Introduction
In his book "Buy This, Not That," Sam Dogen offers a comprehensive guide to achieving financial independence. This book is perfect for anyone looking to take control of their finances and work towards a future of financial freedom. Dogen, drawing from his own experiences and expertise, provides practical advice on everything from tackling debt to making smart investment decisions.
The book's central premise is that by making the right financial choices, anyone can achieve financial independence. But what does financial independence really mean? According to Dogen, it's either having a net worth that's 20 times greater than your average gross income or having enough investments to generate passive income that covers all your expenses. Ideally, you'd have both.
Let's dive into the key ideas presented in "Buy This, Not That" and explore how you can apply them to your own financial journey.
Understanding Your Why
Before embarking on the path to financial independence, it's crucial to understand why you're pursuing this goal. What does financial freedom mean to you personally?
For some, it might be about reducing stress and improving overall well-being. Financial independence can free you from the constant worry about money and job-related pressures. It can provide peace of mind knowing that you can afford unexpected medical bills or other emergencies.
Others might be seeking financial independence due to concerns about job security. In today's rapidly changing job market, the idea of lifelong employment with a single company is becoming increasingly rare. Financial independence gives you the freedom to work because you want to, not because you have to.
Some people might be motivated by the desire to weather economic storms, like recessions, without financial stress. Others might want to make their parents proud or have more time to spend with their children. Maybe you want the freedom to work only for companies that align with your values.
Whatever your reasons, understanding your "why" is the first step in your journey to financial independence. It will help you stay motivated when faced with tough financial decisions or setbacks.
Tackling Debt: The First Step to Financial Freedom
One of the biggest obstacles on the path to financial independence is debt. Dogen emphasizes that paying down debt should be your top priority if you're serious about achieving financial freedom.
Here's the order in which you should tackle your debts:
Credit Cards: With average APRs around 15% (and some as high as 29.99%), credit card debt is typically the most expensive. Pay these off immediately and only use credit cards for rewards and insurance benefits. Never carry a balance forward.
Car Loans: Your car depreciates in value every month, even if your loan interest rate is low. Dogen suggests following the "one-tenth rule for car buying" - don't spend more than one-tenth of your gross annual income on purchasing a car.
Student Loans: If you're considering college, choose an affordable school that allows you to pay off your loan within four years of graduating.
Mortgage: This is a complex area that we'll explore in more detail later.
Dogen warns against the temptation of buy-now-pay-later offers. While they might seem attractive in the short term, they can be a significant barrier to achieving financial independence.
Designing Your Investment Strategy
Once you've tackled your debts, it's time to focus on investing. The key to building wealth is to earn, save, invest, and plan strategically. Dogen recommends aiming to own a mix of stocks, bonds, and real estate, with a small portion of your savings set aside as an emergency fund in risk-free assets.
Dogen presents three allocation models for consideration:
Conventional: This low-risk option involves investing in stocks, bonds, real estate, and risk-free assets. It's suitable for those who are comfortable working until their state retirement age.
New Life: This more aggressive model is for those aiming to start a new life around age 40. It includes some alternative investments like venture capital, private equity, and cryptocurrencies.
Financial Samurai: The most aggressive model, this involves investing in yourself, building your own business, and creating passive income streams starting in your twenties.
Whichever model you choose, the goal is to build more wealth than the average person by age 60. Remember, diversification is key to weathering economic downturns and recessions. After age 40, don't have more than 50% of your net worth in any single asset class.
Real Estate: A Key Component of Wealth Building
Real estate plays a crucial role in building wealth. While renting can be a good short-term solution, Dogen advises buying a home if you plan to stay in one place for five years or longer.
When it comes to buying a home, Dogen introduces the 30/30/3 rule:
- Spend a maximum of 30% of your gross income on your monthly mortgage payment.
- Have 30% of the home's value saved in cash or semi-liquid assets (20% for the down payment, 10% as a cash buffer).
- Don't spend more than three times your annual gross income on the house.
Investing in real estate beyond your primary residence can also be a great way to build wealth. Real estate often outperforms stocks and bonds during economic downturns and benefits from rising rents and property values during robust economies.
Optimizing Your Career and Side Hustles
Your career is the engine that fuels your ability to invest and build wealth. Ideally, you want a well-paid job that you love. If that's not possible, prioritize a well-paying job and pursue your passions in your free time.
Dogen advises using the first 21 years of your career to build the best foundation possible. If you're just starting out, look for jobs in lucrative industries like venture capital, investment banking, strategic consulting, IT, engineering, real estate, or oil. These industries often offer six-figure salaries straight out of school or within five years.
However, high-paying jobs are highly competitive. Be prepared to apply repeatedly until you get the job you want.
