I drove to the office of an accountant recently. I needed some advice about taxes and this guy was recommended to me by a friend. After I walked in his secretary said that he was ready to see me. His office walls were 1970s style wood paneling. I knew he was legit because he didn’t waste money on remodeling.
Once we moved past formalities he asked me what I needed help with. I told him that I was anxious about taxes because eventually I’d start drawing down my early retirement account and I didn’t have a plan in place for that. I get neurotic when I don’t have plans in place. He asked me what I was talking about and I explained to him that I was financially independent.
I don’t think he believed me.
He then went on the offensive. It felt like I had violated his profession and he started lecturing me on how I needed to be concerned about inflation, and housing costs, and recessions, and if I had kids where their college tuition would come from. And then he tried to sell me on financial services. That was my cue to leave.
I’ve learned that if you want to reach financial independence FAST there are two great options: 1) inherit money from a wealthy family member or 2) become a Bay Area tech entrepreneur and have Facebook or Google buy your start-up.
But most of us aren’t going to reach financial independence either of those ways. The good news is that there’s a third option and it’s fairly simple: be MOSTLY frugal and make as much money as you possibly can in your profession. Because how frugal you are has a direct impact on how fast you retire:
I don’t think anyone wants to be frugal. But it only sucks when you listen to the cost-cutting advice from experts who say you need to clip coupons to save 25 cents on yogurt. Or that you should switch to re-usable cloth toilet paper made from your old t-shirts (WTF?). Or that you shouldn’t turn on your air conditioning even though it’s 95 degrees out. And of course you should NEVER EVER buy a latte at Starbucks.
But who really wants that life? I don’t believe depriving yourself is a part of personal finance.
There’s also the experts who say you shouldn’t care about spending $5 per latte three times a day because it doesn’t really matter all that much, your sole focus should be on making more money. While I agree that maximizing your income is critical to building wealth, I’d argue that most of us reach an income plateau no matter how much time, money and effort we spend grabbing for the next rung on the career ladder.
So instead think about landing in the MIDDLE on the frugality scale. Go after the big wins:
- Creating a minimal and classy wardrobe that lasts for years.
- Living close to where you work to cut down on commuting time and costs.
- As a young, healthy adult choosing a high deductible health plan.
- Renting a small house or apartment. Maybe even a camper?
- Ditching the costly cable with premium channels.
- Choosing to buy a used car rather than a new one.
- Getting free travel from credit cards.
It took me 13 years to reach financial independence and I probably could’ve done it in less time if I had clipped coupons. But I chose to go after the big wins and then felt okay spending money traveling the world, grabbing a cocktail after work, sitting in a Starbucks on a Saturday drinking a latte, and using disposable toilet paper.
I’ve been emailing with a fellow reader named Megan. To illustrate how retiring in 15 years is possible I’m going to use her as an example. She brings home about $50,000 a year after-taxes, and she saves $25K and spends $25K. In order for her to be financially independent she needs $625K ($25K in expenses multiplied by 25).
So how long will it take her to save up $625K through lazy and uncomplicated investing? It’s less than 15 years:
That also assumes she won’t make any more money than what she currently makes. If she gets a promotion or finds a new job and negotiates another $10K, $15K, or even $20K in salary then she’ll be able to retire even faster.
When most people make more money they spend more money instead of saving and investing the extra. Frugality goes out the window and they might even feel entitled to a certain level of wastefulness. It’s one reason why the net worth of Americans never exceeds $250K:
Henry Blodget, there’s more on him here, wrote an article on LinkedIn about how much you need to save each month to retire with $1M. Reading through the comments I found it disturbing that many people have a Rick Ross attitude of YOLO when it comes to their money:
We probably all know people like this. How many years will go by before they realize they’ve gotten themselves into a MAJOR financial emergency? And when they do, will it be too late? Will they be forced to work until they die, like 37% of Americans? I was happy to see one person get it:
Financial independence wasn’t hard for me. It only took me 13 years. What I struggled with was 13 years of second-guessing my goal, either spending way too much money or depriving myself, dealing with the naysayers who said I couldn’t do it, and getting bad advice from accountants. I feel like I’m in a good place now.