How to Spend $500 each Month to Achieve Financial Independence

In our post from earlier this week, we discussed the results of the Schwab 2019 Modern Wealth Survey.  It should be no surprise that most of the participants in the survey were living paycheck-to-paycheck.  But interestingly, the participants reported that they spent an average of almost $500 a month on non-essentials items.

Only through identifying our non-essential spending, can we eliminate it.  If you truly desire to overcome the paycheck-to-paycheck lifestyle, redirecting this $500 each month is crucial.  But where should you spend this money to better yourself financially?

How should you spending $500 each month to obtain financial independence?

As the old saying goes, a penny saved is a penny earned.  In this case, cutting out the non-essentials from your life just gave you a nice pay raise.  The following are the three areas of focus for your monthly $500 bonus.

1. Eliminate your Consumer Debt

Conquering your current debts is a perfect starting point.  The Schwab survey noted only 32% of all participants did not carry a credit card debt, paid other debts on time, or had no debt at all.  That means about two-thirds of Americans are carrying credit card debt or struggling to pay their loans.

What you need to do if you have debt is list everything you owe money on and how much.  Get a trusty notepad and pen and start writing everything down.  Credit cards, student loans, cars, or payday loans.  Every debt you owe money on, write it down.

Then tackle your debt with Dave Ramsey’s strategy called the “Debt Snowball.”  Arrange the list of your debts with the lowest loan balance first and your largest remaining balance last.  Use that extra $500 to pay off the lowest debt first.

Then target the second lowest debt.  Instead of using just your newfound $500 a month, also use what you were paying toward your lowest debt.  This way, you are paying even more every month on your second debt than you were on the first one. 

Keep this “snowball” rolling until all of your non-mortgage debt is removed from your life.  Once that is done, make the commitment to never obtain these consumer debts again.

2. Build Your Emergency Fund

What should I do after my debts are all paid off?  That is a great question.  The wealth survey noted that only 38% of all participants had an emergency fund.  

You are probably thinking, what do I need that for, the US Government will always pay its Service Members?  

If you are new to the military you may not know this, but there actually have been a few times in the last decade when the US Government thought it may not have the funds to pay its Soldiers.  *gulp*. 

The fear of not receiving a paycheck is worse than the fear of combat for many military members.

By having an emergency fund, you will not have a fear a missed paycheck.  Nor will you need to revert to debt, such as credit cards or payday loans, should something unexpected occur such as car maintenance or an unforeseen expense during your next move. 

How big should your emergency fund be?  Most financial advisers recommend 3-6 months’ worth of expenses.  I know that sounds like a lot of money.  Buts lets face it, by this point, you are saving that extra $500 a month plus all of the money you would have been putting toward paying down debts. 

You will have this funded in no time.  Just out your notepad again and list out all of your expenses.  That will provide a guideline of how much money you need each month to survive.  See, it wasn’t that hard.

3. Invest in Your Future, Because no one else Will

Once your debts are paid off and the emergency fund is established, then we can focus on investing.  Your net worth will explode before your eyes with the powers of compounded interest and time.

Imaging planting a tree with one seed.  In time, it will grow up and create its own seeds.  These new seeds can be used to grow additional trees.  If you keep this up, you will end up with more trees than you know what to do with.  

This is what happens once you start investing your money, your wealth multiplies to a level that you will have more money than you know what to do with.  Just as it takes time for a tree to grow, it will take time for your investments to grow.

I know what you are thinking, I don’t know enough about the stock market to invest.  You are in luck, there are two great programs for you to take advantage of to increase your wealth.  They are the Thrift Savings Plan, or TSP, and the Individual Retirement Account, or IRA.

As a Service Member, you have access to the TSP which allows for automatic deductions from your paycheck to fund your retirement.  TSP allows you to invest in funds which are low in fees and diversified across indexes.  

This means you can own a little bit of a lot of companies and as such reduce your risk of loss.  As of 2019, your annual contributions to TSP are limited to $19,000.

According to the results of Chris Hogan’s study, 79% of Millionaires in America achieved the millionaire status with a retirement plan, such as TSP, which was offered by their employer.  

That means you, as a Service Member, have access to a program which investing in alone can make you a Millionaire.

An IRA is an account you can set up with any brokerage to invest for your retirement.  The difference is you will have access to every stock or fund traded by the brokerage.  With an IRA, you have the option to invest in low fee index funds just like those offered with the TSP.

Additionally, you can automate funding your IRA account with an allotment as well as automate the purchase of low fee mutual funds.  In short, you set this up once, like TSP, and never have to worry about funding your retirement account again.  This is what David Bach advises to become The Automatic Millionaire.

As of 2019, the annual contribution limit for IRAs is limited to $6,000.  Wait a minute, that is the same as $500 a month, which is the amount noted by the Schwab survey as about the average we spend monthly on non-essentials.  Ironic how we can decide to spend the money today on non-essentials or invest the money for our future.

If you do decide to go with an IRA, I have personally invested exclusively with Charles Schwab for decades.  They are a discount broker that has met all of my needs.  They currently have an offer to receive $100 when you open an IRA account using Referral Code REFER6Y2XN.

Get Started Today

No one in the military or life is going to take your hand and lead you to financial independence.  You must make the decision to achieve the status of “wealthy.”

So what is wealthy?  The average value determined by the survey participants was a net worth of $2.3 Million; with more than half believing they will become wealthy during their lives.  

I feel I should point out that 59% of the survey participants stated they live paycheck-to-paycheck, but over half believe they will become wealthy.  

That means even today, participants of the survey are struggling to get by but yet they believe they will become a self-made millionaire.

Just as they believe they can overcome their financial adversity, you can too.  As the Chinese proverb says, “The journey of a thousand miles begins with a single step.”

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