The Investment Playbook for Reaching Financial Independence

Posted on:January 22, 2024

Money is a tool for living a good life.

You need it now, you’ll need it tomorrow, and your future self will need it.

Personal finance is all about balancing how much you spend today vs. how much you save for tomorrow.

The end game of investing is to reach financial independence where you can do what you want, when you want, with the people you love.

Spend too much now, your future self pays the price.

Save everything for tomorrow, you don’t live today.

It’s all about balance, making sure the pendulum doesn’t swing too far either way.

Investing in your future self is one of most important decisions you will make that determines the life your future self lives.

So where do you even start?

Where should you invest your hard earned dollars?

How much should you invest?

In this article, I summarize the key information I wish I had known when I started my investing journey.

This is a detailed playbook that synthesizes what you need to know about investing and how to practically grow your wealth.

Topics covered include:

If you apply the information in this playbook, you will reach financial independence.

It’s not a question of if, but when.

Whether you are just getting started with investing or are currently working toward financial independence, this is for you.

This is your roadmap to building wealth while living for today.

Table of Contents

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Tax-Advantaged Accounts

The money you make will be taxed by the government.

There are four main types of taxes taken out of your income:

Thankfully, there are special accounts you can use to invest your money and reduce the amount you pay toward these taxes.

Tax-advantaged accounts reduce your taxable income in three primary ways:

Depending on the type of account you use, you can take advantage of some or all of these benefits when you put money into them.

Investing your money into tax-advantaged accounts is a great way to reduce your taxes and grow your wealth.

Here are the top three tax-advantaged accounts you should use and what you need to know about them.

Roth IRA

The first account you should know about and use is a Roth IRA.

It’s awesome and something I wish I knew more about sooner.

A Roth IRA is a tax-advantaged account in which you contribute after-tax dollars.

You do not get any pre-tax deductions from contributions to this account, however, all investments within a Roth IRA and their earnings grow tax-free and can be withdrawn tax-free when you are 59 1/2 or older.

This means that you are not taxed on whatever amount is in your Roth IRA when you withdraw money after 59 1/2 years of age.

It’s hard to grasp how good this is.

This is why the federal government has set the maximum contribution limit to $7,000 ($8,000 for people aged 50+) in 2024 and has income limit thresholds for who can make contributions.

If you are a high-income earner and not eligible for a Roth IRA, look into a Backdoor Roth IRA and work with a financial professional to use this advanced strategy.

Here’s an example to showcase how simply maxing your Roth IRA each year can help you reach financial independence.

You are a 25-year old who decides to contribute $7,000 into their Roth IRA every year until you are 60 years old.

All money in the Roth IRA is invested into an S&P 500 index fund which has an annualized interest rate of 10% each year (Interest rate assumption based on S&P 500 historical average).

At 60 years old, you would have $2,086,887 that you can withdraw tax-free.

That is incredible when you think about it.

Investing $7,000 a year starting at 25 could result in over 2 million tax-free dollars at age 60.

That is only $583 a month.

For comparison, the average monthly car payment in January of 2024 is $726 according to Bankrate.

And this outcome doesn’t even include any changes to the Roth IRA contribution limit that would increase over the years.

Please note that the exact amount you would have in your Roth IRA at age 60 would vary based on the performance of the S&P 500 index fund over that 35-year time period and the purchasing power of the money would be impacted by inflation.

But nonetheless, maxing your Roth IRA each year is a simple way to build a big pot of money that you will be able to withdraw tax-free.

It’s also important to note that a Roth IRA is something you open on your own through a financial provider of your choice.

It is not offered through your employer.

If you haven’t done it already, open a Roth IRA and max it each year.

You won’t regret it.

401(k) & 403(b)

The 401(k) and 403(b) are the next tax-advantaged accounts you need to know about.

The 401(k) and 403(b) are company-sponsored retirement accounts where you contribute a percentage of your paycheck directly into them.

For all intents and purposes, these two accounts are the same.

403bs are offered by public schools, colleges, and tax-exempt organizations.

401ks are offered across industry employers.

