It’s confession time! The first time I read about the concept of achieving financial independence, I thought it was some April Fools prank. Retirement only happened at 65, right? The thought was too intriguing however to not dig into further. After all, traveling the world why I can still move all four of my limbs properly sounded very enticing.
What became obvious very quickly was that I am not alone on my newfound journey to achieving financial independence. There is a whole community of people just like you and I out there, who would love to retire early and enjoy life vs dedicating it to working for someone else. Not one to take perception as fact, I posted a simple question on a “little” online treasure trove called Reddit.
At what age did you guys catch on to FIRE (Financial Independence / Retire Early) and why?
What became apparent that a few people catch on in their 30s and 40s. All the while, the majority of people get hooked on achieving financial independence in their 20s. Kudos to you guys. I guess, having caught on in my early 30s makes me a late bloomer. The question remains, are we all a bunch of dreamers or can this be real…
Achieving Financial Independence
Prank or Reality?
Achieving financial independence turns out to be a surprisingly simple equation.
~ spend less than you earn = savings = investment potential / gains = financial independence ~
Let’s break it apart with an example. Imagine someone making $50,000 / year after maxing out 401(k) retirement contributions and paying income taxes. Additionally, we are going to make the assumption that the ultimate retirement savings comfort level/goal is $1 million dollars.
During the accumulation period, we are banking on 5% investment gains (adjusted for inflation). Following retirement, we will choose less risky investments and bank on 4% investment returns. These 4% returns will cover all living expenses, so the $1M balance will never be depleted. Are you still with me? Let’s take a look…
If you manage to save 10% of your $50,000 after tax income, you are looking at 49 years of work to accumulate the desired $1 million retirement stash. Ouch! That’s not desirable at all. Well, let’s increase that savings percentage to 40% and you are looking at “only” 25 years of working for someone else. Woohoo … much better. If you are striving for the ultimate, save 80% and retire after “just” 17 of work. Much, much better! And guess what, your 401(k) contributions will add to your retirement cushion even more!!
How can you be on your way to achieving financial independence?
Reduce your expenses as much as you can! The lowest level of expenses results in the highest savings percentage. And early retirement will inch closer and closer with every dollar you save!
How can you save a large % of your paycheck?
Save Money By…
Increase your disposable income! Yes, I know that is easier said than done. It is important that you do not settle. That means looking for better-paying employment opportunities and even picking up side hustles if you can.
Invest Any Disposable Income You Have
Are you on board the financial independence train? Drop me a note in the comment section and let me know how it’s going 🙂
If you enjoyed this post, be sure to check out this complete listing of posts for other personal finance must reads!