What is it that you desire out of life? What is it that gets you out of bed in the morning with an eagerness for the new day? What is your purpose? Most people struggle with these questions, the answers to them seem to be fleeting, and dart from topic to topic. Some lucky few people have combined what their “work” means with answering these questions. However, most people are working jobs they would rather not be at. Many are wishing for more time with loved ones. Others see the world, and yearn for travel across the globe. What if I told you that these things were available for the taking? What if I told you that in order to get these things you hold so dear… all you had to do was reach out and grab them?
Well, you can have these things. You can be set free to pursue your passions without abandon. All it takes is some simple planning, and then some repetitive doing. How is that possible you ask? By changing the way you live today, so that you can live tomorrow the way you only dream of today. I am talking about saving money, learning about the 4% rule, understanding basic investing, and choosing to be different. Almost a year ago, I chose to be different. I stumbled onto Mr. Money Mustache, and he explained in three succinct posts how I could pursue Financial Independence and that it was not a pipe-dream. Anyone can do it. In fact, if you had $0 saved today, you can still likely retire in under a decade by making changes. Let’s dig in to how you can start fulfilling your dreams.
The 4% Rule
Once upon a time, there was a financial study that was run, called the Trinity Study. Long story short, it shows that over 100 years (in thirty year rolling windows) there have only ever been two retirement years in which a portfolio would have been depleted while the owner withdrew 4% each year. Let me say that again, based on the Trinity Study, it is statistically safe to withdraw less than or equal to 4% of your portfolio, and you will NEVER run out of money. In fact, in many cases the portfolio grew over thirty years. This is the bread and butter of the financial independence community. With this knowledge in hand, we can do some simple math, and plan for a safe retirement.
Do you need $25,000 / yr. to cover your required expenses? If so, multiply by 25 to discover the nest egg you could withdraw 25k from for the rest of your life ($625,000). Some people take the study and get a bit paranoid about the two failure scenarios. If that is you, plan to withdraw 3% of your portfolio instead and multiply your desired salary by 33 ($825,000 for 25k yearly salary). The study found no cases (including the Great Depression and World War II) where a 3% withdraw depleted the portfolio.
This rule is the corner-stone of all early retirement and financial independent philosophy and advice. Learn it, love it, use it.
This is where the rubber meets the road. Savings are exciting to the individual who is chasing financial independence. Why? Because it is a double-edged sword! By saving one more dollar today, you are not only better preparing yourself, but you are showcasing that you need one fewer dollars to retire happy! Keep track, and before too long, you will recognize that you do not need nearly as much to retire as establishment wisdom thinks you need. My wife and I live off of less than $24k in expenses per year (mortgage excluded). However, if we manage to save an additional $1,000 per year (a measly $83.33 per month) we now only need $23k to retire comfortably. Do the math as shown above, and now our required nest egg is $600,000 instead of $625,000. Let that sink in… By saving $83.33 more per month, you need $25,000 LESS in your total nest egg. Except now, that extra $1,000 I am saving per year is working to get us one step closer to our required nest egg.
Hopefully this is getting you to start thinking about some things. Do you really need cable TV? Would Netflix or a Roku or Sling TV work just as well but for a fraction of the price? What about dining out? Does it make you happy? If you spend more than $83 per month of restaurants that means you’ll need another $25,000 in your nest egg before you can quit the rat race. Is that worth it? My wife and I awakened to the psychology of how to think about money and savings through a book called “The Millionaire Next Door.” If you haven’t read it, you really should. If you won’t, the basic summary is that most millionaire’s live MUCH more frugally than you would expect… and that is typically why they are, and continue to be, millionaires. Change your life today, so that you can be free tomorrow. Even small choices can have a big impact.
Investing is too hard! I do not have the time to pick stocks! I do not understand mutual funds or index funds or whatever. I hear people give up on investing more often than I can count. The sad part is that it is so simple. I used to be a Dave Ramsey follower, but once you get into the meat of financial independence, it becomes clear that Dave is tailoring his advice to help the largest swathe of people possible. It is commendable, and I benefited from his teaching, but he doesn’t go far enough, and I disagree with his investing advice. Dave would have you invest in low-cost, high performing mutual funds. The sad truth is that even “low-cost” mutual funds will cost you far more in expense ratio (the fee the fund manager charges you per year) than any Vanguard index fund.
It wasn’t until this year that I truly understood how easy, and how hands-off investing could be. I read J. L. Collins “The Simple Path to Wealth” and it forever changed the way I invest. If you have not read it, or you find investing complicated. Please, please, please buy it. Read it. Learn. This book probably saved me millions of dollars in fees and investment performance during the upcoming life of my portfolio. More than that, it painted a clear picture of how to withdraw from my portfolio in retirement, how to give generously, and most importantly how to invest simply and smart.
Choosing to be Different
If you have made it this far into the post, then I haven’t scared you off with all this talk about being different and saving money. Good for you! I will leave you with a personal anecdote, and why I am so passionate about pursuing financial independence for my family and I.
I love my family. Around 2:00p.m. each day, I realize there is a little void in me from not seeing them all day, and not being able to hangout with my wife. I am a family man, and I miss my family pretty much everyday. I want that to change. I want for my family and I to experience the WORLD together. I want us to stand underneath cascading beautiful waterfalls where other people were nervous about hiking to. I want us to be on family vacations where we decide to stay another day, or week, or month just because we can. The freedom of flexibility is unbounded! So much so, that I still struggle with what it is that I will do with all of that free-time I will have available to me once I ditch the day job and start pursuing my passions with gusto.
That probably took me less than a minute to type out. I know WHY I am doing this. Giving up some flavorful bread-sticks at Olive Garden, or spending large chunks of my free-time optimizing our personal finances and writing to you are small things when compared with the bigger goal. If you gave me the option to have a meal at a restaurant and not see my family for another day, or skip the restaurant, and be retired one day earlier, what do you think I am going to pick? The trick is that I need to make that image fore-front in my mind. I have to constantly remind myself WHY it is I am doing what I am doing. Because, you know, there are plenty of nay-sayers out there. I get several people a week telling me that I can not possibly retire as early as I plan to.
Be brave enough to be different. Be brave enough to rush after your dreams. If you don’t, no one else will.
What do you think? Are there things you are willing to give up in order to skip the rat race?