I’m excited to share some awesome news with you. As someone who recently (note: recently is three years ago) made a decision, and conviction, to become financially independent I’m running ahead of schedule. If all goes well your ol’ friend Mr. Everyday Dollar will be just shy of 40 when it happens.
Granted, these calculations always have a sprinkle of black magic. There are countless variables when doing the math. Some in my control, but many so completely out of my control that the date can easily slip. I do my best by basing them on data like how much I spend, what amount my portfolio needs to be, the best way to generate cash in retirement, and what the tax implications are.
How did I get here? Luckily, I wound up doing a few things right years ago – like picking an affordable college to attend – that have put me into this position. But even Mr. Everyday Dollar isn’t perfect and screwed the pooch a few times.
For example, in my 20’s the more everyday dollars I made the more I spent. I graduated from eating $1 Totino’s pizzas with a cold PBR to going out and downing $15 gourmet pizzas with a couple $5 microbrews. I sold my economical Honda Accord and bought a luxury German automobile. I switched from spending my vacation time camping and visiting U.S. cities to taking multiple international vacations a year.
During the last three years as I’ve curbed spending and discovered frugality, I’ve learned to place more importance on the things that really matter to me and allow me to live with more peacefulness and happiness: Enjoying a walk with my girlfriend around my hippie-filled and funky neighborhood, mindfully preparing meals from scratch at home while listening to Artie Shaw and drinking wine, and making choices to live with less impact on the Earth’s resources.
If I could go back in time I would take back the years in my 20’s when I foolishly spent money on crap, ultimately pushing me further away from financial independence. I’ll have to work more years because of that decision, but I want you guys to benefit from my mistakes.
That is why I created the following blueprint for financial independence. While it starts at age 22, don’t despair if you’re older than that. Think of it as a plan you can start right now. It took me a few years to figure this out so my road has already had more bumps than those who use this blueprint starting after college.
It’s important to start off on the right foot so the blueprint assumes you made a fiscally responsible decision when choosing a college. It’s extremely important to not be straddled with tens of thousands of student loan debt (ideally no debt like 40% of undergrads).
After graduation, get a really cheap apartment even though the temptation might be to rent a place with granite counter tops and a rooftop pool so you feel like you made it. You can spend money, but buy quality things that will last you a lifetime.
Buying a home in Stage 1 will very likely be a lousy investment, but we all need a place to live. The beauty of the blueprint is the home is paid for by the age you become financially independent. Make sure the home you choose meets your requirements, which at a minimum means it’s efficient and practical.
In your first job work hard to build your career. It’s the time to say “yes” to every project thrown your way, to gain experience, to network, to build your professional reputation, and to have a mentor.
Face your fears so you continue to grow and you’ll find opportunities come your way which means you will make more money. Don’t be tempted to spend more, instead live well below your means. Shoot for saving 50% of your take home pay.
When you start investing in Stage 2, the easiest method is to use Vanguard funds but you may choose invest in individual stocks. When 4% of your portfolio covers your yearly expenses you can consider yourself financially independent. An easy way to figure out how much you need in your portfolio is to take your yearly expenses multiplied by 25.
You can certainly retire at age 40 when you hit Stage 3. I recommend you continue to work but live like you’re financially independent. Plow all your income into your portfolio as a cushion. It’s time to feel out being retired and drawing 4% from your portfolio to live on. Are you sleeping okay? Do you think this is a feasible lifestyle? Spend a year or two making sure you’re comfortable before you quit your job.
What if you want kids at some point? Well, they’re really not all that expensive. You’ll make it work.
In Stage 4 you can leave the workforce. You draw 4% yearly from your portfolio. You own your time now so do as you wish. If you decide to work for money at some point, which is likely to happen sometime during the next 22 years, put all your income into your portfolio.
What about healthcare during this stage? Surprisingly, it’s cheaper than you think.
You’ll eventually each what most people consider is a real retirement age, which is Stage 5. If Social Security is still around you can begin taking distributions plus you can begin taking your 401(k) distributions. Welcome to your second retirement!