Here at Super Frugal Duo, we make no secret that one of our most important goals is to become financially independent as soon as possible.
Financial independence: these two words can provoke a variety of emotions, from fear to excitement. Personally, the thought of financial independence is both exhilarating and terrifying. Why? The idea that there will no longer be a steady reward for a job well done to fall back on can be a terrifying thought. Hear me out though. You may be thinking, “How does one even survive when they no longer have that reliable income funneling in each month?” That’s what financial independence is all about, when other resources come into play and fill the gap, offering support. For example: dividend paying stocks, rental income, bonds, high yielding savings accounts and more can all be used to meet your financial needs.
Are these reliable sources for replacement income? Yes and no. Individually, if you relied entirely on just one source, you’d be playing a financial game of Russian Roulette.
Having multiple sources changes the game. Let’s imagine we’re starting out with a few different sources for future income – for example stocks, bonds, or index funds (if that’s your thing) housed in 401k’s or IRA’s. Combining these resources and pooling funds into multiple outlets turns the game more into a game of … Jenga.
When you first start playing Jenga, there’s a slow and steady build upwards. How risky you choose to be is up to you, and this can go with your portfolio as well. To draw the game out and limit the risk, you want to have a solid foundation on the board. On the other hand, if you want to reach the end of the game as quickly as possible, you may be more likely to take risk (like, only leaving one single middle block for the foundation/bottom of the tower). You may be able to build a taller tower by only leaving one block per row (or a build your portfolio quicker), but you risk having the entire tower come tumbling down if you make just one wrong move (or risk losing everything if you only took excessive risks in your portfolio).
In this scenario, we’re playing the game for the long haul. We start first by keeping our foundation solid. Just like if you only took blocks from the middle on up in Jenga, leaving a strong base, a diversified portfolio of stocks and bonds can provide the investing equivalent. You may be risky towards the top (perhaps trying your hand at higher paying dividend stocks that may not be as reliable) but your middle and base are as solid as they can be. In the end, even if the riskier top half of your Jenga tower tumbles down, your more secure bottom half likely won’t be affected much, if at all.
Let’s change the rules of Jenga a little bit by adding in extra blocks (or, in other words, diversifying our portfolio by adding in rental income, REITs, or high yielding savings accounts). Those gaps in the game can be filled in with these new blocks. Now, we really have a solid structure – even if we removed blocks, we have enough on the board to continue having a long game without the stress of the whole tower toppling over.
The point of all of this? All financial aspects are risky. There’s risk involved when you put your money in stocks or real estate but there’s also risk when you rely on a full time job or freelance income – there’s no guarantee there’s going to be that steady income at a full time job for the rest of your career life.
Diversifying your portfolio and reaching financial independence can help to lessen that risk. At first, it’ll scare the shit out of you because that money is no longer “in hand”, you no longer have that hefty balance in your bank account, and you’re trusting sources outside of your control – but by diversifying your portfolio you’re giving yourself multiple outlets. The goal is to encourage those dollars to grow, but you have to give them time to do so. Just like a slow and steady game of Jenga – the tower can become quite tall if you take your time and build a solid foundation (and maybe “cheat” a little by adding a few extra blocks 😉 )