I’ll be using the term 401k moving forward, but remember that any time I say 401k it could mean 401k or 403b depending on what you have access to through your employer.

There are two main types of 401(k)s - traditional and Roth.

Traditional 401(k) contributions reduce the amount you pay in taxes today by lowering your taxable income for the year.

These contributions and the earnings can then grow tax free in the account.

Upon withdrawal at 59 1/2 or older, you pay taxes on both the contributions and the earnings based on whatever the future tax laws and tax rates are at the time of withdrawal.

Roth 401(k) contributions are similar to the Roth IRA in that they are after-tax contributions.

You pay taxes at your current tax rate and Roth 401(k) contributions are deducted from your paycheck as after-tax deductions.

The contributions and earnings in a Roth 401(k) can grow tax free and be withdrawn tax-free after age 59 1/2.

Not all employers offer a Roth 401(k) option, so if you are wondering what you have access to, you will need to check your 401(k) plan description to see what your employer-sponsored plan offers.

The contribution limit for how much you can put into a 401(k) in 2024 is $23,000 ($30,500 for people aged 50+).

Your traditional 401(k) + Roth 401(k) contributions cannot exceed this contribution limit.

Most employers offer an employer match for their 401(k).

This is literally free money.

You need to make sure you invest at least the minimum amount needed to receive the maximum employer match.

For example, your employer may provide 50% of what you contribute up to 6% of your gross salary.

To get all the free money, make sure you invest at least 6% of your gross income into your 401(k) and you will get 3% of your gross income for free in your 401k as an employer match.

The contributions from your employer match may have vesting periods, which means you need to meet certain criteria or you may lose that free money.

Generally vesting periods will require you to work at your employer for X number of years to become vested.

Check your plan description for what your vesting period and terms may be.

If you are ever considering switching jobs, make sure to look into your current vesting information when comparing salaries and total benefits between different jobs.

401(k)s may sound complex, but they really aren’t too hard to understand.

Here is the key information:

While it sucks that a 401(k) is tied to your employer and that the quality of what is offered can vary between plans, the 401(k) is a great vehicle for growing your wealth.

Having a tax-advantaged space that has a large contribution limit is phenomenal.

Take advantage of this account as much as you can and aim to increase your contributions to your 401(k) over time as your salary grows.

Any additional amount you can contribute beyond the company match will help grow your wealth and reach financial independence quicker.

HSA

A Health Savings Account (HSA) is the grand daddy of tax-advantaged investment accounts.

An HSA is a tax-advantaged account you can open when you have a High Deductible Health Plan (HDHP).

To be eligible, you need to have an HDHP, be on no other health insurance plan, not be currently enrolled in Medicare, and not be claimed as a dependent on someone else’s taxes.

Most people save money in an HSA to pay for medical expenses not covered by their HDHP.

It can be used that way, but the true magic is when you use your HSA as a long-term investment account instead of a short to mid term pot of money to pay for medical expenses.

Before using an HSA as a long-term investment account, I recommend you make sure you have a solid financial base and have the basics down:

This last point is key because you will need to be able to pay for all emergent healthcare costs out of pocket that are not covered by your HDHP up to the out-of-pocket maximum listed on your HDHP plan description.

When you reach this level of financial fitness, you are in a position to be able to leverage the magic of the HSA.

HSA’s are triple tax-advantaged

This is amazing.

And it gets even better.

Not only do you avoid federal and state taxes when contributing to an HSA, these contributions are not subject to FICA taxes, which are your Social Security and Medicare taxes.

This saves you an extra 7.65% on your HSA contributions and even more if you are a high-income earner.

It may not sound like much, but it really adds up.

Here is how you can tactfully use an HSA as a long-term investment vehicle:

If you look further into HSA’s, you’ll see there are some advanced tactics where you can pay for all healthcare expenses out-of-pocket now, save your receipts into the future, and then submit them for reimbursement at a later date.

Personally, that’s too much work for me.

I like to keep it simple.

Healthcare is already expensive and I’m sure I’ll have plenty of medical bills in the future to use up my HSA funds.

