It still happens on a regular basis — even after three years of retirement.
I meet someone new, they ask what I do for a living, I say I’m retired, and they look at me like I just stepped off a ship from Mars.
I can see in their faces that their minds are trying to compute what they just heard. They are seeing a guy (who looks like he’s forty — or so I’ve been told) who seems way too young to be retired and it just isn’t adding up.
Once they recover they generally say something like, “How did you retire so early?”
I reply, “Well, I’m older than I look. I’m 55 and retired at 52.”
This generally makes a bit more sense to them, though it still seems like an unbelievable accomplishment.
So they say something like, “Ok, but that’s still pretty early. How did you do it?”
I’ve experimented with a ton of responses over the years, but the one I’ve come to like best is this:
“Really it’s just about the basics. We earned a good salary, saved a bunch of it, and invested it well.”
Sometimes there’s a bit more discussion but generally this makes the situation plausible for them.
A small fraction will want to dig deeper and when I get to “we bought some rental units during the economic downturn a few years ago” this seems to click for them. I’m sure they imagine that I’m some real estate magnate with 100 properties to my name. Ha! Anyway, this gets them home and we move on to other topics.
Of course my explanation is simply the Cliff’s Notes version of what happened. I don’t have time to explain all the particulars.
New Friends on the Internet
The same interaction happens here on ESI Money every day.
New people show up from Google, a syndicated article, a guest post I did somewhere, a referral from a friend (thanks to those of you who recommend me to others), and any number of other ways.
They then have to poke around here and there to piece together what this site is about and what steps this guy took to retire at 52.
Of course they can read my about page which is a decent overview, but it’s not really a detailed story. So they have to read here and there to get the full picture.
Until now, that is.
In this post I intend to summarize, in detail, my thoughts on how to become wealthy (or become financially independent). As you might imagine they boil down to earning, saving, and investing.
What else would I call a long post on E, S, and I other than a “manifesto”? 😉
With that said, let’s start at the beginning and work our way through…everything…
What is Financial Independence?
Depending on where you read, there are many definitions of financial independence (FI). I use the following definition:
Having wealth to cover expenses indefinitely.
The keys to this definition are:
- Your expenses are covered by your assets. You pay for your living expenses by income generated from assets, drawing down (spending) your assets, or a combination of both.
- You have enough to live this way indefinitely. Your finances should be able to last at least through a reasonable estimated lifetime. If your assets cover your expenses for only three years, you are not FI.
- You do not have to work. You can choose to work if you like, but it’s not required. This is the “freedom” part of FI. You have the freedom to decide what you want to do with your time.
This site is about getting you to FI – helping you accumulate the wealth to cover your expenses indefinitely.
Three Simple Steps to Financial Independence
As you can probably tell, I’ve spent a lot of time thinking about money management, writing about it, and living it out in my personal life.
And so, based on my experience, I’ve narrowed the path to FI down to these three steps:
- Step 1: Earning. You need income. The higher, the better but any income can work if you’re diligent. For most people, the key to driving income growth will be to develop their careers but others may develop a business or side business to grow their earnings.
- Step 2: Saving. You must spend less than you earn. It’s vital. Even if you make $1 million a year, if you spend it all you won’t get to FI. You need to control expenses to maximize the difference between income and spending (within reason, of course. You don’t have to be frugal to the point of hating life). This difference is your savings or what I call your gap (more on that in a minute).
- Step 3: Investing. You take your savings and invest to grow it. While I opt for index funds and real estate, there are many other ways to invest for success.
These three steps, combined with time and effort, equal a recipe for FI. Your mindfulness and conscientiousness towards the three steps will determine how long it takes you to achieve FI.
Now that we’ve outlined the three steps, let’s explore each of them in detail and address some practical tips for making the most of each.
You need earnings (income) of some sort to survive. And the higher they are, the more you can thrive.
Of course everyone would like to earn more money. But what are the best ways to do so?
There are many options but by far the single-best way most people can earn more is to grow their careers. That may not sound exciting, but it’s true.
