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Financial independence is the freedom to not work for the rest of your life. Think typical retirement, but potentially achieving this goal earlier in life. FIRE (financially independent, retire early), is an acronym that others have used to discuss this topic. I’ve recently read and been inspired by a number of books regarding Financial Independence and it will one of four topics (financial independence, minimalism, happiness, and parenting) I will focus on through my website.
While the idea of being financially independent and retiring early may seem like an unachievable dream, it’s more realistic than you think. Recently, I read the book “Quit Like a Millionaire” by Bryce Leung and Kristy Shen, where they were able to save up enough money to retire early and travel the world in their early thirties. Even since they have retired, their wealth has continued to grow while they maintain a reasonable lifestyle, living on their passive income through their investment savings. In addition, “Financial Freedom” written by Grant Sabatier is another example of someone who within 5 years was able to save up enough money to achieve financial independence and retire in his thirties. In both of these cases, the individuals were able to save up money on their own and did not rely on hitting it big through a startup company or inheriting money.
So how much would you need to retire early? The 25x Rule suggests that you would need to save up 25 times your annual living expenses to have a high likelihood of supporting your future income by living on the returns from your investments. Forbes magazine recently released an article about “How the 25x Rule Can Help You Save For Retirement.” Theoretically, if you wanted to live on a $40k annual living expenses, you would need to save 25x that amount, or $1,000,000 by withdrawing less than 4% of your total savings annually. Keep in mind that the 4% withdrawal isn’t guaranteed for success and is dependent on the rate of inflation. In addition, if you you are to retire early, you will need your retirement savings to last significantly longer than the typical person retiring today. However, Grant suggests in his book that you may actually need less saved the earlier you achieve financial independence because you have more years to allow your savings to compound interest, depending on the performance of your investments and inflation. We’ll dive deeper into that at a later date.
While many people achieve retiring early through FIRE, many gain freedom by supplementing their annual income to achieve financial independence earlier through side jobs, personal businesses, rental properties, or working part time. The benefits of supplementing that income is that you can greatly reduce the amount of money needed to retire. For example, if you are able to earn an income of $20k per year annually through a side business, you could potentially become financially independent after saving only $500,000 versus $1,000,000.
Saving upwards of a million dollars sounds like a lot of money, but how can people achieve this goal when the average American carries upwards of $38,000 in debt, excluding their mortgages, and one in five have no retirement savings at all according to a report published from Northwestern Mutual. Between car loans, student loans, houses, and credit card debt, it’s easy to see how many people consider this task impossible, especially if there is a perception that someone needs extensive knowledge about stock market performance in order to be successful once they are able to put money aside.
Our society has trained us that we must consume as much as we can, even going into debt to grow our economy. Success is pictured as a bigger house, bigger car, and more clothes, forcing us to work long overworked hours and prevent us from enjoying the things in life that truly make us happy. Meanwhile our homes are busting at the seams with more clutter, only reinforcing the perception that we need larger homes to store all our stuff. Two of the largest purchases for families where we carry debt are our homes and our vehicles. Could we save money by reducing the clutter we need to pay money to store, whether with storage units, larger homes, bigger closets, shelving and storage solutions. Better yet, can we challenge our purchasing decisions and support our financial independence journey by reducing the unnecessary purchases before they even enter our home? How about our online purchases, where we can make a one click purchase with 2 day free shipping before questioning if it’s even worth the hard earned dollars we sacrifice so much of our time to make?
Doing some rough calculations, if someone had zero savings today, and started to contribute $1600 per month with an assumed 7% return on their investment, they could potentially save half a million dollars in 15 years. If we continue to save this amount per month, we could reach a goal of one million dollars in less than 23 years thanks to the benefit of compounding interest.
Do you think you could save $1600 a month starting today? What challenges do you face? In my next post, I’ll talk about some ways we could make a huge impact by understanding big purchases many of us face such as home and car purchases. What would you do with financial independence if/when you achieve it? Would you still work part time, start your own business, give back to your community, or simply enjoy more freedom with your time to travel or be with the ones you love?