Understanding the Debt Ceiling and The Secret to Becoming Financially Independent
For those unaware, our country has been at an impasse over the impending debt ceiling that we are facing. To put into perspective just how bad that was, the Federal government was less than two weeks away from being unable to pay their bills.
What exactly is the debt ceiling, you ask? Well, our country works on a checks and balance system. Our country has monthly obligations like payments to retirees, Medicare and Medicaid providers, and hundreds of thousands of others that receive checks from the US Treasury.
Of course, the amount that is allowed is also predetermined. It's not like we can keep making promises for payments and extracting money from the Treasury. Just like any household or business, there is a maximum limit that the country can borrow. When we hit that upper limit of how much debt, or IOUs rather, we essentially have to come up with ways to pay the bills, or we risk running out of money to pay for the bills we already have promised.
Why is this such a big deal? In simple terms, think of it this: the US government has promised to make Social Security payments to the approximately 65 million individuals collecting Social Security. It has also pledged to pay healthcare providers around the country for services rendered through Medicare and Medicaid.
If we hit the debt ceiling, our entire payment system for those obligations may come to a grinding halt! Social Security payments could be delayed, which would affect sixty-five million Americans. Hundreds of thousands of healthcare providers may not receive their billable payments for healthcare expenses, forcing them to stop providing healthcare services to government programs. An unresolved debt ceiling could affect welfare programs like free school lunches and food stamps.
Just like us individuals, countries must also be cautious of the debt being taken on.
Hitting the federal debt ceiling is an unprecedented event. Never in the history of our country have we ever hit the debt ceiling. At this point, I want to make clear that we have had government shutdowns, with the last one occurring in December of 2019 and lasting 35 days, but a government shutdown and a debt ceiling are two different things.
A government shutdown is only when Congress fails to pass a spending bill, a debt ceiling, which is unprecedented, is when we have hit the upper limit of our debt. Now, just like a household and a business, our country is always bringing in an income. Like you and I, we bring in a monthly income each month, and we use that to pay for our bills and obligations. Our country is the same, the US has taxes coming in to help pay bills, but the Treasury cannot just appropriate their income to a specific place.
For instance, if the Treasury collects $100 million a month and we have total monthly obligations of $150 million a month, they cannot just say, hey, let's throw it all towards Social Security to ensure it stays solvent. Nor can they direct all receivables toward bond payments to not default on the Treasury bondholders. Social Security, by the way, is funded by Social Security taxes, but that amount is never enough, so it takes on debt to cover outstanding payments. No, it has to appropriate it according to the budget, which means there will be areas of a shortage.
If the US government defaults on its debt obligations, this would be catastrophic to global markets. We hold US debt through buying bonds and through our pensions and 401(k) systems. Other countries also hold US debt since we have one of the trusted financial systems.
Take a moment to think of your investment portfolio. Do you have any Stable Value funds or money market funds in your 401(k) plan? Stable value and money market comprise predominantly of US Treasuries. Do you have a target date retirement fund? Those most certainly hold US debt. How about the TSP? If you're in the TSP and invested in the G Fund, you're more than sure to be having US debt. Didn't pick the G Fund but instead invested in the Lifecycle fund? Check your holdings within the fund, and you'll see an allocation towards US Treasuries.
So what happens when that monthly debt payment to you and hundreds of millions of investors all around the world stop? Again, nobody knows because it has never happened before. But I can tell you that aside from the massive panic, it could also force that debt to become more expensive in the future.
It's a trickle-down effect that could potentially have a massive negative impact not only on the US economy but the global environment. Now, luckily, the decision that needed to be made regarding the debt ceiling has been postponed. Like many things, fiscal policy is not easy to get past Congress, and both sides-Democrats and Republicans were unable to come together on how to best address this. Rather than coming to a resolution now, Republicans have given the Democrats the option to raise the debt ceiling through December temporarily.
Is it a win? For now, yes, it would be, and it gives our country a temporary pause until December at least. But how frustrating and mentally tiring is all of this? So much of our lives are out of our control. So many of us work towards the dream of retiring one day without any clear indication of whether that is even a possibility. Adding to that uncertainty is the unknown of what other wrenches get thrown our way.
If there's one thing that COVID has brought forth to many of us, we want some control of how our future looks. Not only that, but we also want to have a better work-life balance because time is fleeting, and tomorrow is never guaranteed. I have to tell you that this mentality shift has been dramatic this past year. More and more people I talk to, especially the younger generation, tell me they want financial control. More people are fighting not to stay beholden to debt and instead; be able to do what they enjoy. They are tired of being a debt-ridden society working their 9 to 5's like a hamster.
But how do you get out of the hamster wheel when everything in your life depends on a reliable income that can sustain your overexuberant lifestyle? The answer came down to two words: financial independence.
Imagine your life without financial stress. What does that look like?
