The Path to Financial Independence: Moving From Second to Third Base

As we continue to explore the wealth game, it’s time to set our sights on third base and head toward financial independence. At this point in your financial life, you’ve reached a point where many would consider you successful. You’ve got a house. You’re regularly contributing to your 401(k) and other retirement plans. Likewise, you’ve built an investment portfolio and have begun accumulating assets. It feels good. You might even be tempted to just stay in this place. But you’re not done yet. Acquiring true wealth requires that you continue rounding the bases.

Follow Along With The Financially Simple Podcast!

• How to know if you’re ready to move from second to third base
• How the move from second to third base differs from the move between first and second
• The Millionaire Next Door Calculation Gap and the power of compounding interest
• Using your income increase to expedite your transition from second to third base

Financial Independence: Knowing When to Move to Third Base

Making the move from second to third isn’t like the transition from first to second. Although there’s a lot of action, it’s just not as difficult. This is because much of the heavy lifting has already been done. During the move from first to second base, you developed the financial habits that will propel you toward third. Likewise, you began accumulating assets to help you reach your goals. Therefore, making your way from second to third (and toward financial independence) isn’t really as difficult. It just requires intense focus and a bit of patience. But how do you know when you’re ready to make the move?

You may recall the calculation I mentioned in the last entry. In it, I used a calculation from The Millionaire Next Door by Dr. Thomas J. Stanley. This simple calculation provides a benchmark for what your net worth should be according to your age and income. You know you’re ready to make the move from second base to third base when you’ve begun to close the gap between your actual net worth and where your benchmark calculation says you should be. If you need a refresher on this calculation, check out the link below.

RELATED READING: Building Assets – Safe on Second

As you begin closing that gap, there’s a natural progression. You’re not repeating the process that took you from first base to second base. No. That was all about building the muscle memory for your financial life. Instead, the steps to get from second to third are mundane and repetitious. You’ve already got assets and that’s a huge piece of the puzzle, friends. After all, the goal of getting to third base is to have enough income-producing assets to cover your lifestyle without having to work to earn a living. So, how do you get to third base? What does it take to gain financial independence?

The Role of Compounding Interest

According to Investopedia, compound or compounding interest is “the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.” Similarly, Kate Ryan, Director of Investment Solutions for TIAA states that “Compounding happens when earnings on your savings are reinvested to generate their own earnings. Those, in turn, are reinvested to generate their own earnings and so on. So over time, compounding can add a lot of value because you have more time periods — more earnings — and those earnings are ‘earning earnings.’”

Friends, this is why the trek from second to third is so much easier than the move from first to second. By the time you’re leading off second base, you’ve already begun to utilize the power of compounding interest, propelling you toward third. As you earn more and more money from your investments and the interest they earn, you can reinvest those earnings, creating a snowball effect that can carry you toward real wealth accumulation. Then, as each of your assets grows, a shift begins to take place. Although you may have begun working to earn a living, now your assets are paying your way. As you allocate more and more of your returns toward such areas as real estate (rental properties, commercial, etc.), small business, equities and bonds, and combine them with comprehensive tax planning, you suddenly find yourself on third base, knowing that you don’t have to work today to pay the bills.

Gaining Financial Independence

Beyond compounding interest, another plus is your income should be increasing, allowing you to take the surplus over your lifestyle to magnify the speed at which you move from second to third, it’s a win-win. What do I mean by that? Let’s assume you live on $50K per year. Yet, your income is $75K. As you can see, you have a $25K surplus which can be used to increase your net worth. You could place that surplus into an investment account or use it to buy real estate, etc. There are many options for making that money go to work for you. But that’s just this year.

Let’s say your income increases to $100K next year. Well, by holding your lifestyle to the same magnitude as it was prior to the pay increase, you now have $50K to put towards your trip from second to third. Those new earnings can snowball, creating earnings upon earnings. The goal is to shift your mind away from reliance on income—the job that you have, and the business you sacrifice so much for—and move into the assets you’re accumulating. That’s where you’ll find true financial independence. That’s how you win the wealth game.

Wrapping Up…

Folks, if you still need help figuring out the wealth game and how you can make your money work for you, reach out to us! It’s what we do day in and day out. I know life is hard. I get that. But life is good. Trying to win a game that most don’t even know they’re playing is frustrating. But small changes to your everyday habits, and having a great advisor, can help you to start rounding the bases. With a great coach and a solid plan, we can make playing and maybe even winning the wealth game at least financially simple. Let’s go out and make it a great day!

Are you interested in learning how you can break the financial handcuffs and begin rounding the bases? Reach out to our team. We would love to speak with you about your unique situation.