Chapter 1 — We’ve Been Duped
Five lies stand between most people and financial freedom, and the first is the most insidious. Lie #1 tells us that financial freedom requires a big salary — that we are destined to live paycheck-to-paycheck. Our minds make this easy to believe. Imagine somebody making $50,000 a year their entire adult life. Even saving 10 percent a year, or $5,000, how could they ever become a millionaire? Over 45 years they would have saved $225,000. That amount couldn’t possibly grow to $1 million. Or could it? Would you believe it could reach $3,421,620.11? That is what our $50,000-a-year earner accumulates over a working career by investing just $5,000 a year — about $416 a month — at an average investment return. The lie was never true to begin with.
Lie #2 insists that financial freedom takes 40 years or longer to achieve. Once you believe this, you stop seeing financial freedom as a goal worth pursuing. Either you’ll never reach it — per Lie #1 — or you’ll have one foot in the grave when you do. Both feel like reasons to give up before you start.
Lie #3 tells us that happiness is expensive. The truth is more uncomfortable: we so often spend money not from deliberate choice but from the habits and routines of life. Once these habits form, they are difficult to break. As Warren Buffett has stated, chains of habit are too light to be felt until they are too heavy to be broken. The question is never whether you can afford the latte. The question is whether the latte is actually what you want.
Lie #4 says that investing is complicated. Imagine spending no more than about 30 minutes a year — yes, a year — to maintain your investment portfolio. That is genuinely all it takes with the right approach, and the right approach is simpler than most people dare to believe.
Lie #5 insists that debt is a fact of life. Underneath this lie is a misunderstanding of happiness itself. We each have a baseline of happiness. A positive event — a raise, a shiny new purchase — may temporarily lift that baseline, but gradually we return to it. That cool new car you bought six months ago is today just a car. The raise you received last year is a distant memory as you fret about this year’s. We borrow against our future selves for feelings that evaporate faster than the ink dries on the contract.
Chapter 2 — The Game Plan
This is not a book for one kind of person. If you are in your twenties, you can use what follows to retire in your thirties or forties. If you are in your forties or fifties with little savings, you can use it to retire on time. You can, if you choose, work a typical 45-year career and retire in your sixties or seventies — you’ll have a truckload of money if you do. Or you can use your financial freedom to empower yourself to do meaningful work you love, at any age. The plan doesn’t dictate the destination. It opens the door.
Chapter 3 — A Note to Mom and Dad
Financial freedom does not have to mean permanent retirement from everything. Consider the trajectory of the man who wrote this book: Rob Berger retired at 49, and again at 51, and went back to work he loves at 52. What mattered wasn’t the leaving. It was having the choice. That is what financial freedom buys — not idleness, but options. The ability to walk away from something you don’t love, and toward something you do.
Chapter 4 — The Money Multiplier
Most people see each dollar that enters their lives as nothing more than a dollar. What they don’t see is the dollar’s potential. Every time a dollar passes through your hands, you face a choice: spend it, or put it to work. Spending is, of course, necessary. Housing, food, and clothing are true needs. Cable TV, expensive cars, and gym memberships are wants. No judgment there — but the distinction matters.
As for the dollars you don’t spend, you can put them to work: deposit them in a savings account, invest in a 401(k) or IRA, or use them to pay down high-interest debt. Every dollar you put to work is like an employee — the best kind. They never complain about working conditions. They don’t ask for a raise. They never sleep or request time off. They work 24/7. And if you let them, they will keep working for the rest of your life, like the Energizer Bunny, just keeping going and going and going.
The only change required to start building wealth is to invest your money. This doesn’t require working overtime, staying at the office on weekends, getting a second job, cutting out vacations, eating rice and beans every day, winning the lottery, or getting a raise. Just invest your money. Wealth comes from investment returns, not directly from saving money. You must save to get the ball rolling, but the vast majority of wealth comes from investment returns. That’s true for you and me, and it’s true for the richest men and women in the world.
Think of the Money Multiplier as a moving walkway for your money. The longer you let your money ride, the faster that walkway goes. It consists of just three parts: the amount you invest, the time you let it run, and the rate of return you earn.
Chapter 5 — Tick-Tock
Time is the most powerful element of the Money Multiplier, and the numbers make this almost impossible to believe until you see them. If we assume a 9.3% return, one single cent compounded annually for 225 years would be worth $4,892,563.14. The same compounding that builds an avalanche of wealth on the way up multiplies losses for those who delay.
Consider two investors. Samantha graduates from college, starts her first job, and immediately signs up for her company’s 401(k). She invests $208 a month for 10 years, earning a 9.3% annual return, and accumulates $40,940.80. After year 10, she stops adding money entirely — but lets her investments continue to compound. Thirty-five years later, her nest egg is worth $1,047,937.16. She is a millionaire, and she hasn’t contributed a dollar in decades.
William waits 10 years to begin. Once he starts, he invests that same $208 a month for 35 years — three and a half times longer than Samantha saved. His total? $660,135.60. He invested for more years. He contributed far more total dollars. And he still ends up with less. The compounding Samantha captured in her first 10 years could not be replicated by William’s subsequent 35.
The best time to start saving and investing is today. Delaying even one year can cost thousands of dollars over the long run. Delay for five, 10, or 15 years and the losses compound like interest on a credit card. If you are late to the game, there is still hope — but the clock is already running.
Chapter 6 — Think Small
Small amounts of money, invested over time, become large piles of cash that can change your life. To make this concrete, consider the Rule of 752. Take any recurring weekly expense and multiply it by 752. The result is how much you would have accumulated if, instead of spending that money, you invested it for 10 years earning a 7% return. There is no magic in the number 752 — it is simply the result of the Money Multiplier applied to a weekly expense at that return rate.