There are two gigantic reasons why growing your career should be priority number one for anyone looking to earn more:
- Your career is a multi-million dollar asset. This fact alone should be enough for you to want to nurture and grow it. After all, if someone gave you a million dollars, you’d take some steps to make the most of it, right? Well, your career is more valuable than that and if you tend to it, you will reap substantial rewards.
- Your career can be worth millions more if you treat it right. Yes, literally MILLIONS more! What other idea, effort, activity, etc. do you have that provides a chance of earning you an extra million or two? Exactly. That’s why paying attention to your career is so important.
If you’d like to run your own numbers – to see how much your career is worth and how much it could be worth – check out my impact of a career calculator.
These are only the monetary reasons. It’s also likely that as you grow your career you’ll receive more responsibility, gain more in control of your work life, and have more interesting and challenging tasks to work on – all things that most people find attractive in a job.
Many will argue that there’s no way to get ahead in their current job, profession, or company. That is not true. There are always ways to do so. In every profession there are people who advance. They climb higher and get paid more.
You can do so as well if you want it. However, if your job is so terrible that you don’t want to or can’t bear the thought of working on your career, you may want to consider a change. That’s a subject for a different book, however.
How to Grow Your Career
Now that we’ve established it’s important to grow your career, you might find yourself wondering how to do it. I can help you there, too! I’ve identified seven tried and true steps to growing your career:
- Over-perform. There’s a specific way to do this to get the most results.
- Be likable. Treat people how you’d like to be treated.
- Network. Easier than ever with LinkedIn.
- Be attractive. It’s not just about your physical qualities.
- Continuing learning and developing skills. Keep growing and keep earning.
- Know how to manage yourself. You need a process for getting things done.
- Know how to market yourself. Resume writing, interviewing, and the like.
These steps require very little effort compared to the rewards they can generate. They also do not demand a great deal of time. Small, daily efforts will add up over time to deliver big results.
I detailed the seven steps in How to Manage Your Career to Make Millions More. You can read the specifics there. After you review that post, I recommend you develop a personalized plan to grow your career.
You can also keep an eye out for my career posts as they provide additional suggestions for making the most of this valuable asset.
By the way, I learned these seven steps through the school of hard knocks. It took a lot of time and mistakes to find them, time which was not spent maximizing my income. Even so, I worked my way to become president of a $100 million company with 800 employees. And over the 28 years I worked, I averaged over 8% annual pay increases. You can grow your income just like I did – even if you’re well into your career.
Other Ways to Earn More
Once you have your career humming, there are other ways you can add to your earnings. A few ideas:
- Develop a side business/income. I’ve had several side businesses in my lifetime including freelance writing (which helped us pay off our mortgage in less than 10 years), marketing consulting, being a soccer referee, and blogging (where I’ve earned $1 million so far). As such, I’ve seen how side hustles can be nice income supplements.
Better yet, side hustles can help you get to financial freedom within a decade. This is because they have a double impact – they provide additional savings to get you to FI as well as reduce the assets needed to hit FI. They can be very powerful financial assets themselves.
If you’re interested in the concept but don’t know what you’d do as a side hustle, here are some ideas worth considering. You may also want to consider what skills you may have that others would be willing to pay for. You could do some consulting using your career skills (make sure you check for conflicts of interest before doing this) or develop your own small business from a hobby (ex., bike repair) or interest (ex., pet sitting).
And if you’re wondering where you could find the time for a side business (one of the major objections I receive about them), here are ten places to begin looking.
- Get a second job. This is probably not a great long-term solution, but having a second job for a period of time can help in a specific area (ex., getting out of debt).
- Find opportunity money. I love what I call opportunity money – cash you receive for slightly adjusting your habits. Why not get paid for something you’re already going to do? One of these is using cash back credit cards. I have earned almost $20k in the last 12 years doing this. Of course it’s essential to avoid all fees and refrain from extra purchases to make this strategy worthwhile.
Admittedly, it’s more difficult to grow your income than it is to cut spending. This is because earning more requires time and extended effort with sometimes no guaranteed payoff. But if you focus on the top ways to make more, you can reduce the time and effort spent while maximizing the results.