If for some reason you did save up more money in your HSA in retirement than you can spend on healthcare, you can withdraw HSA funds for any reason after age 65 and they will be taxed as ordinary income if not used for medical expenses.

The worst case scenario is you have good health, low healthcare costs, and the money you withdraw will be taxed like a tradtional 401(k).

Sounds good to me.

An HSA is hands down the best vehicle to grow your money.

It is more advanced though, so it is imperative to have your money fundamentals down before using an HSA as a long-term investment vehicle.

Another important consideration before using an HSA is to evaluate the pros and cons of all the healthcare options provided by your employer.

Based on your unique family situation and healthcare plan offerings, you need to see which plan is best for you while factoring in the tax-benefits of using an HSA as a long term investment vehicle.

Over the last 8 years, my wife and I have been paying down our student loans, building up our savings, saving for a house, and growing our emergency fund.

Being able to pay for all healthcare expenses out-of-pocket, especially if we hit our out-of-pocket maximum, would have been hard based on all our other financial goals we were working toward.

The Preferred Provider Organization (PPO) healthcare plan offered by our employer was much better for us at the time compared to the HDHP + HSA.

Now that we have paid off all our student loans, built up a healthy emergency fund, grown our savings, and bought our house, we are now in a healthy financial position to leverage the HSA as a long-term investment vehicle without taking on extra risk.

By focusing on the fundamentals first, we built our selves a solid foundation and we can now leverage this amazing tax-advantaged account.

If you have a solid financial base and can afford to pay all your healthcare costs out-of-pocket, I highly recommend using an HSA as a triple tax-advantaged account to grow your wealth.

Investing Order of Operations

Without knowing your unique situation, here is the investing order of operations I would recommend for most people:

If you have an emergency fund that covers 6+ months of expenses, no high-interest debt, enough extra savings to pay for all healthcare expenses out-of-pocket, and the HDHP offered by your employer is favorable for your unique situation, here is my recommended order of operations for investing:

This is the simple pathway to reaching financial independence.

Save as much as you can and invest your money into tax-advantaged accounts each year.

For all your investments in tax-advantaged accounts, I recommend putting your money into a low cost, target date retirement fund.

Choose the target date retirement fund that aligns most closely with the age you think you will retire.

As you get older, the asset allocation of the target date retirement fund will automatically become more conservative as you transition from growing your wealth to preserving your wealth.

You don’t need to know anything about stocks or changing your asset allocation over time to reduce your risk, it’s great.

How Much You Should Invest

One big question remains.

How much should you invest?

Unfortunately there is no simple answer to this question - it depends.

A common recommendation is that you should save 15% of your gross income for retirement starting in your early 20’s when you first join the workforce.

Employers have traditionally offered pensions and retirees have had extra income through Social Security.

Your 15% savings, pension, and Social Security would provide a great life in retirement.

Oh how the times have changed.

Saving for retirement is fully in your hands now, so you need to make sure you save plenty for your future self.

Housing, healthcare, student loans, and the cost of simply living has sky rocketed in recent years.

Pensions are less common and it is uncertain if Social Security will be around when you hit retirement.

I’d rather control my own fate than hope that the government provides me with enough to live.

For many, it is nearly impossible to invest 15% toward retirement when getting out of college as they are just trying to stay afloat and survive.

This means that more and more people are not able to invest much until their late 20’s, 30’s, or even 40’s.

Add in the reduction in pensions and the uncertainty of Social Security being available in the future, putting 15% toward retirement once you get established likely isn’t going to cut it.

Plus, the goal is to reach financial independence to live a great life, not save the bare minimum to live in poverty when you are older.

My advice is to invest as much as you can into tax-advantaged accounts while balancing living for today.

This is the hardest part about investing.

Learning to give up a little today for a whole lot tomorrow.

As you are just getting started on your financial journey, aim to pay off your high-interest debt and build a 3-6 month emergency fund.

Invest just the minimum amount needed to get the full employer match within your 401(k) or 403(b) to take advantage of that free money.