The numbers become staggering over a 45-year period, where the multiplier becomes 36,036. A $4 latte three times a week adds up to $432,432. Cable TV at $25 per week adds up to $900,900. Eating out twice a week adds up to $1,081,080. These are not tricks or exaggerations. They are what happens when small recurring costs meet the power of compounding over a lifetime.
The point is not that you must give up every latte or cancel every subscription. The point is that seemingly insignificant weekly choices, made repeatedly over decades, shape the trajectory of your financial life. You don’t need a lot of money to start investing. Even $25 a month will get you started — and once it starts compounding, it has nowhere to go but up.
Chapter 7 — Investment Returns
Over a 40-year period, an initial investment doubles four times at a 7% rate of return — once every 10 years. At 9%, the same investment doubles five times, once every eight years. The gap between those two trajectories is not merely academic. It is the difference between two entirely different financial lives.
Consider what a single percentage point costs in practice. Instead of accumulating a Freedom Fund of more than $1.7 million, a seemingly small 1% difference in return lowered the outcome to $1,213,503.86 — a loss of $494,568.90. Nearly half a million dollars, gone, not from a bad decision or a market crash, but from a difference smaller than the margin of error on most people’s monthly budgets. The rate of return on your investments matters enormously, and seemingly small changes, multiplied over time, have a huge, life-changing effect on your Freedom Fund.
Chapter 8 — Financial Freedom
Ultimate financial freedom comes when you can live off your savings and investments without needing to work. It is as simple as that. We are conditioned to define financial success by a fat paycheck, yet financial freedom hinges on how much you spend, not how much you make. That is what explains the all-too-common stories of celebrities, athletes, and lottery winners going broke. They had huge incomes, yet they failed to achieve lasting financial freedom because their expenses consumed all of their income — and then some.
Financial freedom can be measured across seven levels, each defined by how many years of expenses you have saved. The levels give you a concrete way to measure progress, which matters more than it might seem. Known as the Progress Principle, making progress toward any meaningful goal gives us the grit to keep going. Each level represents a milestone worth recognizing in its own right.
At Level 5, you’ve saved five years of expenses — assuming $50,000 in annual expenses, you’ve amassed $250,000, more than most people ever accumulate. Level 5 is also a danger point. With so much saved, it’s easy to become complacent, to drift back toward old habits. But it is also where you first feel the weight lift. Knowing you could walk away from a bad job and be fine financially is, as it turns out, a great feeling.
Level 6 means 10 years of expenses saved. Here something remarkable begins. At $500,000 saved, a 9.3% return generates approximately $46,500 over the next 12 months, bringing the total to $546,500. The following year, the portfolio generates just over $50,000 — the same amount being spent. For the first time, your money is working as hard as you are.
Level 7 is ultimate financial freedom — 25 years of expenses saved. At this point, you can completely retire if you choose. Or, like Rob Berger himself, you can work on projects you love while still earning income. The choice becomes yours, which is exactly the point. When you reach Level 7, you can pursue your passions. That may mean keeping your job, starting a business, or doing something else entirely. You decide.
The math behind Level 7 comes from the 4% rule, developed by financial planner William Bengen in the early 1990s. It is a guideline for how much of your Freedom Fund you can spend each year without running out of money. In year one, you spend 4% of your investments. In each following year, you adjust by the rate of inflation. If you spend $50,000 a year, you reach Level 7 when you’ve saved $1,250,000 — because 4% of $1,250,000 equals $50,000. You get the same result by multiplying your annual expenses by 25. Think of it less as a hard rule and more as a reasonably safe guideline — one designed to give you a reasonable chance of dying before your money runs out.
To determine your current level, know how much you spend each month — including periodic expenses like gifts and vacations. For savings, don’t count money earmarked for a specific goal like a home or car purchase. That short-term money is already spoken for. What you’re measuring is the Freedom Fund that will one day work for you without being asked.
Chapter 9 — How Much Should You Save?
Saving 10% was popularized by George S. Clason’s The Richest Man in Babylon, originally published in 1926. Save 10% of every dollar that comes into your life, Clason argued, and you’ll do just fine. It was true in 1926, and it’s still true today. Dave Ramsey, never one to undersell urgency, espouses saving 15%, stressing in one podcast that there is nothing magical about the number — the key is to get serious. Before Senator Elizabeth Warren was a senator, she co-wrote a book on personal finance, All Your Worth: The Ultimate Lifetime Money Plan, which recommends the 50/20/30 budget: 50% of income to needs, 30% to wants, and 20% to savings.
These are all reasonable rules of thumb, and rules of thumb make a good starting point. But always think for yourself, making informed decisions about your own finances. What matters most is this: save even 10% and you are doing better than the vast majority of Americans. According to the Fed, the average saving rate in the United States is around 6%. The bar for outperforming the norm is genuinely low. Clear it.
Chapter 10 — Emergencies
There is only one kind of shock worse than the totally unexpected: the expected for which one has refused to prepare. An emergency fund is not optional equipment. It is the foundation that makes everything else possible — the buffer between a temporary setback and a permanent derailment of your financial plan.
When your saving rate rises to 20%, your spending rate drops to 80%. Not only are you saving more, but you also need less money to equal one month of expenses. The emergency fund itself becomes easier to build. The Slingshot Effect describes what happens next: every dollar you don’t spend increases your savings and simultaneously decreases how much you need in your Freedom Fund to reach each level of financial freedom. The more you save, the less you spend. The less you spend, the faster you achieve each level. Your saving rate — and by extension your spending rate — is the lever that multiplies everything else. It is the key to unlocking a lifetime of financial freedom.
