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Reaching financial independence before age 40 is one of our top money goals.
With that said, I wanted to use this Money Talk Monday to share what financial independence is and how you can achieve it.
Financial independence in its simplest form is when the money you have is enough to cover your lifestyle for the rest of your life.
What a lot of people don’t understand is you can achieve financial independence well before the traditional retirement age.If saving 15% of your income can get you to financial independence at age 67, then saving 50% of your income or more can get you there decades sooner. Click To Tweet
So listen in as I share how we are plan to become financially independent before age 40:
Speaker 1: 00:00 Quick question. If you knew you had enough money in the bank to do whatever you wanted to do, would you still do whatever it is that you're about to do? Like for instance, would you still go into the office every single day if you knew you didn't have to? Or would you go find some work that was actually fulfilling even if it paid significantly less? Or maybe you'd find more time to travel or spend time volunteering for causes you care about or becoming a stay at home parent? Whatever you'd want to do is totally possible if you start making some different financial choices today. That's why on this money talk Monday, I want to talk to you about financial independence.
Speaker 1: 00:58 Achieving financial independence basically means you have enough money to fund your lifestyle for the rest of your life without ever needing to earn another dollar. Now, you may choose to go out and earn more money, but the fact is you don't need to make more money. So how is financial independence possible? Well, at its core, the formula is very simple. You essentially need to live on less than you make and then invest the difference. The more you invest, the sooner you'll reach financial independence. So if investing 15% can get you to financial independence by age 67 which is what most financial gurus say, investing 50% of your income can get you there decades sooner. What it is, it's really just a simple math problem. So the first thing you have to ask yourself is how can you get to the point to where you're saving 50% of your income?
Speaker 1: 01:55 Well, I'm glad you asked. So one of the first steps is to look into cutting your expenses. And I'm not necessarily talking about that Starbucks drink that you have. I'm talking about the big stuff. What percentage of your income is spent on housing? I mean, the average car payment on a new car is about like $600 a month. How much would eliminating that payment move the needle? I mean, yeah, the daily frappuccino adds up. We all know that. But so who do the $30-40,000 decisions? And to start this off, that's really where we need to focus because just a few of those right will allow you to move the needle so much faster than skipping the ice coffee. So for example, when we looked at buying our house, we were approved for over $400,000 now I remember looking at our spending plan and our goals and thinking there was just no way we were coming even close to a $400,000 house and we did it.
Speaker 1: 02:54 We bought our house for around 200,000 and now our expenses including utilities, lawn care, and all of that are between about 16 and 20% of our income after that's after tax income, which is crazy considering that number is usually about 40 to 50% for most people. Not only that, so we used to have car payments, they were four 39 and two 96 every single month. And I remember those because I hated making those payments every month. Well since we've paid off both of those cars and we plan on driving the ones we have until basically the wheels fall off, there's $735 every single month that we get to invest. And that gets us closer to financial independence. So if you look at it, buying a house that lined up with our spending plan and not having a car payment freed up thousands of dollars every single month for us to invest. Now another big area that we got into control was our food spending.
Speaker 1: 04:00 In one of the last episodes I shared how we had spent more on food than we did on rent in a previous month. And I'm embarrassed to say that's 100% true these days. My amazing wife plans out our meals and doing that has reduced our food spending to only about 5% of our income. And that's with us doing the occasional dinner out. So you see, just by making a few small tweaks to the way we spend money in the big areas, we've been able to push our net worth into the six figures since becoming debt free in 2016 but now here's the thing, you can only cut back so far and I mean, let's be honest, some of you guys have spending plans that are pretty much as bottomed out as you can get. So what can you do to get to financial independence? Well, the answer to that question is make more money.
Speaker 1: 04:54 When we first got married, we made what, I would say better than average household income, but since that time in 2014 I think our household income has grown by about 70 to 80% and so how do we do it? Well, the first thing is we made sure that we do our best work at work. For example, my wife was actually just awarded teacher of the year last year for her work. Now does that come with an immediate pay raise? No, it doesn't. But she has a master's degree and a principal certification. And so if she decides to put those to use and move up in the education field, that's one heck of an accomplishment to have on your resume. And it could go a long way towards increasing our income if she decides that's what she wants to do. Which brings me to the next point because sometimes you just need to get some more education.
Speaker 1: 05:47 Maybe there's a certificate or some kind of certification that you can get to help you earn more money or maybe in your field and advanced degree is totally worth it. Or in my case, sometimes it's just a book or two that help you develop a skill that's really valuable to your organization. So I've been in sales my entire adult life and so my income has been mostly predicated on my effort and my skills. So with that, I've read a ton of books on becoming better at closing, building rapport, and all those things that are essential to becoming a great sales rep. and it has helped tremendously. But even with education, I will say the two times that I've had the largest income jumps were because another person noticed my work and referred me to an open position that I would have never known about. And this last one was because I'd built a good reputation in my field and the company that I'm working for currently actually reached out to me directly about an open position and that almost doubled my income.
Speaker 1: 06:50 So no matter what you do, always make sure that you're doing your best work at work. I mean, again from getting recognized like my wife or being approached with open positions that can almost double your income. It's really worked out for both of us to just always make sure we're putting our best foot forward at our traditional nine to fives. Now the next way to earn more money is to start side hustling. We just had MJ bridges on for episode 13 which you can firstname.lastname@example.org slash episode 13 and in that episode MJ shared how he made an extra $30,000 in one year with the side hustle is charging scooters. And let me tell you that is just incredible, but I love it. Not just because he made $30,000 but because it shows that you don't need to do something super sophisticated and fancy to help you make more money.