If you want additional ideas for making more money, you can subscribe (for free) to my posts.
Saving is just as important as earning – maybe even more so.
This is because you can earn all the money in the world but if you don’t save any of it, you won’t make financial progress.
The money you save you’ll use to create investments which will sustain you long after you’ve stopped working. And the good news is that saving money is easier than earning since you have more control. However, in order to create savings, you’ll have to manage your spending carefully and mindfully.
That doesn’t mean re-using toilet paper and making your own toothpaste to save money. Rather, I suggest being moderately and selectively frugal. In other words, spend on what you like to spend on, but do it in moderation. And simply cut out all the other stuff you don’t like as much. This is where you can really save some big bucks.
The purpose of controlling your spending is to create an ever-growing gap, the difference between what you earn and what you spend.
To help you get there, here are some of the best ways I’ve found to save money:
- Have a cash flow plan. Some people call this a budget but regardless of name, the concept is the same. You must know and track your spending to make any substantial progress in saving money. Doing so will help you identify where your money is going and help you direct and control it.
- Focus on big wins. Here are the 52 best ways to save money. These tips will give you the biggest savings possible in a variety of areas.
- Buy a house you can afford. Buying a house you can afford will save you thousands in interest payments. Reaching too high and buying the most house you can not only costs you for the house itself, but also locks you into a whole host of other expenses which drag down your net worth.
- Save when buying cars. Either buy used cars or use a bidding process when you buy new. Do not finance a car purchase. Save in advance and pay cash.
- Control small spending. You don’t have to micromanage every nickel but if you’re not careful, small expenses will add up to a large drain.
- Live in a low-cost city. There’s no denying that some areas of the country are more desirable but they come with a hefty price tag. But there are also wonderful places that are very affordable.
- Stay in shape. Doing so will not only save you money in a ton of ways but also help you earn more.
- Stack discounts. Why settle for 10% off when 50% off is much better?
- Get rid of your stuff. You’ll declutter your life, earn some money, and save a bundle, especially if you currently rent a storage unit.
- Ask for discounts. It doesn’t hurt to ask, does it?
These are just some of the ways to control your spending. I add new tips regularly so watch my “save” category for more ideas.
The good news is that you don’t have to do all of these. Just pick the ones that work best for you to keep spending as low as possible and you’ll be able to save.
Obviously the more you save, the faster you’ll be able to reach FI. If you maximize income and control expenses, FI will almost take care of itself. But you can do better than that as you work on step 3…
Now that you’ve started working to grow your gap, it’s time to invest your savings. As you do, here are some guidelines to follow:
- The most powerful investing weapon is time. You will want to invest early and often, giving compounding as much time to work as possible.
- Early in your investing career, your primary objective is growth. This simply means that you want your investments to increase in value as much as possible year after year, rather than produce income. This is how your net worth begins to snowball into something significant.
To accomplish growth, I recommend low cost, stock index funds. I used a three-fund portfolio from Vanguard and recommend the same for others who are more than ten years away from retirement. For more details and specifics about investing, including why I prefer index funds, I suggest reading The Simple Path to Wealth and The Bogleheads’ Guide to Investing.
- After several years, when your investments reach a large enough size, you can begin to transition to income-producing investments like real estate and dividend investing.
Keep watch on my invest category for an ever-expanding list of investing ideas and thoughts.
Considering the ESI Scale
Now that we’ve got a handle on the three steps, let’s see how you rate on each and where you can improve to grow your wealth.
There are almost as many ways to hit FI as there are moves in a chess match! But let’s look at some common things you’ll need to keep in mind as you earn, save, and invest.
To determine how well you are doing on a particular step, and where you need to improve, let’s use the following rating scale. Think about what we’ve discussed in each step and grade yourself:
How did you do? Did you figure out your strengths and weaknesses? Hopefully you did and can now develop a plan to improve!