Chapter 11 — The 4% Rule
Over the past century or so, inflation has averaged just under 3%. Reducing the assumed 9.3% nominal return by 3% yields a 6.3% real rate of return — adjusted for inflation. When estimating how long it will take to reach Level 7 financial freedom, always use the real rate. The nominal return matters for accumulation. The real rate tells you the truth about your purchasing power.
With a nominal return of 9.3%, you might wonder what happens to the other 5.3% that the 4% rule doesn’t let you spend. Three things consume it: inflation must be countered by reinvesting the difference so your portfolio keeps pace with rising prices; stock market returns are lumpy — some years up 25%, others down 25% — and your portfolio must survive extreme bear markets; and in retirement, most people shift toward more bonds, moving from a 70/30 stock-to-bond allocation toward 60/40 or even 50/50, which lowers expected returns below 9.3%. The 4% rule accounts for all of this. Think of it less as the 4% Rule and more as the 4% Guideline — a historically supported probability, not a guarantee.
To use it, take your annual expenses and divide by 4%, or multiply by 25. The result is your Level 7 Freedom Fund goal. For extreme early retirees planning to live off savings for 60 or more years, 3% or 3.5% is a more conservative assumption. For someone planning to work until 80 with only 20 years of retirement ahead, 5% or higher might be appropriate. For most purposes, 4% is the right starting point, and these calculations don’t account for additional income sources like Social Security or a pension, which only improve the picture.
One of the most important insights about Level 7 is this: how much you earn doesn’t change how long it takes. The time to Level 7 is a function of the percentage of income you save, your rate of return, and your withdrawal rate — not the raw dollar amount. If two people each save 10% of their income and earn the same rate of return, it will take them the same amount of time to reach Level 7, even if one earns $50,000 a year and the other $500,000. The higher earner is saving more dollars, yes — but they’re also spending $450,000 a year and need a Freedom Fund of $11,250,000. The percentage is what matters. A one percent difference in investment returns can add five years or more to the timeline. And if pushed for a concrete savings target, the answer is always: at least 20%.
Chapter 12 — Level 7 & Saving Rate
The Latte Factor — the idea that skipping a daily $5 beverage frees up about $150 a month to save and invest — tends to generate argument. Critics call it trivial. Defenders call it symbolic. Both miss the point. At a 9.3% nominal return over 45 years, that $150 a month accumulates to $1,231,783.24. That is not a trivial number. It is more than most Americans have saved by the time they retire.
The deeper principle is the Slingshot Effect: every dollar you save has two effects simultaneously. It increases your savings and it decreases the size of your Freedom Fund target. Spend less, and the finish line moves closer even as you move faster toward it. Both forces compound together. That is why the saving rate is not merely one variable among many. It is the variable that accelerates every other part of the plan.
Chapter 13 — The Cost of Happiness
What makes you happy? It is a simple question and one of the hardest in life to answer. Many people live their entire lives without ever seriously engaging it. Before going any further, sit with it. List the top 10 things in your life that genuinely make you the happiest. For most people, the list turns out to be shorter than they expected — and cheaper.
This is the central reframe: we shouldn’t be asking how much we need to make to be happy. We should be asking how much we need to spend to be happy. The distinction sounds subtle, but it changes everything. Income chasing is a game with no finish line. Figuring out what your happiness actually costs gives you a target — and often reveals that the target is already within reach.
Chapter 14 — Freedom First, Lattes Second
Warren Buffett put the operating principle plainly: “Do not save what is left after spending, but spend what is left after saving.” One very important lesson about money, learned over three decades: relying on willpower alone to save money rarely works. Willpower may get the job done for a time, but eventually the guard comes down. It is exactly like dieting. By sheer force of will you may lose a few pounds, but as the pounds come off, willpower subsides, and eventually it’s all ice cream and fries. They call it a yo-yo diet, and you can end up weighing more than when you started. The same thing happens with money.
The solution is to stop relying on willpower and start relying on systems. Before you allocate a single dollar of your income to expenses, decide how much you’ll save. This may require a look at your necessary expenses, but arrive at your saving rate first — then spend what’s left. Once you’ve decided, automate the process entirely. Have the money you’re saving removed automatically from your checking account as soon as you get paid. If your employer offers direct deposit, split your paycheck. If not, set up automatic transfers with your bank to a savings account and an investment account.
Then make the saved money as difficult as possible to reach. Set up a savings account at an online bank separate from the one where you keep your checking account. To access the money, you have to initiate an online transfer that takes several days. Think of this as keeping the junk food out of the house: what isn’t within easy reach doesn’t get eaten. If you use transfers rather than direct deposit splits, schedule them to occur as soon as you get paid. Every day that passes between payday and the transfer is a day that money can disappear into something else.
Chapter 15 — The Money Audit
Write down every monthly bill you have, including the amount. So much spending happens without thought — especially when everything from the mortgage to utilities to cable is paid automatically from your bank account or charged to a credit card. The goal of a Money Audit is a complete list of all monthly expenses: rent or mortgage, credit card debt, car loans, school loans, all other debt, utilities, internet, cable, home phone, cell phone, streaming subscriptions like Netflix and Hulu and Amazon Prime, and all insurance — car, life, health, and homeowners.
Creating a complete list is critical. Miss one item and you may miss an opportunity to save. Check your credit card and bank statements carefully to make sure nothing slipped through. Out of sight is genuinely out of mind, and most people find at least one surprise when they actually look.