Speaker 1: 07:42 There is opportunity everywhere. You just have to be open to the opportunities and willing to do the work. So now once you've widen the gap between your income and your expenses, it's time to start making some smart investments. Me personally, I believe in total market index funds and there's really nothing you can really do to sway me from that. But one of the reasons I wanted to start this podcast was to highlight the different ways that people invest. And so over the next few weeks you're going to hear a couple of different strategies. For example, Wednesdays guest is a big time real estate investor who use that to reach financial independence. So you have to find what you're comfortable with and good at. But again, for me, I believe in low cost total market index funds more than anything else. So with that, let me give you a little bit of my investment strategy first things first.
Speaker 1: 08:35 I make sure that I'm contributing up to the match in my 401k. Now the company I work for now matches 100% of my contributions up to 3% of my salary and then 50% of my contributions for the next 2% of my salary. So 5% of my salary goes into my company 401k directly me. Not only does my employer have some really solid investment options, but doing this allows us to lower our taxable income as our 401k contributions happen before we get taxed. Now, if we had a high deductible health plan, I would make sure that I was maxing out of HSA after contributing up to the match in my 401k. But because the high deductible plan doesn't make mathematical sense, given my healthcare options with my job and my wife, because chronic illness and all the expenses that come with that, we don't have an HSA.
Speaker 1: 09:27 And so we skip right over that to maxing out our Roth IRAs. So the limit for Roth IRAs in the year 2020 is $6,000 and so once we're done with that, we will max out a traditional IRA, which has that same $6,000 limit. And then once we're maxed out there, we're going to go back to the 401k and the 403b and work towards maxing those out as well. And that's our strategy. And so, and another money talk Monday, I'll go into why we set things up that way. And while we do things in that order, but for this episode, the key thing for you to get is if you want to reach financial independence, you need to invest, invest, invest, and then find a way to invest more, right? Those thousands of dollars. I mentioned earlier that we were able to find through the lifestyle choices, do us absolutely no good sitting in a savings account.
Speaker 1: 10:21 So think about what $100 could have gotten you at the grocery store 20 years ago, right? And then think about what $100 gets you at the grocery store today. So see, saving $100 in the year, 2000 means you would have less buying power today than you did then, which is not what we want when we're going after financial independence. Also, listen, now I know a lot of you work hard, but when it's invested, your money can work way harder than you ever will. I mean, if you work eight hour days, five days a week, every single week there are 105 days that you aren't working and earning income. Not to mention the other 16 hours in the day on the days that you do work. See, my money works harder than I ever can because it's working 24 seven your money meets to work as well if you want financial independence. So now that you've cut expenses, you've found ways to increase your income and you started investing, how will you know once you actually hit financial independence?
Speaker 1: 11:25 I mean that just depends on how much you plan to spend in retirement. The key that unlocks this whole thing is understanding the 4% rule, which basically States that if you withdraw an average of 4% of your portfolio each year, it should be able to maintain its value even with inflation. Sort of figure this out. What you have to do is first things first, you need a spending plan because you're going to need to know your monthly expenses and you're going to take those monthly expenses you plan to have in retirement age and convert that to a big annual number by multiplying those monthly expenses by 12 so let's say your retirement expenses are $2,000 a month, right? That would be $24,000 a year that you plan to spend in retirement. You're then multiply those annual expenses which were 24,000 by 25 which would give you $600,000 now a quick math check will tells us that 4% of 600,000 is indeed 24,000 which means that once you have $600,000 if you live on $2,000 a month, you should have enough money to never have to work again.
Speaker 1: 12:37 Now again, whether you do or not is totally up to you, but just having that choice makes all the difference. I mean, think about how much more productive you would be if you actually worked somewhere that you loved and you were passionate about and you were excited to go to everyday. So if you can live on half your household income, financial independence should be attainable for you in about 15 years or so. And the higher that savings rate, the sooner you will reach it. Now we're projected to hit financial independence around age 40 if we stay at this pace and have no drastic lifestyle changes. Now listen, I've got to admit something. I mean, having a higher than normal income does help us because we get to save such a large amount of our salary. But because we make what we make, we do still get to enjoy life a lot more than somebody, let's say making $40,000.
Speaker 1: 13:33 But financial independence is still attainable on an average salary. Again, it's a simple math problem. So saving 25 times your annual expenses and withdrawing an average of 4% each year should last you. The math doesn't change just because you have a lower income. What happens is it can be more difficult as you're deciding where to cut back your spending. So we're going to go much deeper on this topic of financial independence and how to achieve it because this is just a huge focus for us. But I definitely wanted to use this money talk Monday and the episode that's coming out on Wednesday to start introducing it. Um, and let me just say this episode Wednesday, you guys are gonna love it. Andrew's phenomenal. If you have any interest in real estate, he's going to blow your mind with some of the strategies he's used to reach financial independence with real estate.
Speaker 1: 14:28 But if you do want some more investing knowledge or just knowledge on financial literacy as a whole, because I mean we talked about cutting expenses, increasing income, investing, all that, be sure to go grab my money guide where I talk about all that stuff and I give you even more practical tips on how to structure your finance to create that dream life. You can find the money guide over winningtowealth.com/guide also, if you have any questions on this and you want to take a deeper dive, be sure to swing by the neighborhood and ask them. I'm always available in there and again, you can find that at winningtowealth.com/neighbors that is winningtowealth.com/neighbors to join the neighborhood and continue dialoguing and ask all of your questions, but thanks again for listening to another money talk Monday. We'll talk soon.
Speaker 2: 15:26 [inaudible].