Financial Independence
Making the hard decisions to have the best life
We all dream of being millionaires, winning the lottery to have the easy life of fortune and no worries. For some this is a reality.
For some lottery winners it also becomes a nightmare as they don’t know how to handle their finances and they are soon back to being broke. Wouldn’t it be nice if you could reach your dreams of being debt-free, financially independent, and not have to work to cover your normal living expenses? Notice I said “normal” living expenses. I’m not talking about a life of luxury, but a carefree life where work is optional and you can travel the world and “work” on projects or things that you enjoy. This IS the reality for many that have taken the steps and made the sacrifices to live the FIRE lifestyle. FIRE is an acronym for Financially Independent-Retire Early. And the nice thing is that is isn’t as hard as you may think. There are many who have retired in their 20’s, 30’s, 40’s, and even 50’s. It all depends on when you get started and how aggressively you go about it. Some have been able to reach it in less than two years after getting started. Read on to discover where you are and how you can get started to live the life of your dreams now.
Can I really retire early?
The path to FI (Financial Independence) has many roads. There is not a single path to financial independence. But there are similar steps in all of them. The very first step you need to do is to know your expenses. I, like most people, could never get a budget to work so I gave up. For many years, maybe even decades, my family just spent what we needed. This is not to say that we bought whatever we wanted, we had some control. But we didn’t ever pay attention to how much we spent on whatever. We didn’t spend frivolously but we were overspending nonetheless. In order to even be able to make a realistic budget you need to first know what you are spending. You must maintain a record, or write down all of your receipts/expenses for at least one month but even better if you can do two or three months, to really know what you spend and where the money is going. You may “think” you only spend $400 a month on groceries but you may actually spend closer to $700. You may “think” you only spend $100/mo eating out, but you may find out you actually spend closer to $300/mo. It is an eye-opening experience when you can visually see what you are actually spending. Doing this will help you understand where your money is going and where you can cut back to control your spending habits.
Once you know where your money is being spent, you can make wise-informed decisions on where you can cut back or remove things completely from your expenses. This is important. To reach financial independence sooner than later, it helps to reduce your expenses so that you can use that money toward the greater good. Some people cut things out completely and then realize that they miss them and decide to put them back in, maybe at a reduced amount. It’s up to you to decide what is important to you and what you need in your life. The point is not to deprive yourself, but to have self-control over your expenses. About 10 years ago we made the decision to cut cable. It was expensive and we didn’t even have a lot of time to watch anything to get enjoyment out of it. At first it was a bit difficult, especially for my wife who was a stay-at-home Mom at the time. But she adjusted and we haven’t looked back. Technology has improved a lot in the last 10 years that more people are doing the same and just using internet-based programming such as Netflix for their entertainment along with an antenna to get free local programming. This can save over $100/mo for what some would be paying for cable.
Getting back on track… This specific article will not get into the nitty-gritty details of how to reach FI. It will just cover the very basics with some methods that are used. Later posts will cover each one more in-depth discussing the pros and cons and how you can get started with each one and ways to save money and cut your expenses. The most common FI path people choose is with investing in index funds. Particularly Vanguard index funds because of their very low expense ratio. The most popular of these funds is the VTSAX or Vanguard Total Stock Market Index Fund.
The way people do this is to first determine their expected yearly expenses. This is why you need to first know how much you truly spend each month. Then take that yearly expense and multiply by 25. This is your “magic” retirement number. Many are surprised that they do not need millions of dollars like people have always told them. All of the retirement “experts” say you need at least $2 Million saved to have a good retirement. If your yearly expenses are say $30,000, then you need to have saved at least $750,000 ($30k x 25). This FI retirement plan is based on the assumption that you can live off of the 4% rule. Which means you can safely withdraw 4% of your savings each year and have enough to live forever, assuming your expenses don’t go up and the markets don’t crash. 4% of $750k is $30k. This will last forever assuming the portfolio grows at least 8% per year which is the approximate average of the market returns. So it is still growing more than you withdraw. This is also what is often referred to as buying a money making machine because in theory you should never run out of money. We’ll explore more detail on that in a later post.
Besides thinking it still impossible to save up a lot of money, other ways of reaching financial independence involve being creative and starting your own business or an online store or something to bring in revenue besides your typical W-2 job. And there are a million different ideas we could explore there. But we won’t do that right now either. What I want to do is just get you thinking about the endless possibilities. The primary reason people can’t reach FI is because they don’t see a way to truly increase their income to have enough excess from their living expenses to be able to save anything significant.
That’s how I felt and couldn’t see a way out. My job skills were not enough to be able to jump from a normal $50k/yr salary to a $200k/yr job. But I knew if I did not increase my income in some way I would be doomed. My family was growing which meant my expenses were going up. I could get a second job, but I didn’t want to do that to take even more time from my family. The solution I discovered I refer to as the shortcut to FI. It is the #1 source for most of the millionaires in the US and possibly the world. It is Real Estate. And no, you do NOT need to have a lot of money to get started. If you can purchase right, buy the right property at the right price and generate good rental income, you can fairly quickly replace your income and it will grow with every property purchased. And if you do it right, you may be able to reach your minimum FI number with well under $100k out of pocket and a lot sooner than you think possible. And that $100k amount is over time, not an all at once expense and could be done with less than that, it was just a round number. This is how I got started and I think is the very best way for the average person to work toward FI. I will cover my story soon in another post where I’ll discuss how and why I did what I did to get started with very little out of pocket.
Live your Dream
Where do you want to be 5, 10, 20, 30 years from now? Do you want to still be sitting in a cubicle wondering where did your life go? Life is not meant to be lived in a cubicle. I got started with FI on my 40th birthday. I wish I knew the things I know now when I was in my teens or early 20’s so I could start living with intention to know the steps to take to set myself up to retire by 30 so I could enjoy my life and my kids before they grew up. This is what I want for you and everybody else. Our time here on this Earth is limited. Time is our most precious resource. We can’t waste it. Do we want to trade our time for a minimum wage job or take time away from our family because we have to work at a job we don’t enjoy? Work is good and productive. Our society could not exist without people doing jobs for things we need. But we should do all we can to spend as much time as we can and enjoy life, creating lasting memories as often as we can. That could mean transition into a flexible job doing something you like. Or starting a non-profit that allows you to travel but also is flexible to give you time you need when you need it to care for a sick family member. Or just have time to volunteer helping people in your community or around the world.You need to know your WHY so that you will have the drive and focus needed to make the choices you need to make to put yourself where you want to be. You will need to work, especially at the beginning to get funds to grow in other ways to then replace that income. But you don’t have to work until you no longer can if you don’t want to. Of course, I am not suggesting you have to leave your job to live the FI lifestyle. If you take pleasure from the work you do, you can still do that. But wouldn’t it be great to also have another source of income should you need it? You may be a great doctor that helps people every day. But what will you do if you get in an accident and can no longer use your hands? Wouldn’t it be a great stress reliever to know that your family will be taken care of if you can no longer provide? Or even just to know you work because you want to, not because you have to? This has been a huge release of stress in my life. I am the main source of income for my family and I often worry what would happen if I were to unexpectedly die. Knowing that the rental income we receive can support them without my working income takes that worry away. This has helped my overall health by having less stress. Being in a strong financial position without the burden of debt and stress of work can have a huge impact on marriages and prolong our lives. And we all know the saying, “A Happy Wife, means a Happy Life”.