Working the ESI Scale to Financial Independence
It’s essential that you take a critical look at your behaviors and progress if you want to achieve FI. While you’re assessing yourself, here’s some food for thought based on my experience:
- You can’t be a disaster in any of the steps if you want to reach FI at a reasonable age. Failure in one is enough to kill progress in the other two. For instance, if you are great at earning and saving but you lose a ton or can’t propel your earnings through investing, you’re dead in the water. If you can’t earn more than minimum wage, it’s going to be hard to make much headway with the other steps. And of course we’re all familiar with disaster of lifestyle inflation!
- If you’re “bad” in one of the steps you’ll likely be hindered significantly. There’s a reason Warren Buffett says “never lose money.” And if you’re bad at any of the three steps, you’re going to lose money. Maybe you can overcome it with stellar results with the other two, but I doubt it.
- To reach FI at any reasonable age you need to rank at least neutral on all of them so you aren’t harming your finances. “Neutral” is the absolute minimum for all three steps for those looking for FI.
- On a positive note, the better you are at all of them, the faster you’ll get to FI.
- To reach FI a bit earlier than most, you’ll need to be good at two of the three.
- If you want to reach FI when you are 50 or younger, you have rate “excellent” in at least one category and “good” in the other two.
- The most common paths for reaching FI in relation to E-S-I seem to be “excellent – good – good” and “good – excellent – good”. The ones who retire really young are “excellent – excellent – good.”
- I don’t think anyone is excellent at investing. I think “good” is the best most of us can strive for realistically. That leaves earning and saving as the focus areas for everyone.
You should continually work on growing in all of these areas so you can hit FI as soon as possible.
I call this process “working the ESI Scale” and if you’re interested in how others are addressing these issues, check out my series of ESI Scale Interviews.
When Can You Become Financially Independent?
So, you begin working on earning, saving, and investing. You grow each of these over the years. And now you want to know when you’ll be financially independent.
The short answer is “it depends.”
The long answer is that it’s not possible to determine without knowing your retirement expenses. I recommend developing an FI budget for a year or two from your expected retirement date so you know exactly if you can cover your costs. If you’ve been doing a budget up to this point, knowing your expenses and putting together an FI budget should be a breeze.
Then, once you have enough income and assets to cover these expenses indefinitely, you are FI.
For instance, if Joe completes a rough budget and knows he needs $40k a year to live the lifestyle he wants, then that’s the number he needs to cover. Once the combination of his post-retirement income and the amount he can withdraw annually from his assets surpasses $40k and can be sustained indefinitely, he’s FI.
For another example, check out this post on how to get to a $50k retirement.
If you need some help running the numbers for yourself, check out my ESI Scale Financial Independence Calculator.
By the way, I also recommend building in a margin of safety (several of them actually) as you set your retirement number. Bad things can and do happen and you don’t want to forecast your numbers so close to the break even point that you can’t withstand life’s curve balls now and then.
Examples of Reaching Financial Independence
I read many FIRE (Financial Independence Retire Early) sites and am amazed by the various ways people have achieved FI (especially those in their 30’s and 40’s).
The FI spectrum ranges from those who only need $30k a year to cover expenses while others need $100k (or more!). Here’s an example of one end of the spectrum compared to my situation.
The most common path, the lower end of the spectrum, is as follows:
- High income while working
- Low expenses
- Savings rate of 50% or more
- Invest in index funds, real estate, and/or dividend stocks
- Reach FI with an annual expense number of $30k or less at a relatively young age
My path was a bit different since I wanted a higher level of income in retirement (referred to as Fat FIRE by many). Here’s how things panned out for me:
- High income while working. I had a successful career during my working years.
- Moderate expenses. We were semi-frugal but not misers.
- Savings rate of 36%. Could have been better but could be worse.
- Invested in index funds initially and then real estate.
- Reached FI in my early 40’s and finally retired in my early 50s.
There are people above and below these numbers, but this range probably covers the majority of those who reach FI and gives you plenty of middle ground to shoot for.
