So you want to quit your job and retire early? You’re done with the long commute, the tiny cubical and grouchy boss? You want to live life on your own terms; you want to see the world; you want to spend your time doing things that really matter. But financial independence and early retirement could never really happen, could it?
Actually, financial independence is more accessible than you may realize. It takes planning, sacrifice and a new way of thinking to make it happen.
Here are 5 steps to Financial Independence and true freedom.
Step 1 in your journey towards Financial Independence must begin with a radically new mindset. This may be the hardest step in the entire process. It may be such a huge mindset shift that some may decide to end your journey to financial independence right here … but I hope not. Without the right mindset and expectations, you’ll be disappointed when eventually reaching your goals.
Your new mindset includes 4 primary elements:
The first mindset shift is that wealth doesn’t bring lasting joy. It may give a momentary thrill that may last a few minutes or even a few days, but if the belief is that money will bring lasting satisfaction or joy then those pursuing it will ultimately find emptiness, not fulfillment. Those who are honest, who have made a lot of money will tell you that it doesn’t feel like they thought it would and the feeling didn’t last as long as they had hoped it would.
The second mindset shift is that if you’re not content now, you won’t be in the future. There’s a quote attributed to John D. Rockefeller that when asked, “How much is enough?” he answered “Just one more dollar.” As humans, we tend to think that just a little more will finally fulfill us. Just one more will finally be enough. It’s not wrong to pursue financial independence, to save, to invest, etc. but if you’re not content now, you won’t be when you reach your goals.
The third mindset shift is that you need to have consumerism deprogramming. Our world around us tells us that we need to have the latest clothes, the latest phone, the newest car, the nicest/biggest house. If we don’t, you are missing out, you won’t be accepted or respected or that you deserve it or that it will make you happy. The truth is that big companies hire smart advertising teams who creatively spin attractive ads to persuade you to give them your money to get what they tell you to want. We hear it everywhere, we see it everywhere. None of us are immune to it. But the first step in the detox is waking up to its reality. When you see that ad on the billboard or watch that commercial that is selling something to you, ask, “What are they really saying with this ad?” and “What am I subconsciously believing because of what they are telling me?” Perhaps in the short term, there will be a shot of endorphins, but know that it’s not going to bring lasting results. Consider that the things that we are told will bring freedom, may actually bring servitude and bondage.
This leads us in the fourth mindset shift. For some, the term “frugality” is a bad word. But when it comes to early retirement, it is an important mindset. Frugality isn’t something that comes naturally to most people. It’s a discipline that is learned. As we consider a life-well-lived, it makes the habit of frugality easier. For example, bringing a packed lunch of last night’s dinner leftovers to work rather than eating at the cafeteria. It’s making a cup of coffee at home rather than picking it up at the local gourmet coffee shop each morning. In some cases, the frugality is actually better quality than the conventional options. Many times frugality comes down to better planning.
Sometimes frugality is actually freedom. The more that you own, the more items need to be maintained, which takes time, and space and money. If you don’t have the items then you don’t have to maintain the items. A boat, for example, takes time and space and money to maintain although it may rarely be used. A second house will take time and money although it too may be used infrequently. It’s worthwhile asking yourself if the things that you own, actually own you.
So if you’ve made it this far you’re likely asking, “Why should I bother pursuing financial independence? Is it worth the effort and sacrifice?” I would say, yes! It is worth the effort. But not for the reason that most people pursue it. The fun and the goal of financial independence comes when we’ve been truly freed from finances to have control of our greatest asset, which is time, to pursue the things that we find most valuable and to make a difference in the world. Financial independence is not an end in itself. It is a vehicle to accomplish a higher calling. It is freedom from finances to provide the freedom to do things that have lasting value.
Step 2 towards Financial Independence is Destroying Debt.
Do you really want to be financially independent? At times this process may feel like you’re digging yourself out of a hole. But don’t give up! It WILL be worth it!
Once you have your mindset and expectations in order, the next step is to get down to business and destroy that which is keeping you back from growing wealth. Ask yourself what behaviors or beliefs caused your debt. Have those things that you purchased, which put you into debt, brought the ease or joy that you anticipated? If not, consider selling them to pay off your debt. If credit cards are the problem, get rid of them and consider going to a cash system until you have your spending under control.
To begin to Destroy Debt, make a list of all the debts that you have. They may include a car loan, credit cards, student loans, medical debt. List them in order from smallest debt to largest. You may also want to consider listing them from the greatest interest rate to lowest.
A. Begin by paying off the top debt on your list aggressively, while also paying the required minimum payments on all other debts.
B. Once the smallest debt has been paid off, add the amount that had been going to the first debt, that is now paid off, to the second debt on your list. This will begin the snowball effect which will pay down each debt more quickly until all debts are paid off.
