Financial Wellness @ Work

How to Be Financially Independent in 5 Years (No Matter What Age You Are)

One of the things that makes the lives of financial planners so difficult is that we usually have to get people to do what they don’t want to do, so that they can get what they want. In other businesses and professions, you’re generally either providing a good or service that will provide some immediate pleasure or alleviate some immediate pain. Financial planning is more like dieting and exercise. Almost all the pain (saving money, taking a little more investment risk, diversifying out of your favorite stock, or taking the time to draft boring estate planning documents) is upfront for a gain (being debt free, having enough money to retire, or making sure your family is taken care of in case something happens to you) that seems so distant and far away.

Most of us know that financial planning is something that we need to do, but it’s easy to procrastinate because it’s rarely urgent (and by then it’s often too late to do much). So how can we overcome the challenge of our own inertia? I think it begins with finding at least one goal that really motivates you.

One of the things that has inspired me is a blog called earlyretirementextreme.com, which shares stories and tips from people who were able to retire in their early 30s, not through get rich quick schemes, but by “extreme” saving. The math works out so that if you save 75% of your after-tax income, and earn about 8% a year on those savings for 5 years, you’d have enough to maintain that standard of living indefinitely by withdrawing a sustainable income of 4% a year from those savings. Imagine being financially independent 5 years from now and being able to do whatever you’d like to do for the rest of your life?

I also know this is possible firsthand because I have a very good friend who will be financially independent, and essentially able to retire, this year at the ripe old age of 32. He did this without ever earning a six-figure income or making any noticeable sacrifices (he doesn’t make his own clothes or go dumpster diving). In fact, you wouldn’t notice much different about his lifestyle at all.

So why don’t more people do this? Obviously, it’s quite difficult to live on only 25% of your after-tax income but the blog is full of more real-life examples of individuals who’ve been able to do just that with middle-class incomes of $30-70k. The most important thing is changing your perspective on money and how much you really need to live a happy and fulfilling life. As an example, I read an article about how many wealthy technology executives and entrepreneurs live incredibly modest lifestyles. Warren Buffett, the second richest man in the country, is also notorious for his frugality. When you really think about it, you may discover that you need a lot less than our consumer society would lead you to believe.

That all being said, saving the full 75% may not be realistic for most people, especially if you’re used to a certain standard of living or have a lot of financial obligations that are hard to get out of. But, if you could apply just a few of these ideas to your life and save, say 30% of your income, it could still make quite a big difference, whether your goal is to pay off debt faster or retire a few years earlier. In the next series of blog posts I’ll be discussing some of the specific ideas on the site and what I’ve done in my own life to try to save and invest about 75% of my income.

Does that mean I’m planning to retire in 5 years? Not necessarily. I enjoy my job and can’t imagine not working at all, even when I’m well into my golden years. To me, it’s more about the security, freedom, and peace of mind that comes from not being dependent on anyone else for my livelihood.

A final point is that the younger you are, the easier, more necessary, and more beneficial these changes will be. It will be easier because young people tend to have fewer financial obligations. For example, recent graduates often just need to maintain the lifestyle they’re already used to in college (and have enjoyed quite a bit) instead of automatically increasing their spending to match their higher incomes once they start working. At the same time, it will be more necessary because younger generations won’t be able to count as much on government entitlement programs that are going bankrupt and defined benefit pension plans that are going the way of the dinosaur. The good news though, is that they will benefit more from having a longer time for their savings to grow and compound and for them to enjoy the freedom that comes with financial independence.

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4 comments

  • SunlightAugust 4, 2011 at 3:21 pmReply

    Great article. I’ve followed Jacob’s ERE for a few years and recently read his book and it has done more to help me make changes than anything else I’ve ever read. He sugar coat’s nothing: )

  • CarAugust 4, 2011 at 3:45 pmReply

    Great article. I am 24 now and doing one more year of school then I plan to save up as much money as I can for at least 5 years. I bet if I saved enough for 10 years, I could stop and let compound interest do its thing. When you start saving for retirement at 35 or 40, you have to save so much more and don’t end up with nearly as much money.

    One of my main goals is to not have to rely on working for someone else. I have felt so trapped at jobs in because I had no other choice. I had debt and bills to pay off. A couple jobs I left on the spot, but I either went into debt or ate up my savings just to get out of a toxic situation. A lot of companies nowadays do not have the well-being of the employees in mind when they make decisions. It’s all about profits or saving face, unfortunately.

    When you have savings, you have choices.

    (plus, my future career will lead to self-employment, at the very least as a part-time side business)

  • Liz DavidsonAugust 4, 2011 at 6:11 pmReply

    Hi Car,

    Like your attitude on this– a lot. Work should be meaningful and it should be your passion. The early retirement strategy gives you something that is priceless– freedom to do what you love, whatever that may be…. to live your purpose.

    Idealistic as that sounds, its the truth. I’ll take that over Prada any day!

    Liz

  • DFHAugust 11, 2011 at 1:10 amReply

    This blog is very useful to us.
    _____________
    Edward

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