Dreaming about your financial independence day could turn out to be more of a nightmare if you’re not doing much about it.

How many of us imagine going into work and {insert video-dream-effect here}. You sit down at your desk and your boss slithers over and starts giving you grief about not putting cover pages on your reports. Then you calmly stand up and say “Well boss, I wish I could say it’s been a pleasure. My resignation is effective immediately. Have a good life.”

Mic drop – in front of the boss’ office – as you glide carefree through the front door.

Of course, you can do that any time. But it’s a lot harder if you need a job, you know, to pay your bills.

But what if you didn’t need that job? What if your calendar said today is your “Financial Independence Day.”

 

Pick a date. Create a plan. Discipline and action will get you there.

When Is My Financial Independence Day? How Do I Get to It?

Financial independence is a simple concept that few people give serious thought to unless they’re actively planning their retirement.

A person who is financially independent is no longer dependent on a job to cover their lifestyle. Instead of their income coming from working at a job, it’s earned from their money working for them. Investment income can come from gradually selling off assets, or passive income generated by those assets. To use a familiar example, if you own a few pieces of real estate, you could generate income by selling off properties over time, or from ongoing rental income.

Similarly, you could gradually sell off shares in equities, or you could live off the dividend income.

How do you reach financial independence to retire younger? Just start stacking up investments that generate income, or that are likely to grow in value!

Well, okay, there’s a little more to it than that. But not as much as you think.

The Old-School Model of Retirement Planning

In the classic retirement model, people saved up a nest egg over several decades, retired, then gradually sold off that portfolio over the next couple decades. The goal was simple: ensure you expire before your wealth does.

When you sit down with a financial advisor, they’ll explain a concept called “safe withdrawal rate” – the percent of your portfolio that you can sell off each year, if you want it to last for at least another 10, 20, 30, 40 years.

But what if you don’t want your portfolio to dwindle? What if you want it to last indefinitely? To keep growing? There are plenty of ways to put your money to work for you. Not all assets need to be sold to generate income; look no further than the real estate example above. Or dividend income from stocks. Or income from private notes.

The average American works for around 40 years before retiring. Why does it take so long? Because the average American’s savings rate is a paltry 3.2%.

What it Takes to Retire Younger

Want to reach financial independence in four years, not 40?

The formula isn’t complicated. In fact, it boils down to two actions: cutting your spending, and investing as much as possible in income-producing investments. We like the one-two punch of live within your means and multiple streams of income. The lower your expenses, the easier it is to cover them with investment income. The higher your savings rate, the faster you build a portfolio of investments to generate that income.

Simple as those two actions are, this is where most people shrug and lose interest. “I have to give up cable TV? No thanks, I’ll keep doing what I know, and continue working.” Part of the problem is self-discipline, of course. But far too many Americans lack the financial literacy – much less the wealth literacy – to realize just how plausible it is to retire young.

Ashley Thompson retired from teaching four years after she and her husband started investing in rental properties. She just turned 30. “We lived extremely frugally. Our evenings and weekends were spent working side jobs and studying investments and real estate.” They obviously channeled their knowledge into action.

Brady Hanna reached financial independence six years after he started investing seriously for financial independence, at the ripe age of 36. “I want to provide for my family and free up my time, so that I can spend my time helping out in the community and with my church.”

Anyone can retire young, having reached financial independence. The cost? Your savings rate has to become your highest priority, rather than your last priority.

Calculating Your Early Retirement Date

When’s the earliest you could reach your financial independence day and early retirement? The math isn’t as intimidating as you think.

Use our Choosing Wealth™ calculator to start playing with numbers. If you invest $1,000 every month for five years, at an average 7% return, what will you have at the end? How do the numbers change if you double your savings to $2,000/month? How about $3,000/month?

Example: Choosing Wealth™ Calculator

Save and invest $1,000 a month and see the magic of consistency and compounding!

Or if you let your investments compound for ten years, rather than five?

Alternatively, you can approach it from the other direction. Enter your target nest egg, and figure out what you’ll need to invest every month in order to retire within five years, or ten.

When you’re comfortable with the basic numbers, then start looking at how you could accelerate your rate of return. What types of investments will help you get there? Equities? Real estate? Crowdfunding investments? Private notes? Would an financial advisor help?

When in doubt, more financial education is always a good start. The good news is there are plenty of free financial education resources across the web, including right here at the Wealth Literacy Institute’s education portal. Our members gain access to even more material.

Keeping Up with the Financial Treadmill

Ever wonder why so many doctors and lawyers work 60 hours every week and constantly complain about working too hard? Even with six-figure salaries, most people simply turn around and spend nearly every penny. It’s a phenomenon known as “lifestyle inflation” – as a person earns more money, their lifestyle expenses rise concurrently.

Got a raise? Great! Time for a new couch/car/apartment/house/second home/yacht! Lifestyle inflation puts you on a financial treadmill – no matter how much faster you earn money, financially you keep running in place, because you keep spending as much as you earn.

Most people save whatever is left at the end of the month. Which means their savings and investments are their lowest priority.

The Shift from Working by Default to Working by Choice

Working for 40 years, saving only 3-5% of your paycheck, is a choice. Sadly, it’s a choice most Americans don’t even realize they’re making.

Imagine if every paycheck came with a simple multiple-choice selection:

  • 5% savings rate (40-year retirement plan)
  • 10% savings rate (25-year retirement plan)
  • 25% savings rate (12-year retirement plan)
  • 50% savings rate (8-year retirement plan)

Those numbers are invented of course, but that doesn’t mean they’re unrealistic. Especially as you start looking at more income-oriented mechanisms that don’t rely on long-term appreciation, such as private notes, dividend-heavy mutual funds, side business and rental properties.

To retire young, to reach financial independence, it takes a mindset shift. Your savings needs to become your highest priority. That means setting aside savings as the first “bill” paid from every single paycheck – AKA pay yourself first. Whatever is left can be spent. If that means waiting to buy something your want, then so be it.

“I can afford it” are four of the most devastating words to most Americans’ budgets. Sure, you can afford it – if you’re willing to work for 40 years before retirement.

Why not reach financial independence by your 40th birthday – or earlier? Of course, you’ll have to listen to all your friends’ commentary about how “lucky” you are to have retired young. As they climb into their $50,000 cars and you glide off carefree in your ten-year-old reliable.

Anyone can reach financial independence and early retirement. It comes at the cost of discipline and financial literacy.

Or better yet, wealth literacy.

When will you reach financial independence, at your current savings rate and investment returns? When would you like to retire? What can you do to get there faster? Share your thoughts below!