Common places to save include increasing insurance deductibles, reducing life insurance if you are over-insured, moving to a lower-cost cell phone provider like Cricket or Republic Wireless, dropping to a lower-tier cable package, reducing internet speed, refinancing debt to a lower rate, getting a roommate, or paying car insurance for six months at a time instead of monthly. Real-world examples show the range of what’s possible: switching to Mint Mobile for cell service saves $500 a year; negotiating internet pricing annually saves $30 a month; shopping at Aldi instead of a conventional grocery store saves $30 per trip; moving from a two-bedroom high-rise to a studio saves $150 a month; biking to work instead of driving saves roughly $40 a month in gas and maintenance; cancelling a gym membership and buying home equipment saves $65 a month; making coffee at home with a French press and bulk beans saves $70 to $80 a month; switching to SimpliSafe home security at $15 a month saves $270 a year on homeowner’s insurance; and one family that shopped their house and auto insurance saved $3,000 a year — with umbrella coverage included in the new policy.
If your employer matches retirement contributions, take advantage of the match without exception. The best ways to save money are the ones that are painless and require action just once. Conduct a Money Audit at least once a year, and automate any money saved so it goes directly toward your financial freedom.
Chapter 16 — The Power of Habit
The Latte Factor is a metaphor for how we waste small amounts of money on small things — a teaching method designed to get people to rethink how they spend and realize they have more than enough to start saving. Breaking a habit is painful at first. The daily mocha fills the mind, feels like sacrifice, feels like it genuinely hurts to give up. But then it doesn’t. After a couple of weeks, the adjustment happens. The craving disappears. And it turns out the daily habit wasn’t providing the happiness it appeared to be covering. In the end, the Latte Factor isn’t about avoiding things that bring genuine pleasure. It’s about making sure how you spend money truly brings the joy you desire. In many cases, we spend out of habit, and the happiness is fleeting.
Small wins fuel transformative changes by leveraging tiny advantages into patterns that convince people bigger achievements are within reach. This is the mechanism behind habit-based financial change, and it can be approached deliberately in four steps.
The first step is to identify your financial habits. Think about how you routinely spend money. Track everything you spend for two weeks, or review recent credit and debit card statements. Look for patterns: lunches out every day, subscription services you’ve stopped using, habitual purchases of gadgets or clothes, or weekend spending driven by boredom rather than desire. Take 30 minutes and examine your financial life to locate the routines.
The second step is to pick one spending habit to change — just one. If you try to change too much at once, you are more likely to fall short of your goal entirely. One habit, changed well, beats five habits changed badly.
The third step is to replace the habit with a better one. Don’t just cancel the weekly night out — replace it with something fun that costs less. Don’t just cut back on eating out — replace it with an extra special meal at home. Think through the cue, routine, and reward structure of the habit you want to change. Perhaps you eat out at lunch every day because noon is the cue, leaving the building is the routine, and the real reward isn’t food but escape from the office. The solution isn’t to eliminate the escape — it’s to change the routine. Bring your lunch and still leave the building to eat at a nearby park. The reward is preserved; the cost is eliminated.
The fourth step is to automate your savings. Increase your 401(k) contribution, your savings account transfer, your investment transfer, or your debt payment to capture the money you’re no longer spending. If you don’t automate this step, you’ll end up spending the money on something else — and may not even remember what.
Chapter 17 — What If?
Ralph Waldo Emerson observed that all life is an experiment and that the more experiments you make, the better. The What If question is an experiment in imagination — a way of thinking outside the current life without requiring any permanent commitment. Start small: What if I skipped my daily latte? What if I took my lunch to work? What if I ate out less? Then ratchet up the boldness: What if I scaled back my vacations? What if I got rid of cable TV? What if I biked to work a few times a week? Then go to the questions most people refuse to entertain: What if I got rid of one of my cars — or all of them? What if I downsized my home? What if I moved close enough to my job to walk? What if I moved to a less expensive part of the country?
Some of these raise immediate objections. You think: that’s impossible. But take time with the impossible ones. What would you actually do without a car? Your daily routine might change dramatically, but you would survive. The purpose of this exercise is not to argue you should sell your car. The purpose is to invoke the imagination — to think beyond the current situation, to consider seriously what at first seems out of the question.
The numbers make the case concretely. At a 6.3% real return, getting rid of cable TV and saving about $100 a month gets you to Level 7 three years faster. Eating out less and saving about $200 a month gets you there six years faster. Going without a car and saving about $300 a month gets you there eight years faster. All three changes together, for $600 a month in savings, gets you to Level 7 more than a decade sooner — about 30 years instead of nearly 43.
Running 21-day experiments is the practical tool here. Twenty-one days is long enough to discover whether a change is tolerable, even enjoyable, without requiring a permanent commitment. It is a simple way to test not only whether you can put more money toward your Freedom Fund, but also whether the way you are living today actually makes you happy.
Chapter 18 — The #1 Freedom Fund Killer
Cars are the number one Freedom Fund killer. Jeff Rose of GoodFinancialCents.com describes car payments as the single greatest thing killing our wealth, and the numbers make the case powerfully. According to NerdWallet, the average monthly cost of owning a new car breaks down as follows: $523 for the car payment, $98 for insurance, $146 for gas, $99 for maintenance and repairs, and $12 for registration, fees, and taxes — totaling $878 per month.
Invested instead at a 9.3% annual return, that $878 a month becomes $172,817 after 10 years, $609,257 after 20 years, $1,711,459 after 30 years, and $4,495,003 after 40 years. Not everybody can go without a car, and even those who do will spend something on alternative transportation. Not everybody buys new. Many pay cash, avoiding interest but still forfeiting the investment opportunity. And the $523 average payment doesn’t last forever — eventually the car is paid off and driven for some period of time. All of this is true.
And yet buying a new car every five years, under these assumptions, costs over $3.7 million in missed wealth-building opportunities over a lifetime. Simply driving the car longer adds hundreds of thousands of dollars to your wealth — assuming you invest what you aren’t spending on the car. Cars are expensive. Any reduction in car expense can go a long way toward supercharging the journey to Level 7. Freedom first, cars second.
