Financial independence and how to retire early are phrases that seem to be uttered at an increasing rate. You may have heard the acronym F.I.R.E. which is a reference to “financial independence retire early”.
The truth is that people have financial independence on their minds. A simple Google search of how to retire early returns over a billion results!
That tells us that many people are looking at ways to retire early and to be financially free of debts.
Debt owns you. Any student loan holders out there? I hear ya. Student loans can be such a heavy burden to many. According to an article published in Time magazine, it is estimated that Americans are living with a total of $1.5 trillion dollars in student loan debt.
For that reason, its no wonder that so many are seeking ways to become financially independent.
What if I told you there is a very simple formula to calculate when you can retire early? Because there is. I will explain how anyone can retire early by following a simple recipe.
One misconception about those that retire early is that everyone thinks in order to do so you must be a millionaire. That is simply not true.
Becoming financially independent to retire early boils down to how much you can live off of. How much you are willing to live off of, and what type of lifestyle you want post retirement.
Can I retire early in 10 years?
Yes. Anyone can retire in 10 years at any age. Here are the steps to take to make that happen.
The first step is:
Know your current financial state.
I think the best thing to do first is to look at the numbers. The investment and retirement calculator on the financial guru Dave Ramsey’s website will allow you to understand how much you need to save.
The second step is:
After understanding your current financial state and learning how much you will need to invest will help you make a plan.
A good rule of thumb to go by to reach FIRE is to save 25x your current expenses to achieve early retirement.
Let’s say, for example you make $40,000 per year. Take $40,000 x 25 = 1,000,000
You will need to have saved $1,000,000 to retire early.
The second half of this equation is what is known as the 4% rule.
The 4% rule goes like this. By law you are allowed to withdraw 4% off the top of your retirement investment upon retirement.
Let’s look at our numbers now to make sense of this.
We have calculated that to retire comfortably when you make $40k per year, you would need to have saved $1,000,000 in retirement.
When you reach that goal of $1,000,000 in your account, you can withdraw 4% to live off of.
In this case, 4% of 1,000,000 equals $40,0000. Which is what you were making per year prior.
Wow, one million dollars! How on earth can one save one million dollars in 10 years? I will tell you how.
The third step is:
Paying off debt. Once you pay off debts, you can then use that “extra cash” to put towards investing and saving.
I love the debt snowball method coined by Dave Ramsey. It basically boils down to looking at all of your debts and paying off the smallest one first.
Any extra money you have at the end of each month should go toward the smallest debt. Once that is paid off, boom, you have extra money. Now take a look at your next smallest debt and put all extra income towards that.
As you can see, it has a snowball effect. As you pay off debts you will become more confident and more enthusiastic about paying off your next one.
Look at things you can sell now.
Most often this is a vehicle. Do you have a car payment? Get rid of it fast. I know we all need reliable transportation. But really look at your situation. Honestly ask yourself if you need a brand new vehicle or a vehicle at all.
For those that live in urban areas, you can most likely get by without a car at all.
My husband and I only have one car. This was intentional. We choose to live close to work so that I am able to walk. Honestly, weeks go by and I never drive. Plus it is healthy for me to walk every day.
Do you have a house you can sell?
For those that are home owners, look into selling and downsizing. If this is possible for you, it can be a huge savings. If you don’t want to sell, consider getting a room mate to cut down on monthly housing costs.
The forth step is:
Investing and saving at a high rate. You will need to cut as much spending as possible and start investing at a higher rate. This is the part that many people find the hardest. The reason is that it can involve significant lifestyle changes.
Take a look at your current monthly expenses. Understand your areas where spending is highest. For most people that would be housing, student loans, and food.
It is very common for people that have achieved FIRE to invest and save half of their income. So, lets keep using the $40,000 a year salary. You will need to save and invest half of that.
Ways to cut monthly expenses:
- Take on a roommate
- Put your home on Airbnb
- Reduce your food expenses by not going out to eat
- Stop buying new clothes
- Do free fun activities for entertainment, walks,hikes,game nights…
- Bring your lunch to work
- Stop buying coffee (I promise this adds up!)
- Start a side hustle, and use that extra income only to invest
Want some inspiration?
There are a number of aspiring young adults that have achieved financial independence and I personally have found their stories motivating. CNBC showcases a handful of millionaire early retirees on their website.