The Money Dock: by Bosun Alex Kempin
OK folks, time for a typically boring financial subject to be made un-boring. Here are the basic steps involved in achieving financial independence (FI). Of course, there are many ways in which one can achieve FI, however, I have found and prefer to stick with six easy steps.
Before I get into it, let’s look at the definition of FI from Google: “Financial independence is 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.”
Imagine that for a few minutes, will you? Not needing to work yet still enjoying a good quality of life. One can dream.
So, how do we achieve this status? Here are the steps.
An emergency fund is just that, a fund for emergencies. It should be separate from savings or spending accounts yet be quickly accessible. There is no standard rule but most finance fanatics use the 6-12 month rule: enough to support your living expenses for 6-12 months should something untoward happen.
This can be difficult for yachties as we don’t incur the same expenses as landlubbers do such as rent, groceries or car payments. So consider spending habits, necessary expenses and tolerance for risk to come up with a number to cover those living expenses for 6-12 months.
For example, I keep $10,000 in a quickly accessible term deposit should I need to cover an unexpected flight, rent for a few months or a hospital bill.
This is a tragically underused money trick yet so simple. Basically, set up automatic payments so that when a paycheck arrives, a certain percentage is immediately deposited into a savings account. Doing this removes the temptation to spend and avoids the psychological struggle of manually transferring money into a savings account. Most of us never even miss that money because by the time we check the balance in our spending account, it’s already gone.
Oh, and plus, that savings account grows pretty fast when we forget to check on it.
This is the financial version of weight loss. When we spend less money than we earn — eat less than we burn — we save money.
This requires an understanding of spending habits so look back over credit card statements to see where money went over the past six months. For the majority of us yacht crew, living below our means should be relatively easy considering our lack of expenses and high earning power.
Generally speaking, good debt is a house mortgage or student loans, things that have strong future earning benefit. Most other things are bad debt (vehicles, jewelry, etc). One of my clients took out a small loan to cover the cost of his chief mate’s ticket. This is good debt, although ideally, he should have saved separately for this, which he now does.
Defining debt can be subject to each person and their values, but common sense often prevails. By the way, buying a car on a finance plan is never smart. If you can’t afford to buy the car twice in cash, don’t buy it at all.
This can be tricky for some of us, which is understandable given the nature of our industry. Try not to spend for the sake of spending. Being at sea for months can cause temptation. Treat yourself, of course, but don’t undo all your hard earned savings.
Each dollar spent means a dollar further away from financial independence. OK, that’s a bit dry and depressing but, nevertheless, true.
Look back on expenses and understand what is of value and what is important. Spend freely on what you love but save ruthlessly on what you don’t.
This is my favorite step of them all. Investing is a huge component of becoming financially independent. We cannot save ourselves rich. Our money must make more money whilst we aren’t working.
Until we are able to make money without directly exchanging our time for it, we will not be FI.
Most financially independent folk live off passive income, either in the form of rental properties or stocks, or both. Of course, you must work hard to be able to afford houses or large stock portfolios, and thankfully yachting is the perfect industry to do just that.
The struggle is to find a balance between working and saving hard now and enjoying the money earned along the way. I’ll let you know when I’ve found it.
Bosun Alex Kempin has worked on yachts for more than three years and combines his passion for personal finance and his degree in psychology to share personal finance information for yacht crew at themoneydock.com or themoneydock on social media. Comments are welcome below.