I’ve had the opportunity to talk to more and more people about financial independence since declaring my early retirement in March of 2019. Its been fun to be able to talk about these topics openly as more people approach me for advice. This post comes from preparing and talking with two former coworkers in their 20’s with rising corporate careers. What advice did I have? Look at Financial Independence in Three Parts:
Part 1: The Accumulation Phase (aka The First $500,000)
Accumulating the first $500,000 is the first stage of gaining financial independence. Someone may be starting from zero or even a negative net worth (like we did courtesy of student loans) and it may take three, five, or even ten years to pass this first phase. This is the time in the financial independence journey where you front-load the sacrifice. Advice I’ve given out to folks in this first phase:
Increase your income. This will likely involve working more. The western work culture wears hours worked as a badge of honor and like it or not, this is the time in your financial independence journey where you probably need to work more. If you have a professional job with the ability to grow your income, focus on that. Build your professional skills outside of your normal work environment.
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If your job gives you more free time or doesn’t have a pathway to grow your income, focus on a side business. If you ever have an interest in investment real estate, try anything to get on part time with a property management company or try to help a few of the high performing real estate agents and try to do weekend leg work for them. The gig economy allows more ways than ever to pickup a couple hundred dollars extra a month. A high cost of living area brings more gig economy opportunities (check out Financial Panther) while a lower cost of living area can bring great rental real estate opportunities (Rethink The Rat Race, Capturing Cents)
Expense Management: The all of the above approach approach:
Housing: You don’t have enough money yet to live alone. If your married, that counts as a roommate but also don’t rule out having other rooms rented. Consider a house-hack: The most economical setup looks like a reasonably priced 3-4 bedroom house, live in one room, and rent out the other 2-3 to friends. Generally the cost per bedroom goes down until you get to 4 and you pickup more savings sharing utilities. Check out what Guy on Fire has done with this strategy.
Transportation: Avoid the temptation of buying an expensive car. Your car is a tool, not a status symbol. If you get a situation where you *have* to have a decent car due to your job, go buy a Hyundai Elantra or similar off a rental fleet. They’ll sell you a 1-2 year old the car with ~ 35,000 miles on it for $12,000 and you can drive it another 150,000 miles and have all the modern technology inside. You’ll find it tough to beat $0.08 per mile for a reliable modern vehicle.
Food: “If its not sold at Aldi’s, you probably can’t afford it”. Okay, that advice is a little extreme, but track what you spend each month on food. Meals out are expensive, in addition to the food cost you pay a premium to eat at the space, have someone prepare and bring it to you, then get hit with tipping plus a higher tax bill. Learning to cook good food provides an high return on your investment. We’ve personally found it to be both more affordable and remove the appeal of most restaurants. If we can prepare better tasting food than someone else can, why would we pay 3-4x more to eat inferior stuff? The internet is full of recipes to try.
Start trying out different stuff at Aldi’s, everything sold there isn’t for everyone, but we’ve found it to come out to around $100 of our budget per month being spent at Aldi’s.
Investments: Don’t overthink investments at this point. The difference between the “just buy the index fund” and other strategies out there is minimal. The most impact at this point will come from the daily discipline of increasing your income and lowering your expenses.
Phase 2: Coast FI
Accumulating $500,000 or more before the age of 40 sets you up for financial independence for the rest of your life. This is the point in your financial independence journey where employment options become flexible.
Many of the most successful names in the personal finance space hit Coast FI, then developed their passion business. Mr Money Mustache retired with $600,000, but left his job to become a home builder. That didn’t work out, he continued to live frugally, and ultimately wrote one of the most successful blogs on the internet. Paula Pant has a wildly successful brand/business that was founded after hustling real estate to a Coast FI number. (I knew she was successful, but I was further impressed when she got into the numbers on this interview with Bigger Pockets Money)
When you get to Coast FI, the question of what do you want to do can be answered. Do you enjoy your job and career enough to keep going? That’s great! Is the pay you make in your current job significantly higher than what you can make elsewhere? Consider grinding a few more years to full FI. Do you want to take a gap year to travel the world? Now is the time to do it (well, maybe save $500,000 plus what you expect to spend in that year). Do you want to downshift your career? Now is the time. Want to live somewhere exotic? There are a lot of jobs in the tourism industry in great places in the world that’ll pay decently for someone who can just show up on time.
In our situation, we hit the Coast FI number (long before fully understanding it) and I went after some career goals while my wife took a career break that ultimately turned into her early retirement. We knew that getting to this second step before the age of 40 meant we could scale back our retirement savings. The reality was we never needed to save another dime in retirement accounts. We only needed to earn enough money to meet our spending. We continued to save even with the drop in earnings and fortunately recovered the lost pay with my career growing.
Stage 3: Full Financial Independence.
Congratulations, you have now won the game. You have enough saved to either have all your expenses covered at a 4% or so Safe Withdraw Rate and/or have passive income streams that cover your living expenses. You are financially independent!
So how do the conversations go?
Interestingly the discussions only really make it Coast FI. Once I help someone understand their Coast FI number and the inevitability of being a multi-millionaire in retirement, they start understanding the flexibility. Everything at that point comes down to a choice: How much do you like your job? How much do you want to work in general? Do you live in your ideal area? At this point money is no longer the goal, but the tool that allows life you to play the game of life on your own terms.