Now financial independence gets a lot of commotion these days, and it's often paired with two other words: retire early. The four combined forms the word FIRE-financial independence retire early.
The concept behind FIRE is that we work not for some far-off idea of retirement. No, this isn't our grand daddy's time frame, which often involved working for a company over forty years, collecting the gold watch, and retiring into the sunset at sixty-five.
Instead, FIRE is the ideology of living a lifestyle that pursues a balance between work and family. We work not because we want to be able to retire forty years from now but because we want to one day enjoy our lives and ideally, not at sixty-five but much earlier-hence the retire early part.
While the term FIRE might be new, the concept of financial independence is not. Decades ago, we called it getting our financial house in order, which we then started calling financial peace-such as peace of mind. One of the biggest names in financial wellness, Dave Ramsey, first wrote his guide towards financial independence in the early 2000s with his book The Total Money Makeover.
Each generation that comes along polishes it up a little bit and slaps a new name on it to make it their own. There's nothing wrong with that, and if anything, it gives the generation a sense of purpose when it comes to their money matters. I bring up the subject of FIRE because I feel that in today's uncertainty, now more than ever, we are ready to embrace the possibility of becoming financially independent. Many of us crave it.
So for today, I want to give you a chapter from my book, The Secret to Becoming Financially Independent. The Secret to Becoming Financially Independent is a culmination of my thoughts, philosophies, and research on obtaining a truly-in-our-control life. It is no secret that a significant aspect of our life is dictated by money-how much we have or how much we don't have and need, how much we spend, and how much we are paying off. Money is not only the driver of our world's economy but is also an institution within itself. Having it gives peace of mind, and not having enough of it can cause mental stressors.
The Secret to Becoming Financially Independent was only made possible by my wife Rochelle and our son Liam. Without a doubt, parenthood played a significant role in this mindset, but this can still apply to you even if you are single. But as a father and a husband, I not just wanted but needed security in financial matters. Not only were other lives on me, but I realized that I did not want our lives to be controlled by financial stress.
I wrote The Secret to Becoming Financial Independent over many nights after completing my work while juggling family time and other household matters. There were many nights that I wanted to throw down the towel, but Rochelle just kept pushing me. I think I was self-talking my way out of it if you know what I mean. But she stood by, reassuring me that the details were important and that people out there care about this.
So I hope that this is something that brings you value. If it changes one life, I would say that the sleepless nights were worth it. The book itself is now fully available on the website for download. I created Juncture 401k to provide information to individuals and having my book there, available to download for all in pursuit of financial independence, was very important to me.
For Rochelle, if you're reading this, I want to say thank you. Thank you for standing beside me. Thank you for being honest about how terrible some of my ideas are and being relentless when they are not. Thank you for providing me with the opportunity to do what I do and giving me the space to learn from you. You are an incredible woman and an even more amazing mother.
So without further ado...
The Secret to Becoming Financially Independent
What exactly is financial independence? We hear it being thrown around social media all the time. Aside from the keto diet, it is the hottest trend to capture the Millennial generation. Financial independence is defined as the status of having enough income to pay one's living expenses for the rest of one's life without having to be employed or dependent on others. Income earned without having to work a job is referred to as passive income.
We all want to be financially independent, but this elusive status is difficult, if not impossible, to achieve for many individuals. The secret to being financially independent lies not in a stock tip or obscure investment vehicle. To become financially independent, one must have a road map and the willingness to commit to that plan through the long term. This journey is not an easy one, nor is it an instant overnight turnaround. Instead, it will require you to take a deep hard look at your financial behaviors and come to terms that you will most likely have to undergo some very drastic changes if you want to succeed. However, like my economics professor Steven Reff once said, "We must make ourselves worst off in the short-run to become better off in the long-run." Are you up for the challenge? If so, read on.
Know Why You Want to Be Financially Independent and Envision It
One of the first steps to the path of being financially independent is knowing why you want to become financially independent. Being financially independent is not just about having enough money set aside that you can quit your job for a short period and vacation your life away. It is not about earning more income to live in a larger home or drive more expensive cars. Financial independence is the absolute ability to quit your job and live entirely off of passive income in a way in which your lifestyle is fully funded.
Why would you want to be financially independent? Perhaps you want to be able to devote more of your time to things that matter, such as spending more time with loved ones, or maybe you want to be able to give your time and efforts to charities instead of for-profit organizations. Or perhaps you want to be able to say "peace out" the next time your boss grills you on corporate gibberish.
Knowing your Why is critical in your pursuit towards financial independence.
Whatever the why is, you must set aside the time to recognize the reason so that it becomes a part of you. As you work towards financial independence during the upcoming years, you will be tested again and again. There will be times when you may think you have done enough and contemplate deserting those goals. If you wish to persevere during those moments, your why needs to be top of mind.
