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The one-page guide to financial independence January 3rd, 2014 (by J.D. Roth)
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Comments (71) Note: This article is from J.D. Roth, who founded Get Rich Slowly in 2006. J.D.’s non-financial writing can be found at More Than Money. This year, I learned a lot about money. I think the biggest breakthrough I had in 2013 was to connect the ideas of personal and financial independence. I spent a week in Ecuador talking with folks about this subject, and then I spent a couple of months putting my thoughts onto paper. I’ve done a lot of writing and thinking and speaking on this topic. But you know what? I’ve come to realize that the essentials of financial independence can be boiled down to just a single page.
Financial Independence occurs when you’ve saved enough to support you for the rest of your life without needing to work for money. You might choose to work for other purposes — such as passion and purpose — but you no longer need an income to meet your expenses. To achieve Financial Independence as quickly as possible, follow the basic rule of personal finance: To build wealth, you must spend less than you earn. But instead of heeding the standard advice to save 10 percent or 20 percent of your income, practice extreme saving. Your goal should be to save at least 50 percent of your income — and 70 percent is better. To do this, conduct a three-pronged attack. To begin, minimize your spending. Because a handful of expenses consume most of your budget, pursue these first (and with the greatest vigor). Choose a home in an area with a low cost of living. Reject the advice to “buy as much home as you can afford.” Buy as little as you need. Take out a small mortgage at a low interest rate. Repay it as quickly as possible. Don’t be afraid to rent. Reduce your use of motor vehicles. Walk, bike, or take the bus. Prefer used instead of new. If you can, do it and grow it yourself. Self-insure whenever possible. Spend purposefully. Avoid debt. Next, maximize your income. It’s great to cut expenses and develop thrifty habits, but there’s only so much fat you can trim. In theory, there’s no limit to how much you can earn. Negotiate your salary. Become better educated. Sell your stuff. Start a side gig. Finally, funnel your savings into investment accounts. Take advantage of employer- and government-sponsored plans first. Then put your money into regular investment accounts. Don’t get fancy. Invest your money into low-cost diversified mutual funds. Ideally, choose a total-market index fund. Ignore the news. Ignore the fluctuations of the market. Ignore everyone. Keep investing in good times and bad. If you follow these three steps, you will become rich. As you work and earn and save, keep score. Track your spending. Each January, conduct a review. How much did you spend during the previous year? How much are your investments worth? Have you saved enough to retire? To determine whether you can retire, use the following assumptions: You’ll spend as much in the future as you do now. (In reality, most people spend less. But go with this.) You can safely withdraw about 4 percent of your savings each year and your portfolio will maintain its value against inflation. During market downturns, you may have to withdraw as little as 3 percent. During flush times, you might allow yourself 5 percent. But 4 percent is generally safe. Based on these assumptions, there’s a quick way to check whether retirement is within reach. Multiply your current expenses by 25. If the product is greater than your savings, you still have work to do. If the result is less than your savings, you’ve achieved Financial Independence. (If you’re conservative and/or have low risk tolerance, multiply your expenses by 33 before comparing the product to your savings.) That’s it. That’s all you need to know. That’s the sum total of everything I’ve learned about early retirement over the past decade. If you want more information, check out Jacob’s always-awesome Early Retirement Extreme. This article is about: Basics, Investing, Retirement, Savings
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1. Kathryn 2014-01-03 04:31:01 when you say to multiply current expenses by 25 to see if you can retire, is that monthly expenses or yearly expenses? See All Comments (71) click to expand contents
2. Brian @ Debt Discipline 2014-01-03 04:52:48 I discovered the idea of extreme early retirement in 2013. I think the early in your career and life that you can start this, the easier it will be to achieve. 3. Z 2014-01-03 04:56:57 Annual 4. Beth 2014-01-03 05:33:06 It must be yearly! Let's say your monthly expenses are $2000. You can retire on $50,000. Hooray! Yeah, I don't think so.... Let's try $600,000. 5. Neil Murphy 2014-01-03 05:54:32 This is just great advice. The investment industry loves to complicate things, so you'll depend on them. It's great to see such simple advice disbursed so succinctly. 6. Beth 2014-01-03 05:54:33 Good summary! For me at least, understanding the math is the easy part. Applying the math? Well, that's another story! I'd love to be able to save 50% or more of my income for retirement, but I'm also trying to save for a home, continue to grow my emergency fund and give back to my community. I think we do the best we can for our own circumstances and goals. 7. Dave @ The New York Budget 2014-01-03 06:03:16 That's absolutely true. However, I see a lot of middle-aged people who "give up" because they think that they got too late of a start. You can always make progress and improve your ďŹ nancial/personal situation in some way, regardless of age.
8. Dave @ The New York Budget 2014-01-03 06:06:16 Financial Independence is pretty straightforward, right? I am convinced that when you continuously study, learn, and think about your personal finance, you can't HELP but achieve your goals. I have started saving over 50% of my income and it feels fantastic! 9. FrugalTeacher 2014-01-03 07:03:31 Ha! What an awesomely concise article on financial freedom! This is the year I started focusing on retirement, despite having the goal of paying down 62k in student loans over the next 3 years. It's strangely (but awesomely for a high school math teacher) addicting. Like I wrote in a recent post, it's one thing to say "I'm going to pay off my loans by age 30." It's a totally different thing to say "I HAVE A PLAN to pay off my loans by age 30." Same goes for retirement and this post provides an awesome start! 10. FI Pilgrim 2014-01-03 07:10:16 Great write-up JD, financial independence is worth the effort, in my opinion, and is easier to achieve than most of us think. PrevNext Leave a comment Name (required) Mail (will not be published) (required) Website Comment
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