Chapter 19 — Stocks & Bonds
At first glance, lending money to a company seems safer than buying part of it. When you buy a bond, you hold a contract requiring the company to pay you interest and return your principal when the bond matures — when the term of the contract ends. If the company fails to pay, you can file a lawsuit and, depending on the bond’s terms, lay claim to the company’s assets to recover what you’re owed.
Bonds carry two key risks. The first is credit risk: the company fails to pay. You can sue, but if things go badly enough, there may be no assets to recover even if you win. The second risk, often more serious, is interest rate risk. Suppose you lend $100,000 for 10 years at 7%, which was competitive when you agreed to it. Two years later, similar bonds are paying 10%. You’re stuck with eight more years of earning 3% less than the going rate for equivalent risk. That gap is a real cost — and it’s why rising interest rates hurt the value of existing bonds.
Owning stock has clear potential negatives: no guaranteed interest payments, no contractual right to the return of your investment, profits may not materialize as expected, and the business could fail entirely. But profits returned to a company’s owners — called dividends — offer something bond interest does not. A company is generally not contractually obligated to pay dividends, but dividends can grow over time in ways that fixed bond payments cannot. When a company like Apple distributes profits, the dividend is paid out proportionally to each owner based on their ownership stake — no different from owning part of a local dry cleaners, just at a vastly larger scale.
History makes the performance comparison stark. Imagine investing $300 across three asset classes in 1928. By the end of 2017: three-month Treasury Bills had grown to $2,105.63; ten-year Treasury Bonds to $7,309.87; and the S&P 500 Stock Index to $399,885.98. Since 1928, Treasury Bills have never had a negative year. Ten-year bonds have had 17 negative years, with 2009 as the worst at negative 11.12%. The S&P 500 has had 25 negative years — including a loss of 43.84% in 1931 and 36.55% in 2008.
The takeaway is clean: in the long run, stocks perform better than bonds. In the short term, stocks are more volatile than bonds. Both facts must be held together, because acting on only one leads to either reckless risk-taking or timid underperformance.
Chapter 20 — Mutual Funds
Broadly speaking, there are two types of mutual funds: actively managed funds and index funds. Actively managed funds employ professional managers who attempt to pick winning investments. Index funds simply track a market index — a predefined basket of securities. Some of the more widely tracked indexes include the Russell 3000, which follows 3,000 of the largest U.S. companies; the Wilshire 5000, which tracks all stocks trading in the United States; the S&P Midcap 400, covering mid-size companies; and the FTSE All World Index, which tracks over 3,000 companies in nearly 50 countries.
Over long periods of time, index funds outperform most actively managed funds on an after-fee and after-tax basis. In 2016, two-thirds of actively managed large-cap U.S. funds underperformed the S&P 500. For small-cap funds, 85% underperformed their benchmark. Over 15-year periods, 90% of actively managed funds underperform their respective indexes. Since 2001, 89% of actively managed international funds have trailed theirs. Index funds are cheap, simple, and most outperform actively managed funds over the long run.
Index funds come in different shapes covering different market segments. Small-cap stocks — shares in smaller companies — have historically produced higher returns than large-cap stocks over long periods, but with considerably more volatility. Think of small-cap stocks as a wild roller coaster ride. Growth stocks, like Amazon, Tesla, and Netflix, are companies with rapidly growing revenue. They are the high flyers, expensive relative to their earnings. Value stocks are companies whose stock price is considered undervalued — often older, steadier businesses like Ford.
A Real Estate Investment Trust, or REIT, is a mutual fund that invests in real estate — apartment buildings, retail space, commercial property, and even mortgages. An important tax detail: REIT funds are not tax efficient. They pay out a substantial portion of their profits each year, and those distributions are taxed as ordinary income. If you invest in a REIT fund, do so inside a retirement account. Commodity funds invest in commodities like oil, corn, and gold — either directly or through companies whose performance depends heavily on commodity prices. Bond funds vary by duration: short-term funds with less than three years carry low interest rate risk; intermediate-term funds run three to ten years; long-term funds extend beyond ten years. Mutual funds investing in higher-risk corporate bonds — sometimes called high-yield, or junk bonds — carry more risk but also more potential reward. They are not junk in any useful sense of the word.
Chapter 21 — Mutual Fund Fees
Warren Buffett said it plainly: most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. History bears this out — the lower the cost of an investment, the better it performs in the long run. This is counterintuitive, because we are conditioned to believe we get what we pay for. In most areas of life, that’s true. In investing, it runs exactly backward.
The primary cost to understand is the expense ratio — the annual fee a fund charges, expressed in basis points. One hundred basis points equals 1%. Fifty basis points equal 0.50%. Expense ratios range from just a few basis points, like 0.05%, to well over 200, or 2%.
There is a dirty little secret that few investors know: the transaction costs mutual funds pay when buying and selling securities do not come out of the expense ratio. They are a separate, hidden fee. Not even the fund knows what these will be until it actually makes trades. You can find past transaction costs buried in what is called a Statement of Additional Information — but most investors never look. Index funds, because they trade infrequently, tend to have far lower transaction costs than actively managed funds, adding another layer of advantage beyond the expense ratio alone.
Some mutual funds also charge load fees — paid either when you buy shares (a front-end load) or when you sell them (a back-end load). A typical front-end load is 5.75% of the amount invested. Funds with load fees also tend to charge higher expense ratios, and both the loads and the higher ratios go in part to pay the investment advisors who sell them. For actively managed funds, an expense ratio above 75 basis points — 0.75% — is too expensive; closer to 50 basis points is better. For index funds, keep the expense ratio below 25 basis points, and preferably below 10. The best index funds from Vanguard and Fidelity cost less than five basis points, and Fidelity has recently begun offering some index funds at no cost at all.