Step 3 to Financial Independence is an Emergency Fund.
How much money would you need to survive for 3 months if you lost your job? That’s the number you’re shooting for. If you already have that much saved in cash, great! If not, look for ways to save that up. That’s your security net in case something happens. The greatest part of the emergency fund is the peace of mind that it brings. If something essential breaks, if someone has a medical emergency, or if you do lose your job, you’ll be ok financially for 3 months.
Step 4 to Financial Independence is to know your “FI number.” This number is your early retirement Financial Independence number. It’s the amount of money that you need to have saved and invested to have enough to continue living on into retirement. How much money do you spend per year? Calculate that number by taking a look at your budget. How much do you currently live on each year? Take that number and multiply it by 25. For example, if you plan to live on $50,000 per year then you’ll want to multiply 50,000 by 25 which equals $1,250,000. That is the amount that you’ll need to have in investments to bring in $50,000 a year for the rest of your life. If you plan to retire early, you need to be more aggressive with saving, needing more of it because it will have less time to grow. If planning on early retirement, you’ll want to multiply your annual spending by 33.
At this point, you may be panicking as your thinking that you’ll never be able to save up $1,250,000! The truth is that you don’t actually need to save up that entire amount. That is the number that you need to reach through investments to have $50,000 per year for life. Your actual amount saved maybe around $525,000. That amount saved over 11 years at about 8% return could be worth over $1,250,000. Although $525,000 is a lot of money, it’s not an impossible amount to save.
Inflation is a little over 2%. Meaning that the dollar is decreasing in value at a rate of 2%. If your investments are growing in the stock market at an average of 8% per year, then you can safely take out the 4% or $50,000 per year to live on once it’s reached maturity. This $50,000 a year won’t drain your account, but rather its the amount that if invested correctly will bring a stream of income that will never be drained for the rest of your life. Your $1,250,000 will remain in your investments and can even be left as an inheritance for your loved ones.
The great thing is that this is your “enough” number. You may make more in the future but if calculated correctly, you no longer need to chase after more. Your focus can now be fully on those things that have eternal value.
Step 5 is to get to your FI number as quickly as possible. This can be accomplished in two ways. The first way is by making more money to save. If you’re single, living frugally and especially if you have a well-paying job, you’ll be able to reach your FI number more quickly than someone with a lower-paying job or a lot more financial responsibilities like a family or a large mortgage.
Consider ways to increase your income so that you can increase your savings to get to FI more quickly.
The greatest asset towards FI is likely your current salary. So one way to speed up the savings is to increase your salary. You may want to ask if there is another job that you are qualified for that has greater salary potential or you may want to approach your boss about a raise.
If married and without children, some couples live on one salary (or part of one salary) and save the second salary. This can be a wise strategy towards quicker FI savings.
Would it be a good idea to pick up a second job? Is there a talent or skill that could be used on weekends or after your normal job that could bring in more salary in order to reach FI more quickly? Side hustles can bring in extra cash to put towards your retirement. They can also be fun! Consider any hobbies you have that could make money, lessons you could teach, or skills you could employ. Is there an unused resource that you can tap into or a service you could provide? One of the best investments that you can make is to invest in a small business. The return on a business can bring in much more than the return on the stock market. If planned wisely, a semi-automated business can require a larger amount of upfront work, but then it can be less work in the long run and also help you get to FI more quickly but without the time required. Some people will even consider having multiple side hustles to bring in additional income to reach FI more quickly.
The second way to get to your FI number as quickly as possible is to decrease your spending.
Every day is filled with choices. You choose when to wake up and when to go to bed, what to eat or not to eat, how to spend your free time. The discipline of decision making is not only helpful for making it to FI but also for living a life well spent. It’s a character-building discipline.
One important life discipline is to decrease your spending to increase your savings. There are so many ways to decrease your spending. Bring lunch to work instead of eating out; Cut back on expensive hobbies. Buy fewer clothes. Shop for less expensive car insurance or take public transportation instead of having a car. Purchase a used car.
One of the best ways to decrease spending is on your housing expenses. Downside your house, possibly rent instead of own. Take on roommates. Purchase a duplex or 2 unit house and live in one part while renting out the other. This could potentially create a cost free-living situation, accelerating you towards FI.
As money comes in from side hustles, tax returns, salary raises, don’t increase your standard of living, purchase a new car or plan a vacation. Look at that new money as a boost in your FI savings and invest it immediately as if it had never existed.
So if you really want to quit your job and retire early, if you want to spend your life doing something worthwhile, then these 5 steps will guide you there. In no time you’ll look back and realize that you’ve accomplished your goal. It takes a new way of thinking and a new relationship with money. Many have done it before you and you can do it too!
5 Steps to Financial Freedom and Early Retirement