During this process of establishing your why you will also need to reflect on your current financial state. If you are doing this with a significant other, please be sure to have a serious heart-to-heart talk with them. Be sure to address the elephant in the room: are you and your significant other ready to commit years of sacrifice to achieve financial independence? Do you have the resolve to stick to the dark days ahead?
As you have this conversation with yourself and or your significant other, you must be honest about the following questions:
What exactly does financial independence mean to you?
Does it mean quitting your job full-time or having the ability to work whenever you want? What type of income will you want to have when you are financially independent? Is it $50k a year? $70k a year? Will those figures be utterly passive income, or are they a blend of passive and part-time earned income?
What does your current financial situation look like?
At the very least, you should be able to create a personalized balance sheet showing your income sources, expenses, and debt obligation. You cannot get to where you want to be if you are clueless about what your overall financial picture looks like.
What would you have to give up to achieve your financial independence?
It's no secret that the path towards being financially independent starts with saving, but where will those savings come from? Are you on a constant new car binge every few years? If yes, are you willing to drive an older vehicle in the future? Do you like to unwind after a long week with a night out in the town buying $20 craft cocktails? If so, are you willing to stay in and drop that Jackson in your Roth IRA instead? Do you splurge a large percentage of your income on an overseas trip every year? If you do, would you and your partner be willing to commit to something more reserved from now on?
Understanding what you have to give up to achieve financial independence allows you to make that mental determination before the pain point hits. The last thing you want to do is fall off the bandwagon because you didn't realize how much of a sacrifice your party-life would take.
What are the obstacles in your path towards financial independence?
Identifying your obstacles is critical because you can adequately remove the barriers or circumvent them before they sidetrack you. These obstacles can be both external and internal.
Life is full of obstacles but all obstacles can be navigated past.
An external obstacle could be that you can barely make ends meet with your income and expenditure. Perhaps you have already looked at every dollar you are spending, and there is no more room for cutting. What options can you take to break past this obstacle? Is it negotiating a higher salary? Or maybe it's spending a few extra hours a day on a side hustle to bring in additional income.
An internal obstacle could be that you can't help yourself when it comes to reigning in your spending, especially when you're out and about with your mates. When everyone around you is throwing down Benjamins at the club, you feel like you need to as well. Perhaps it could be that your circle of friends is always on board to travel extravagantly, which also causes you to spend more on your vacations. Understanding that you spend more in others' presence may mean that you will promote more nights in with your friends rather than out.
What is a series of goals that will help you become financially independent?
By now, you already know that obtaining financial independence is a long game. Financial independence isn't an overnight success, but it doesn't necessarily mean that your goal is ten or twenty years away. By identifying a series of smaller goals that will help you become financially independent, you can better follow the roadmap and stay in the game when things get complicated.
The series of smaller goals can be paying off the high-interest credit card debt, securing a refinance on your home mortgage to a lower interest rate and shorter term, or perhaps even obliterating student debt.
Creating A Roadmap To Becoming Financially Independent
Would you drive across town in an unfamiliar city knowing that you want to get to someplace specific at a predetermined time, all while doing this with neither a map nor GPS? Probably not, right?
The same goes for becoming financially independent. Whether you plan on becoming FI in ten years, twenty years, or thirty years, having a roadmap to that goal is critical to achieving success.
Instead of figuring out the next steps every step of the way, wouldn't having a clear and concise picture of what you are supposed to be doing every month be less stressful?
Your roadmap to FI should include how every dollar earned is allocated. Your entire monthly spending habits should be appropriately documented and accounted for. Whether you are initially steamrolling debt or accumulating an oh sh*t emergency fund, you will feel much better knowing what needs to be done at every step.
Create a roadmap and remember to utilize it during your path to financial independence.
Not only that, as smaller goals are achieved, whether it is debt pay-down or savings built, it helps to have a plan of action already in place that has been predetermined to help you decide what the following process appears to be. Doing this eliminates the need to re-calculate and perhaps deviate from your overall objective of FI.
Believe In Yourself And Maintain Your Focus
Financial independence may seem like a lofty goal, but it is not unattainable if you remain resilient and determined to achieve it. Unlike material changes, the FIRE mentality is something that you will have to live, breathe, and accept over time.
Not only do you and your partner need to commit to this plan entirely, but having an action plan on every step is crucial to achieving success. There will be times you want to give up or decide that you have accomplished a fair amount of the bigger goals, but that is normal. You will want to quit, so you will need to refer back to your Why on an annual basis (if not more often) to keep yourself on-track.
And that is it for today, my friends. I hope you enjoyed this episode, and I sincerely hope that my first writing attempt does not suck as badly as I think it does in my mind. Let me know what your thoughts are and what topics of financial matters interest you. As I mentioned earlier, The Secret to Becoming Financially Independent is available now on my website, Juncture 401k.com
Until next time, I wish you and your family the very best.