High fees can add years — even a decade — to the time it takes to reach Level 7 financial freedom. Index funds offer both low fees and better long-run performance. Keep fees as low as possible so your money works for you, not for a fund company or investment advisor.
Chapter 22 — Investing Made Easy
There are four goals to keep in mind when deciding how to invest: diversification, because no one knows which asset class will outperform over the next few decades; a tilt toward equities, because history tells us stocks outperform bonds over the long term; low cost, favoring index funds over actively managed ones; and simplicity, because life is complicated enough without making investing more so than it needs to be.
Mutual fund companies realized they could combine all four goals into a single product. Target-Date Retirement funds — TDRs — do exactly this. If you’re 25 and plan to retire at 65, you’d choose the fund nearest your target year. Vanguard’s 2060 fund, for example, currently invests about 90% in stocks and 10% in bonds. The 2020 fund, designed for people about to retire, invests 53% in stocks and 47% in bonds. As you age, the fund shifts automatically. TDR funds handle rebalancing — the process of buying and selling to maintain your target allocation — entirely on their own. They are truly set-it-and-forget-it investments, and by far the easiest way to invest. One drawback: in taxable accounts, TDRs include bond funds whose interest distributions are taxable. Good TDRs, like Vanguard’s, are relatively inexpensive but still cost more than building a portfolio directly from individual index funds. Poor TDR choices can get very expensive.
For investors who want a bit more flexibility while keeping simplicity, the TDR-plus-one strategy works well. Invest in a TDR and add one additional fund covering an asset class that matters to you. Investor Paul Merriman recommends pairing a TDR with a small-cap value fund like the Vanguard Small-Cap Value Index Fund, ticker VISVX. You might put 90% in the target-date fund and 10% in the small-cap fund.
The 3-Fund Portfolio takes the next step toward flexibility. It requires just three index funds: U.S. stocks, foreign stocks, and U.S. bonds. For long-term investors — those who don’t need the money for at least 10 years — an 80/20 portfolio is ideal. One strong example is 50% in Vanguard Total Stock Market Index Fund (VTSAX), 30% in Vanguard Total International Stock Index Fund (VTIAX), and 20% in Vanguard Total Bond Index Fund (VBTLX).
For investors with an appetite for more granularity, a 6-fund portfolio provides broader diversification at the cost of annual rebalancing. One allocation: 30% in U.S. large-cap stocks via Vanguard 500 Index Fund Admiral Shares (FVIAX); 10% in U.S. small-cap value via Vanguard Small Cap Value Index Fund Admiral Shares (VSIAX); 20% in U.S. bonds via Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX); 20% in foreign developed markets via Vanguard Developed Markets Index Fund Admiral Shares (VTMGX); 10% in emerging markets via Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX); and 10% in REITs via Vanguard Real Estate Index Fund Admiral Shares (VGSLX). There is no single right answer among these options. For those starting out, a TDR inside a retirement account is an excellent solution. The most important quality in any portfolio is that you’ll actually stick to it, no matter how the market performs.
Chapter 23 — Retirement Accounts
Harry Emerson Fosdick had the right instinct: don’t simply retire from something; have something to retire to. Retirement accounts make that possible by providing decades of tax-advantaged growth. They fall into three primary categories: workplace retirement accounts offered by your employer, individual retirement accounts you open on your own, and Health Savings Accounts available if you carry a High Deductible Health Plan.
The most common workplace accounts are the 401(k) and the 403(b). They carry annual contribution limits indexed to inflation — in 2019, the limit was $19,000, with an additional $6,000 catch-up contribution allowed for those 50 and older by year-end. Many employers match a percentage of employee contributions. The accounts come in two flavors with vastly different tax treatment. With a Traditional 401(k), contributions are deducted from your taxable income today. A $10,000 contribution at a combined 25% marginal rate cuts your tax bill by $2,500 immediately — but distributions in retirement are taxed as ordinary income. You are deferring the tax, not eliminating it. With a Roth 401(k), contributions come from after-tax dollars. There is no upfront deduction. But when you take the money out in retirement — including all decades of investment earnings — it is entirely tax-free. A $10,000 investment at age 25 growing to $406,768.46 by 65 at a 9.3% return: all of it tax-free. For most people, the Roth is the better choice. Note that employer matching contributions always go into a Traditional 401(k), even when your own contributions go into the Roth — so you will effectively carry two accounts.
IRAs — Individual Retirement Accounts — have lower contribution limits than 401(k)s. Traditional IRA contributions may or may not be tax-deductible depending on whether you have access to a workplace plan and how much you earn. Roth IRA contributions are never deductible, but qualified distributions in retirement are entirely tax-free, and you can always withdraw your contributions — not earnings — at any time without tax or penalty. Income limits apply: in 2019, the Roth IRA phase-out range for singles was $122,000 to $137,000, and for married filing jointly, $193,000 to $203,000.
If your income disqualifies you from contributing directly to a Roth IRA, a Backdoor Roth IRA offers an alternative. Contribute to a Traditional IRA, then convert it to a Roth. Because you took no deduction on the initial contribution, the conversion triggers no tax liability — assuming you convert quickly before the money grows appreciably. One complication: the IRS treats all your Traditional IRAs as one pool. If you have an existing deductible IRA alongside a new nondeductible one, the conversion is treated as coming proportionally from both, and the portion from the deductible IRA becomes taxable income. Michael Kitces has written an excellent article on the two 5-year rules for Roth contributions and conversions that is worth reading carefully before proceeding. Tax laws are tricky and change — consult a tax advisor.