Then aim to increase the amount you invest into tax-advantaged accounts as much as you can reasonably afford.

As you pay down debts and get established financially, work to increase your investments into tax-advantaged accounts up to a minimum of 15% of your gross income.

Follow the investing order of operations above.

15% of your gross income invested toward retirement is a good first milestone to hit.

Once you have paid down your high-interest debt and have a solid emergency fund, aim to increase the amount you invest into tax-advantaged accounts from 15% to 25% of your gross income.

This is hard work and it will take time.

You may never reach 25% based on your salary, cost of living, values, and life circumstances you encounter.

That’s okay.

The goal is to incrementally improve over time and work toward investing 25% of your gross income toward retirement.

Any progress is progress.

As you increase contributions, make sure to balance saving for other big purchases (e.g., cars and houses), paying down debts, and having enough money to spend to live a good life today.

You may be asking, why 25%?

That sounds like way to much, I could never do that.

Why I recommend working toward investing 25% of your gross income into tax-advantaged accounts is it builds a solid habit of investing in yourself before spending.

It provides a form of forced scarcity where you build a joyful life today while living on less money than you make.

Investing 25% also accelerates the pathway to financial independence.

It provides your future self with freedom to quit your job, retire early, try new endeavors, and control what you do with your life.

25% is all about giving your future self flexibility.

To make progress toward investing 25% of your gross income, you have two options:

I recommend doing both.

Take a hard look at your spending habits and identify the things you value.

This provides clarity on what you should spend your money on (within reason of course) and where you should be frugal.

If reducing your spending doesn’t cut it, you need to find a way to make more money to live the life you want to live.

Find the sweet spot where you make enough money to live a fulfilling life today while investing 25% of your gross income for tomorrow.

Investing Fundamentals

The goal of investing is to reach financial independence so that your future self can do what you want, when you want, with the people you love.

You need to balance spending today and saving for tomorrow.

To grow your wealth, you need to invest your money.

Hoarding cash is not going to work.

One of the best and most simple ways to grow your wealth and reach financial independence is to invest your money into tax-advantaged accounts.

The three tax-advantaged accounts you should use are the Roth IRA, 401(k)/403(b), and the HSA.

Your investing strategy should be simple and automated:

Really, that’s all there is to it.

If you follow these steps, you will build wealth and you will reach financial independence.

Investing can be complex, but it doesn’t have to be.

Ignore all the noise, the get-rich-quick schemes, the risky options, and all the “great financial opportunities” that seem to pop up out of nowhere.

Build solid financial habits and focus on the fundamentals.

Balance living your best life today while saving for your future self.

Future Learnings

Beyond this information, you will need to learn more over time as you level-up your financial knowledge.

I shared the key information you should know about the 401(k), 403(b), Roth IRA, and HSA accounts.

However, there is a lot that I left out.

Over time, you will want to learn more about these accounts to understand the special rules, implications, and ways in which you can leverage them based on your own unique situation.

There are other tax-advantaged accounts like the 457(b), 529, Traditional IRA, FSA, and others.

These are great and likely will be options you want to explore.

As you learn more about the stock market and investing, you may feel like you should move away from target date retirement funds.

I caution you to tread lightly as this is a slippery slope.

Less than 10% of professional investors fail to beat the market.

The odds are stacked against you, so don’t gamble on your future.

If you want to have “more control” over your investments, I recommend only using low cost, total market index funds and making sure you are well diversified.

With just this information, you can see how investing can easily get more complicated.

There is a lot more you will need to learn as financial complexity inevitably creeps into your life.

Abundance and complexity will come as you reach financial independence, so be prepared to adapt your strategy over time.

Overall, this guide is a summary of all the key information I wish I had known about investing when I started learning about personal finance.

I wanted to provide a practical playbook that would help others, like you, implement a simple investing strategy and reach financial independence.

It is a simplified guide, but with enough nuance to hit the key information you should know and do.

The balls in your court now.

It’s time to put in the hard work of investing for tomorrow while living a good life today.

Until next time, stay curious and keep on learning.

— Chris