The easiest way to become independently wealthy is to inherit money from a rich uncle*, or maybe you could write an app that cures male-pattern baldness. If you don’t have a rich uncle or coding skills, what can you do to escape the hamster wheel of death, a/k/a full time work? Publisher’s Clearinghouse? Powerball? Take up the bass and start a band with your bros? Yeah, those sound like brilliant plans, but that won’t cut it for the vast majority of us. So what the hell to do?
The best and most reliable method to financial independence is to start saving when you are young and do so consistently, taking advantage of the reliable growth of your money over time. If you haven’t been able to do that, the only option is to double down on your savings rate. When Mrs. G and I got married in 2008, me in my mid 40s, she in her late 30s, we had a net worth of about $240k, which consisted of:
- Home Equity $200k
- Retirement Savings $80k
- Student Loans -$40k
Although $240k is certainly respectable, most of that was home equity, and would not have allowed us a reasonable retirement based on our savings rate. In 2010 we began projecting how long we would have to work, and we didn’t like the answers. The goal was to be able to retire by the time I turned 60, so our challenge was saving enough in less than 10 years without inheriting a million dollars or winning the lottery.
*maybe his name is Uncle Rich-Haha!
6 Game Changers in the Road to FI
Here are the 6 game changing steps we’ve taken to make our early retirement dream come true in just 8 years. Individually, they each would have barely moved the needle – but as a 6-pack they’ve accelerated our FIRE journey like crap through a goose.
Leverage Your Human Capital
The biggest advantage most of us have is our ability to earn money, or our human capital. This is especially true for younger people in their 20s and 30s, but also true for anyone who earns an income. And every dime you earn and save is worth exponentially more down the road. Zach at FourPillarFreedom.com developed this simple tool to calculate how much your money is worth at various rates of return and savings rates. Check it out. He’s a brainiac.
Avoid Lifestyle Inflation
In past lives I spent what I earned, even when my income was sufficient to save a lot. And that’s not unique. The average savings rate among Americans is a shockingly low 4%. We get a raise, so we buy the newest version of the useless piece of plastic because we deserve to reward ourselves for our success. Rinse and repeat. So after 15 years of increasingly higher earnings, you find yourself deeper in debt (well, heck! You don’t expect me to live in that little shack when I can afford that McMansion, do ya???), shackled with more useless crap, expensive cars, and a storage unit to hold the overflow! Our decision to avoid lifestyle inflation was a game changer in our FI journey.
Debt Elimination and Future Debt Avoidance
Eliminating the student loan was our first priority. Mrs. Grumby continued with her 401(k) contributions and we chopped away at the loan until it was gone. When we sold the house and paid the mortgage balance off, we became debt-free. Up to that point, the mortgage was our only remaining debt. The amazing power of being debt free is difficult to describe, so you’ll just have to trust me.
Continual Expense Reduction and Savings Increases
Increasing your savings rate is the best way to assure a stable retirement. The younger you are, the more time and flexibility you have. When Mrs. Grumby and I got serious about this, I was in my late forties, so a more aggressive savings rate was necessary. We made good incomes but spent like drunken spring-breakers. Incremental spending reductions allow you to increase your rate of savings. I am fortunate for the opportunity to contribute not only to a 403(b), which is the non-profit version of a 401(k), but also have access to a 457(b), which doubles my tax-deferred maximum from $18,000 to $36,000. Whatever options are available to you, at least save to the match level. Ideally, because you are reducing discretionary spending (right?), you can save 15% or more of your gross. If you are young, consider contributing to a Roth, especially if your employer offers it as a 401k. It is a genius way to have completely tax-free money when you retire or become FI.
Track Your Spending
The very idea of this used to give me the collywobbles, and still does to a much lesser extent. Mrs. Grumby, the brains of the Grumby Empire, loves numbers and spreadsheets, and therefore loves tracking spending. So track she does. Once I was dragged aboard, I discovered an application called Personal Capital, which is free to use and incredibly powerful. They do offer financial planning services for a fee, but we just use the incredibly helpful free app. Check it out.
Make Smart Housing Decisions
The final game changer for us was selling the house, but not just because we were able to take advantage of the inflated Portland housing market hysteria. We walked away with $380,000 after realtor commissions and paying off the $75k mortgage balance, although actual profit was much less when repairs and other expenses are calculated in. See this astoundingly** great post for more details. Avoiding maintenance costs, taxes, repairs, as well as enhancing our lifestyle was the real benefit. And we were able to park more money in the market, which over time does far better than real estate. But whether you are renting or owning, keeping housing costs low is a major contributor to your financial well being. And never, ever listen to the advice to buy a house for financial reasons. Ownership is a lifestyle choice with potential financial benefits.
**That’s what I think
Those are the six main decisions that changed the game and accelerated our exit timeline significantly. What are your successes and struggles?