The Health Savings Account deserves special attention. Its tax advantages are without equal — imagine combining the deductibility of a Traditional 401(k) with the tax-free withdrawals of a Roth. HSA contributions are tax-deductible regardless of income; the account grows tax-deferred; and distributions are tax-free when used for qualified medical expenses at any age. Before 65, using HSA funds for nonmedical expenses triggers a 20% penalty plus ordinary income tax. After 65, the penalty disappears, and the account functions like a Traditional IRA for nonmedical distributions.
The recommended order for most people: first, contribute enough to your Roth 401(k) to capture the full employer match — failing to do so is like having a winning lottery ticket and setting it on fire. Second, max out your Roth IRA; it is preferred over the HSA because contributions can be withdrawn at any time without tax or penalty. Third, max out an HSA if you have a qualifying health plan. Fourth, finish contributing the maximum to your Roth 401(k). Fifth, invest the remainder in a taxable account. Those in top tax brackets may do better with Traditional accounts, since the upfront deductions are more valuable at higher rates. Before anything else, save one month of expenses in a high-yield online savings account kept separate from your checking account. That emergency fund is the foundation everything else rests on.
Chapter 24 — How to Evaluate a Mutual Fund
The only tool needed to evaluate a mutual fund is Morningstar.com. Look up any fund from your 401(k) menu by ticker symbol to learn its full name, whether it charges load fees, its expense ratio, and what index or strategy it tracks.
As a practical example, consider a 401(k) menu listing “FID 500 Index (FXAIX).” Morningstar reveals the full name: Fidelity 500 Index Fund. It charges no load fees. Its expense ratio is just 0.02%. It tracks the S&P 500 index. That makes it a perfect choice for the U.S. stock component of a 3-Fund Portfolio. For bonds, “FID US BOND IDX (FXNAX)” charges just 3 basis points, no load, and invests in intermediate-term mostly U.S. bonds — the Portfolio tab confirms over 90% U.S. bonds. For international stocks, “FID INTL INDEX (FSPSX)” charges 5 basis points and invests in a blend of large foreign companies. Following this same process, you can locate emerging market funds, small-cap funds, REITs, or any other fund type your plan offers. The information is all there. You just have to look.
Chapter 25 — Let’s Do This
An old proverb holds that the best time to plant a tree was twenty years ago, and the second best time is now. The same logic applies to investing. If the cost of a Target-Date Retirement fund in your 401(k) is above 25 basis points — 0.25% — it is too expensive. Below 15 basis points is preferable. Anything above 100 basis points, or 1%, is highway robbery. If your plan doesn’t offer affordable TDR options, evaluate the other funds available and build a 3-Fund Portfolio from low-cost index funds: a U.S. stock index fund, an international stock index fund, and a U.S. bond index fund. The process from the previous chapter makes this straightforward.
Fidelity offers several index funds at very low cost and has recently introduced some with no expense ratio at all. Its TDR funds, however, are on the expensive side — if a target-date fund is what you want, Fidelity is not your best choice for that specific product. There is no minimum investment required to open an IRA at Fidelity, though some individual mutual funds do carry minimum investment requirements. Start where you are, with what you have, and let the moving walkway begin.
Chapter 26 — You
Senator Lindsey Graham once observed: it’s one thing to shoot yourself in the foot; just don’t reload the gun. Morningstar publishes two return figures for every fund: Total Returns and Investor Returns. Total Returns assume you invest a lump sum at the beginning of a period and leave it untouched. Investor Returns capture what real investors actually earned — and they are almost always lower. Why? Because investors tend to get excited when the market is up and frightened when it’s down. They invest more when excited and pull money out when nervous. The result is almost always the same: real investors underperform their own funds because they are terrible at timing the market. Welcome to the biggest threat to your journey to financial freedom: you.
The hard part isn’t coming up with a plan. The hard part is sticking to it. As Mike Tyson said, everybody has a plan until they get punched in the mouth. As investors, you will get punched in the mouth — often. The stock market has endured the 1929 crash, the Great Depression, World War II, the Korean War, the Bay of Pigs and the Cuban Missile Crisis, Vietnam, the Oil Embargo, near-20% interest rates in 1980 to 1982, Black Monday in 1987 when the market crashed 22.6% in a single day, the Dot-Com Bubble, and September 11th. We don’t know what the next crisis will be or when it will arrive. But there will be one. And a next one. And a next one. Good years often follow bad years. Bad years often follow good years. This is what normal looks like.
Many people who sold in fear during the 2007 to 2009 crash — when the market dropped more than 50% — tell their stories today with profound regret. By 2012, the stock market losses had been completely erased. Those who continued investing during those dark days were buying at low prices and then reaping the benefits as the recovery arrived.
On debt: avoid lifestyle debt like the plague. This is debt incurred on credit cards to fund living expenses — eating out, vacations, things that leave nothing of lasting value. Work hard to avoid car loans, and if you must finance, choose the least expensive option and remember that freedom comes first. Be smart about student debt by exploring loan forgiveness programs, income-based repayment plans, and refinancing to lower rates through lenders like SoFi, CommonBond, or Laurel Road. And don’t be house poor — a good rule of thumb is to spend no more than 20% of your monthly gross income on housing expenses. Finally, never stop learning. Read the Wall Street Journal even once a week. Read a good book on investing even once a year. You don’t have to become a money enthusiast — but don’t bury your head in the sand either.
Chapter 27 — Getting Investment Help
Some investment professionals earn their fees through commissions paid by the investments they sell you. This is the purpose of the load fee, and it applies equally to expensive insurance products like indexed annuities, which many commissioned brokers push aggressively. The potential for conflict of interest is not theoretical. By earning through commissions, these professionals have a powerful incentive to sell only investments that pay them. They will almost never recommend a low-cost index fund, because there is no commission attached to the sale. The solution, in theory, is a fee-only investment advisor who charges you directly rather than earning commissions. In practice, even fee-only advisors can be expensive enough to put a meaningful drag on long-term returns.
