, and so on. This typically results from not having a strong sense of self and from seeking external validation. As Benjamin Franklin said, “It is the eyes of others and not our own eyes that ruin us. If all the world were blind except myself I should not care for fine clothes or furniture.” Acquired material objects do not necessarily improve your life. Desiring them is indicative of some social, emotional, or psychological gap that you need to work on. Don’t confuse pleasure with happiness. Pleasure is short-lived, and modern corporations have convinced most people that the only way to be happy is through the pursuit of pleasure. The longer you stay on the hedonic treadmill, the more it will break you down emotionally, so get off of it, quickly.

The book Classics: An Investor’s Anthology features an essay about P. T. Barnum that quotes Barnum on the tendency for individuals to step on the hedonic treadmill:

Thousands of men are kept poor, and tens of thousands are made so after they have acquired quite sufficient to support them well through life, in consequence of laying their plans of living too expensive a platform….

Prosperity is a more severe ordeal than adversity, especially sudden prosperity. “Easy come, easy go” is an old and true proverb. Pride, when permitted full sway, is the great undying cankerworm which gnaws the very vitals of a man’s worldly possessions, let them be small or great, hundreds or millions. Many persons, as they begin to prosper, immediately commence expending for luxuries, until in a short time their expenses swallow up their income, and they become ruined in their ridiculous attempts to keep up appearances, and make a “sensation” [emphasis added].⁷

Seneca also shared his thoughts on the futile attempts to maximize one’s monetary worth rather than one’s happiness:

Epicurus says: “Contented poverty is an honorable estate.” Indeed, if it be contented, it is not poverty at all. It is not the man who has too little, but the man who craves more, that is poor [emphasis added]. What does it matter how much a man has laid up in his safe, or in his warehouse, how large are his flocks and how fat his dividends, if he covets his neighbor’s property, and reckons, not his past gains, but his hopes of gains to come?

Do you ask what is the proper limit to wealth? It is, first, to have what is necessary, and, second, to have what is enough.⁸

Morgan Housel recommends a solution to the hedonic treadmill problem: “The solution, particularly after basic needs are met, is actively seeking contentment with what you have. That doesn’t mean you stop saving, stop putting in effort, stop sacrificing. It means you come to terms with the idea that the outcome isn’t a fountain of happiness. So if you’re going to grind, you better damn well enjoy the process.”⁹

Housel’s words remind me of one of the most profound thoughts I have ever encountered on the subject, from George Lorimer: “It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy [emphasis added].”

Never measure life by your possessions. Measure it by the hearts you touched, the smiles you created, and the love you shared. Love people and use things, because the opposite never works. Love is caring without an agenda. Love isn’t something we fall into; it’s someone we become.