The “rat race” is to be forced to get up in the morning, to go to work, to receive a paycheck, to be able to pay your expenses and invoices and so on. The “rat race” is to exchange your time for a salary. It is in this “metro-work-dodo” routine that the vast majority of people live. It is, unfortunately, the system in which we are confronted every day. This routine also comes with a lack of time, stress, guilt, burnout, etc.
How to leave the “rat race”?
It is possible to leave the “rat race”. But, it takes a lot of discipline and determination! To leave the “rat race”, one must achieve financial independence. Some pioneers have achieved financial independence between 30 and 40 years. To achieve financial independence, your passive income must be equal to or greater than your expenses. The passive income is income that you get without having to work directly. Concrete examples of passive income are owning an income property, owning stock titles that pay dividends, having a blog that generates advertising revenue, etc.
The concept of financial independence is, of course, the opposite of the “rat race”. You have to spend less than you earn and pay off your debts as soon as possible. Then use the surplus to invest and generate passive income. From experience, I can see that it is much easier to reduce expenses than to increase income.
Personally, I created a plan to achieve financial independence in 12 to 15 years and thus retire from 9 to 5. I will be between 42 and 45 years old when I become free! It is rare that I stick a label, but I can say that I am part of the movement “FIRE” (“Financial Independence, Retire Early”).
When I reach financial independence and retire from 9 to 5, I will be able to spend more time with my family and other people I love. But, there are many other things on my list, including doing more sports, reading, volunteering, traveling more often, learning about subjects that I am passionate about, etc. I may continue to work for pleasure (and not by obligation!). Who knows, maybe I could start my business. Many options will open … The important thing is that I will not be trapped in a job to pay my bills at the end of the month.
But where to start? You must first take charge of your personal finances.
- Calculate your savings rate and have a net worth
I know so many people who don’t have a budget and have no idea what their expenses are, their savings rate, their net worth or their investments. They ask their financial advisor at their financial institution to choose funds for them, regardless of the type of investment, past performance, management fees, etc.
I suggest that you first assess your current financial situation. You can simply create a budget in an Excel file. The objective of the budget is to record your income and expenses, but above all to understand where your money is going. You can also calculate what your savings rate is (savings / net income = savings rate).
I also suggest that you calculate your net worth (net worth). You can use the same Excel file in which you can record your assets (checking account, TFSA, RRSP, RESP, etc.) and your debts (credit card debt, student loan, car loan, etc.). Net worth is the difference between your assets and your debts (assets – debts = net assets).
- Pay off your debts
Now that you’ve taken stock of your debts, it’s time to pay them off. Start by paying off bad debts, that is, those with the highest interest rate (credit card debt, car loan, etc.).
If your budget is tight, you can create leeway by eliminating unnecessary spending and reducing your recurring costs. This will allow you to pay off your debts faster.
- Increase your savings rate
To achieve financial independence, you absolutely must increase your savings rate. The faster you want to achieve financial independence, the higher your savings rate should be. Some are able to save more than 50% of their net income. Why not you? Is it more important to buy a new car or a new boat? You decide. You can first set up automatic transfers from your checking account to your savings account or your investment accounts. Then, eliminate unnecessary expenses from your budget and save the excess.
- Invest now!
It is important to invest your savings. And I’m not talking about “investing” your savings in a GIC (guaranteed poverty certificate). First, choose the investment vehicle according to your situation and your personal goals. For example, if your tax rate is high, you could encourage an RRSP. If you have children, you could help the RESP. If you invest in an RRSP, you could invest your tax refund in the TFSA. You can also choose investment vehicles that offer tax credits. Several strategies are available. Just choose the one that suits your needs
Then choose your types of investment according to your investment profile, your needs, your investment horizon, etc. There are so many financial products: stocks, bonds, mutual funds, ETFs, etc. You can meet with your financial advisor to choose the investment strategy that best fits your needs and objectives.
It’s not just about choosing investments. Your goals may change, your personal situation may change (e.g. new spouse, the arrival of a child, move, etc.). You have to reassess your investments regularly. The same goes for your budget, your savings rate, your recurring costs, etc.
You now know what the term “rat race” means. It is very likely that you are one of them, unfortunately. But it is never too late to take charge of your personal finances and put in place a strategy to leave the “rat race”. Start today!
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great advice by gary ve