If you're in a low-paying job or can't switch jobs, it's time to develop a side hustle. Dogen's mantra is: "Work while others are sleeping so you can eventually play while others are working." A side hustle can significantly speed up your journey to financial independence.
Your side hustle can be big or small. You could join the gig economy with a second job, or better yet, build something of your own - your own brand. For example, instead of teaching piano one-on-one, create and sell a set of online piano lessons under your own brand name.
Eventually, your side hustle might even become your main source of income. The right time for this transition is when you truly enjoy doing it and it makes enough money to cover your basic needs.
The Importance of Education and Love
Education and love are two crucial elements that Dogen emphasizes in the journey to financial independence.
Education: The Key to Freedom
Education sets you free by helping you make informed choices about your career, investments, and life partner. It doesn't have to be formal education - there are many free online courses available. The key is to be open to continuous learning.
If you're considering a degree, remember that it's not necessary to attend a prestigious school. Choose the best school you can afford without getting into excessive debt.
Love: The Other Half of the Equation
While financial independence is important, Dogen stresses that love is equally crucial. He poses the question: Would you rather be rich and alone or poor and in love? The ideal, of course, is to have both money and love.
If you're single, make finding a life partner a priority. If you're in a relationship, nurture it daily. Remember, if you truly love someone, you'll want to help them become financially independent too.
When it comes to marriage, consider both the financial and emotional aspects. From a purely financial viewpoint, consider the tax implications and social security benefits. If you do decide to get married, keep the wedding costs down. Dogen suggests spending no more than 10% of your combined income or 3% of your combined pretax retirement plans on the wedding.
For bank accounts, Dogen recommends having both joint and separate accounts. This setup provides both shared financial responsibility and individual financial independence.
On Having Children
If you want children, Dogen suggests the optimal time is when you're both financially and emotionally stable, typically around age 32. However, the most important factor is having your finances in order to avoid constant stress and worry.
When your children grow up, it's okay to help them financially, but Dogen advises charging interest and setting a repayment target. This teaches financial responsibility while still providing support.
Practical Tips for Financial Independence
Throughout the book, Dogen provides numerous practical tips for achieving financial independence. Here are some key takeaways:
Save aggressively: Aim to save at least 20% of your after-tax income. If you can save 50%, that's equivalent to one year's living expenses.
Live frugally in your early years: This allows you to reap the rewards later in life.
Maximize tax-advantaged retirement accounts: Contribute the maximum amount possible to these accounts.
Diversify your investments: Don't have more than 50% of your net worth in any single asset class after age 40.
Follow the one-tenth rule for car buying: Don't spend more than one-tenth of your gross annual income on a car.
Apply the 30/30/3 rule when buying a home: This ensures you don't overspend on housing.
Start a side hustle: Use your free time to build additional income streams.
Invest in your education: Continuous learning opens up more opportunities.
Balance money and love: Both are crucial for a fulfilling life.
Plan for children: Have kids when you're financially and emotionally ready.
The 70/30 Philosophy of Decision-Making
One of the most interesting concepts Dogen introduces is the 70/30 philosophy of decision-making. This approach acknowledges that we often don't have enough information to make confident decisions. Instead of thinking in binary terms, Dogen suggests thinking in probabilities.
The 70/30 philosophy states that if you can predict a decision has at least a 70% chance of success, you should go for it. At the same time, you need to accept that 30% of the time, your decision will be suboptimal, and you'll have to live with the consequences.
This approach helps develop a stronger decision-making mindset and increases the likelihood of making winning decisions over time. While you'll still have some regrets along the way, you'll learn from them, and in the long run, your decision-making will likely be more profitable.
Final Thoughts
"Buy This, Not That" offers a comprehensive roadmap to financial independence. Dogen's advice covers a wide range of topics, from tackling debt and making smart investments to balancing financial goals with personal relationships.
The key takeaway is that financial independence is achievable for anyone willing to make smart financial decisions and put in the necessary work. It requires a combination of strategic saving, intelligent investing, career optimization, and continuous learning.
However, Dogen also emphasizes that financial independence isn't just about money. It's about creating a life that allows you to pursue your passions, spend time with loved ones, and achieve personal fulfillment. By following the advice in this book, you can work towards not just financial independence, but a richer, more satisfying life overall.
Remember, the journey to financial independence is a marathon, not a sprint. It requires patience, discipline, and the willingness to make tough choices. But with the right strategy and mindset, you can achieve your financial goals and create the life you've always dreamed of.
So, whether you're just starting your financial journey or looking to optimize your current strategy, "Buy This, Not That" provides valuable insights and practical advice to help you along the way. By understanding your "why," tackling your debts, investing wisely, optimizing your career, and balancing money with other important aspects of life, you can move confidently towards financial independence.
In the end, financial independence isn't just about having money – it's about having the freedom to live life on your own terms. And that's something truly worth striving for.