And there are all sorts of combinations to reach FI that you may want to consider:
- Average income, very low expenses, very low FI income needed
- High income, very low expenses, very low FI income needed (these are the people retiring in their 30’s)
- Average income, moderate expenses, great investments, low to mid FI income needed
And on and on…
The possibilities are endless and as unique as the people striving for FI.
Running Some FI Numbers
For those of you who want more concrete examples, let’s look at some scenarios using my calculator and various assumptions.
We’ll use someone with an $80k annual income. Here are some scenarios (these assume the person has an existing portfolio with a value of $500k):
- Income: $80,000
- Savings rate: 10%
- Annual spending: $72,000
- Annual savings (the gap): $8,000
- Years to financial independence: 22.3
- Income: $80,000
- Savings rate: 25%
- Annual spending: $60,000
- Annual savings (the gap): $20,000
- Years to financial independence: 15.3
- Income: $80,000
- Savings rate: 50%
- Annual spending: $40,000
- Annual savings (the gap): $40,000
- Years to financial independence: 6.7
Even if you had zero in your portfolio, if your gap was $40k on an $80k income, you’d hit financial independence in 16.6 years.
See the power of the gap? This is why it is so important – growing it can shave YEARS off the road to financial independence.
So what do you need to do with all of this knowledge? Here are a few steps to get you well down the road to FI:
- Set a retirement date. You may miss it, but with a date you’ll retire earlier than you would without one.
- Develop a retirement budget. Include costs, income, and the assets you’ll need to make that budget work.
- Create a strategy for managing and growing your earnings, savings, and investments to cover your retirement budget and reach FI.
- Implement your plan and stick with it.
Yes, it seems simple, but it works. Becoming wealthy isn’t that complex, it just requires knowing the basics and having the discipline to work on them over time.
And for those of you who prefer video, here’s a summary:
I get asked quite often where people should look for additional information on how to reach FI, so this section will answer that question.
If you want a guided tour to make your finances better, I suggest you subscribe to any of my free email series.
Here are some resources grouped by topic:
- The Value of Growing Your Career is Worth Millions More than I Thought
- Investing in Your Career Can Pay Off Big-time
- Skills that Can Grow Your Career and Earnings
- The Value of Growing Your Career: A Real-Life Example
- How a Side Hustle Business Can Get You to Financial Independence in 10 Years
- How to Earn Extra Income: Side Hustle Ideas Worth Considering
- Ten Ways to Find Time for Your Side Hustle
- Five Steps for Creating a Winning $25k Blog
- Moderate and Selective Frugality
- The 52 Best Ways to Save Money
- Frugalwoods: Finding Fun and Fulfillment in Frugality
- It’s the Spending, Stupid
- Why I Invest with Index Funds
- Financial Details of My Real Estate Investments
- Dividend Investing Basics
- Millionaire Interviews
- The Ten Best Money Moves Anyone Can Make
- The Ten Worst Money Mistakes Anyone Can Make
- Retirement Interviews
- How to Get to a $50k Retirement
- How to Get Up the Nerve to Retire
- Key to Early Retirement: Margin of Safety
- What to Do with Your Time in Early Retirement
- Top Retirement Don’ts
- Retirement Years are Like Reverse Dog Years
- People Want Results But Don’t Want to Change
- If You Want What I Have You Have to Do What I’ve Done
- Make Small Progress Every Day
Another great article! I would add not only living in an affordable city but an affordable state. Some states have double digit income tax for high earners. I consider what I save in taxes just couldn’t be made up if I lived in a state like California or Minnesota.
Marco Parzych says
Good point, Tink. Also recommend folks take a close consideration of property tax / homeowners insurance rates and cost of living. For example, many consider Texas a tax-friendly state since it has no state income tax, but many areas in the state have extremely high property tax rates (we were paying $16K per year in property tax on our home in the DFW area assessed at $550K).
When considering prop tax and homeowners insurance rates, IA, KS, MI, NE, NY, OH, PA, RI, VT and WI are generally higher (worse) than the national average, with CT, IL, NH, NJ and TX much higher than the national average. On the other side of the coin, AL, AZ, AR, CA, CO, ID, IN, KY, LA, MT, NV, NM, SC, TN, UT, VA, WV, WY are generally lower (better) than the national average for prop tax and homeowners rates, with DE and HI much lower than the national average (although HI has a very high overall cost of living).