The best option is to manage your own investments. The tools and knowledge required are all available, much of it free. If you do want help, weigh the cost carefully. Traditional commissioned advisors and even most fee-only advisors charge more than is warranted for the straightforward index-fund portfolios that serve most investors best.
Chapter 28 — The Progress Principle
Of all the things that can boost emotions, motivation, and perceptions during a workday, the single most important is making progress in meaningful work. And the more frequently people experience that sense of progress, the more likely they are to be creatively productive in the long run. Whether they are trying to solve a major scientific mystery or simply produce a high-quality product or service, everyday progress — even a small win — can make all the difference in how they feel and perform. This is the Progress Principle, and it applies to financial freedom as directly as it does to any other meaningful pursuit.
If you are working hard to save 5% of your income, keeping your gaze fixed on a distant goal of a 30% saving rate is not helpful — it may be actively discouraging, making every step feel like a failure. Rather than focusing exclusively on the big goal, create smaller, intermediate milestones. Perhaps that means increasing your saving rate from 5% to 7% within 12 months. That is real progress, and real progress generates the motivation to keep going.
Concrete ideas for building small wins: set your 401(k) to automatically increase contributions by 1% each year — many accounts offer this feature built in. Use half of your next raise to increase your saving rate. Use half of your tax refund to do the same. These actions are small individually, but each one moves the needle and creates the experience of forward motion that makes the next step feel possible.
Chapter 29 — Debt
Every time you borrow money, you’re robbing your future self. The first problem with debt is that financing a purchase often lulls you into spending more than you should. This is particularly true with cars and homes. When the question shifts from “can I afford this?” to “can I afford the monthly payment?”, the total cost becomes invisible — and that invisibility costs people enormous amounts over a lifetime.
A home mortgage is generally considered good debt because homes tend to increase in value over the long term. But good debt can quickly turn bad. It goes wrong when you pay more than the home is worth — something that happened frequently just before the housing crash of 2007; when you spend more on a home than you can truly afford; when you finance nearly all of the purchase price, leaving no room to maneuver if values drop and you need to sell; or when you buy in an area where renting is far more affordable. As a rule of thumb, borrow no more than one to one-and-a-half times your expected first-year income when purchasing a home. Consider that figure carefully before you sign the loan documents.
Chapter 30 — How to Get Out of Debt
Getting out of debt is simple — note that simple and easy are not the same word. There are four steps: stop going into more debt, get rid of debt you can eliminate outright, refinance remaining debt to lower rates, and pay down what’s left.
Refinancing is worth pursuing for any debt, not just mortgages. For a mortgage or home equity line of credit, LendingTree is a good place to compare multiple lenders at once. For car loans, the same applies — shop for a lower rate if you’re keeping the car. For credit card debt, consider transferring the balance to a card with a 0% APR introductory period, which today can last up to 21 months. Balance transfer fees are typically 3% — well worth paying if the existing debt costs 15% or more. Student loans come in two varieties: federal and private. Refinancing either produces a private loan, and excellent resources for this include SoFi, CommonBond, and Laurel Road. Federal loans can be consolidated, but the resulting interest rate is simply an average of the old ones — not a reduction.
When deciding where to direct extra payments, two schools of thought compete. The debt snowball applies extra payments to the smallest balance first, regardless of interest rate. The progress of paying off individual debts completely can be powerful motivation, and research described in the Harvard Business Review supports its effectiveness: it is a straightforward strategy easily communicated and applied, and that clarity matters for the millions of Americans struggling with credit card debt. The debt avalanche applies extra payments to the highest interest rate first, which is mathematically optimal — it gets you out of debt faster and at lower total cost. Depending on your interest rates, the snowball method could cost thousands in additional interest payments and meaningfully lengthen the payoff timeline. Calculate the difference between the two methods using a free debt snowball calculator before deciding which to follow.
Chapter 31 — Priorities
In most cases, investing should not take a backseat to paying off debt. That doesn’t mean ignoring debt — making more than the minimum payments matters. But tackling debt should not come at the expense of saving and investing. The priority order is important: saving and investing is the number one financial priority, not debt repayment. Giving up an employer match to your 401(k) in order to pay down debt faster is a costly mistake — the match is an immediate 50% to 100% return on your contribution, which no debt payoff strategy can match. And perhaps most importantly, avoiding new debt is vastly more important than how quickly you pay off existing debt. The hole gets harder to dig out of the faster you’re still digging.
Chapter 32 — Yes, but…
The key is to see yourself as an investor, regardless of your age. Investing isn’t for old people. It is for anyone, at any age, who wants to take control of their money and achieve financial freedom. The sooner you start, the easier the whole journey becomes. Your objections to saving and investing are common — at first, almost everyone has them. But they are almost universally workable. The obstacle, as the saying goes, is the way. Find what is keeping you from investing and run toward it rather than away from it. You will have many financial goals throughout your life. Investing to achieve financial freedom should come first among them.
Chapter 33 — To Level 7 and Beyond!
What if you could be just as happy with less stuff? What if you could have complete control over what made you happy and what didn’t? What if the things you thought were making you happy really weren’t — or were actually making your life less joyful? Even worse, what if they were? These are the questions worth sitting with as the journey continues. They are not financial questions. They are questions about what a life is for. Financial freedom creates the space to ask them honestly, without the pressure of necessity distorting the answers.
The numbers, the frameworks, the accounts — all of it is in service of something larger: the freedom to choose the life you actually want. For recommended books, software, and apps covering everything from budgeting to investing to improving your credit, the resources page at retirebeforemomanddad.com is kept updated as new tools appear. The walkway is moving. Step on it.