The average 55-64 year old American has $107,000 set aside for retirement says a analysis conducted by the Government Accountability Office (GAO). That same study found that 29% of households aged 55 and older have no retirement savings at all. This warrants people needing to wake up and take more control of their retirement and financial independence.
In its basic form, financial independence is saving enough money to cover your expenses that you do not need to work. Essentially it’s either having enough savings to live off of, or passive income to substitute working. As the data shows, some of those spending 40+ hours a week for 40+ years in the workforce may not reach this state when they retire. Enter: the F.I.R.E. movement.
The F.I.R.E. Movement
F.I.R.E. stands for Financial Independence Retire Early. Financial independence is closely related to the ability to retire early. If you have enough saved, the perk is that you don’t have to work, though you still can if you want. That frees you up to do all those things you are saving for retirement: traveling, spending time with family, working on your hobbies, etc. People want that sooner and can you blame them?
People don’t want to get to the end of their working career and find that there’s not enough to live on. At the same time, more people are realizing that they don’t even want to spend 40+ years working a 9-5 job, 5 days a week.
While I do agree that holding a regular job teaches lessons of hard work and commitment that everyone needs to learn, I do not think that a 9-5 is the only way to achieve that. But don’t quit your day job just yet. The reality is for those starting out in their financial independence journey, that consistent day job is the best way to make money.. for now.
The biggest key to financial independence is being smart with your money: live on less than you make, and save & invest the rest.
Get out of debt
In order to do that, you need to lower your spending and raise your income. Grabbing hold of your spending is KEY. You could be making all the money in the world but that won’t make a difference if you are spending all the money in the world. Oh, and get out of debt. ALL debt. Dave Ramsey’s Total Money Makeover is a great place to get started.
Dave Ramsey says, “Your greatest wealth building tool is your income.” So don’t give it away in the form of debt payments and interest! Pay off all of your debt (except the mortgage) by using the debt snowball. Once you are debt free, all that money you were sending to payments can now be saved and invested! Collect interest instead of paying it.
- Related: How the Debt Snowball Works in 4 Easy Steps
The Big Number
If you are thinking about retiring early, you need to calculate out how much money you are going to need. Conventional wisdom says you need between 1-1.5 million dollars or 10-12 times your income to retire.
This chart from Four Pillar Freedom shows how many years you would need to save based on your spending and your income. If you make $50k after taxes and spend $40k while investing the other $10k, it would take you 36.7 years to retire.
“According to retirement-plan provider Fidelity Investments, a good rule of thumb is to have 10 times your final salary in savingsif you want to retire by age 67. Fidelity also suggests a timeline to use in order to get to that magic number:
Kathleen Elkins, CNBC
By 30: Have the equivalent of your salary saved
By 40: Have three times your salary saved
By 50: Have six times your salary saved
By 60: Have eight times your salary saved
By 67: Have 10 times your salary saved “
But that number is different for everybody depending on your lifestyle, spending habits, and how you want to live in retirement. Use a retirement calculator to find a number tailored to you. If you want to retire earlier than 67, you need to have more.
Don’t get discouraged if that number is higher than you thought, or you are farther away than you want to be. You have the power to change that! You either need to lower your expected retirement expenses by adjusting your lifestyle or generate more income. Now that you have your number, get to work.
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Work Harder
Work hard now, so you can have fun later. I’m talking about working really hard.
According to this study, strength peaks at 25 and is good for another 10 years or so before it starts declining. In your 20’s and 30’s is when you are most physically able. That, in my opinion, is the best time to be working hard. A 25 year old body tends to take the toils of work more gracefully than a 55 year old body. But, that does not excuse those over 25 from working hard!
The day job, a side hustle, and passive income walk into a bar…
One way you can start today is by diversifying your income streams. You have your day job (active income). Now think of a side hustle. What can you do on the side that will earn you money? Next, find a way to generate passive income. Then find more ways. This article says millionaires have 7 different income streams. Here are 10 different income ideas from Good Financial Cents to get you started.
My husband has a day job and side job that both earn active income. My day job is a stay at home mom and while it doesn’t generate income directly, I sure save us a ton in child care expenses, food, etc. I also have a side hustle that earns active income. In my spare time (HA!) I am working to cultivate streams of passive income.
Active Vs. Passive Income
Active Income
Active income is compensation for your time spent, or your “active efforts.” This is your day job. Nowadays, it is relatively easy to secure a job. It may not be the job, but it is a job. When my husband lost his job, he was able to find work in construction the very next week. It may not have been his field of choice but he did what he needed to.
Jobs in the retail and service industries are readily available and the hiring processes usually take 2-3 weeks. These also make for great side jobs in addition to your day job. Working an extra 10-20 hours a week isn’t going to kill you.. yes, even if you are over 25 and your strength has peaked. The goal is to generate active income to build your passive income. For those searching for financial independence, the ultimate goal is passive income.
Passive Income
Passive income is income generated while not necessarily working at that moment in time. I see this as 2 different ways.
- Your money is working for you; your investments are making money.
- Time you have previously invested creating value or a business is generating income on your behalf.
Passive income is a bit trickier to obtain as you either need money or time. You either need money to invest or time to create. Start by focusing on active income and using that to build up to passive income.
Thanks to the digital age, there are so many side hustles to make money from the comfort of your home. We are in an age where, with enough hard work, anyone can be make money online from being a YouTuber, website designer, blogger, influencer, etc. and you don’t even need a college degree! I hear there can be some good money in it, too.
These require a major time investment but they pay off in the end. It could be a year or two+ of hard work before seeing any return on a social media platform.
Investing
The biggest form of passive income that we can’t ignore is investing. It can be confusing and therefore intimidating. You need to make your money work for you. Find a local financial professional to walk you through it. Our bank offers the consults for free but you do pay a percentage fee on the money you invest with them. We sat down with an investment professional and left only slightly less confused. It’s okay if you don’t understand all of it! That’s what the pros are for.
It’s Not All About Money
At the end of the day, our quest for financial independence is not all about money. Our goal is to spend less time working and more time as a family. In order to achieve that, we need enough savings and passive income to support that lifestyle. Money is simply the tool to get there. Working is simply the way to earn money.
- Related: How to Balance Living Life and Saving for a Future
We want the option of working because we want to, not because we have to.
What about you? Do you have a goal of retiring early? Let me know in the comments below!
Looking for ways to get started saving today? Check out these great articles:
- Check Your Subscriptions | Money Saving Challenge
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- Save Money by Reducing Your Water Usage
- 5 Ways to Save Money on Groceries
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