Bottom line is to be sure to consider a state’s income tax, prop tax / homeowners, and overall cost of living when choosing where to live and eventually retire. The combination of these factors can make a significant difference in one’s ability to achieve and sustain FI.
Excellent article and collection of links and have saved a copy for my kids to read when they are a few years older (currently 12 and 13)
Great summary, ESI. Another definition of FI would be “having wealth and/or passive income to cover expenses indefinitely.” I find that folks generally think of wealth as investments and real estate and some overlook the viability of simply having reliable passive income (such as a military or first responder pension).
One other comment regarding the ability to earn more. Most in these same communities do not have great opportunities to climb the ladder quicker as is the case in the private sector. Case in point, it was not until 15 years in that I had an opportunity for early promotion in the military. Side hustles can be awesome for bringing in additional income, although many that find themselves continuously moving and deploying often struggle with consistent side gigs. That all said, both servicemembers and first responder communities make decent overall income, so although increases in the “E” may not always be possible, focus on the “S” and the “I” can still produce awesome results!
Yeah, not the E so much, but the career-growing rhetoric is a bit unrealistic, very sound if you can find it. I had a ten-year career, making $600 an hour for years, but my spending was crazy, and then the industry disappeared from the face of the earth. Back to the drawing board . . . got a B.A., then jobs ever since, now some minor side-hustling (Amazon Mechanical Turk, Survey Junkie, eBay, occasionally). The Great Recession came along one day, destroying jobs, careers, nest eggs, and killing many; I don’t worry about tsunamis, earthquakes or asteroids anymore, so there’s a plus. One serious medical issue can do the same; more on that later. Still on the job, though, plugging away like a soldier and a champ, some kind of hero to the gf who had a harder go through the worst of it (the GR). Despite a few criticisms, I accept this manifesto at face value as a good read and careful guideline, by one person’s lights, applicable to many if not all; some of the resources/linked articles are truly excellent. I am convinced the modern state of US health care and health insurance rates are a menace to all; this problem must be addressed, solved, mitigated, or else. Horrified at the lack of proper oversight, limited discussion. Other blogs aren’t any better at it, to be fair; the river of denial is vast and swollen to capacity, but then that’s normal, considering humans. Beyond that, I think Ramsey’s 7 baby steps are immensely helpful, tweaked a bit, also the full ramblings of MMM, even when offensive. Strategize, commit, act; never give up. Always some nobility in that . . . be encouraged, beloved brothers and sisters. Be brave, be kind.
And through the darkness we’ll find the light . . . (Beyond Forever/Seraphim Shock). WORD.
GenX FIRE says
Nothing beats earning to open the door. In my first 6 years after college, I earned very little being a LT for the first 4. After that, I had a low paying job and lived in NYC. Money flies out of your wallet there.
It was at that point that I got a good paying job and on the higher earnings cycle. This crazy bull market occurred exactly when we started to earn and save more. I also started to learn from folks like MMM and others and started saving well.
We are now 43 with a young child and in a good place. Our comfort level is to get us a FatFIRE with several million in savings as illness is a reality; I have asthma. Family history is long lives and or bad illnesses, so either way our goal is a FIRE in our mid 50s.
TLDR, he’s right. We did it that way and are on his schedule.
I get excited about savings and investment rates . . . up to 31%, another 5% via company match. Then another 25% of net, straight into a home maintenance fund, every other paycheck. Bonus checks, raises and windfalls go directly into various accounts, so no lifestyle creep. Still cost-cutting here and there; generally seems great, but I’d like to see 50% or more, maybe 66% for the thrill (lol). The best part is changing the way I see my job, which has been harder than needed at times; beefing up on reserves and good planning definitely alters my attitudes, participation and risk profile, all for the better. Knowledge is power, but so is money, only if well-managed.