For most of my life, I’ve been obsessed with real estate. I’m that person who loves going to open houses, looking online at real estate, and being a homeowner. And I see the value in owning properties for the long haul and renting them out to generate income. As I’ve become completely focused on reaching financially independence, I’m less sure that real estate investment will play as big a role…if any.
After reading Mr. Money Mustache, Jim Collins, and others, I realize there is another way. And it’s a rather simple (though not always easy) process:
- Greatly reduce expenses
- Build cash reserves
- Aggressively invest much of your money
- Take advantage of tax accounts
It really comes down to these principles. Simple, right? Kind of like it’s simple to be perfectly fit physically. All it takes is eating fresh, real food, and putting in about 2 hours of exercise a day. People can see this path, but don’t take it. It’s too easy to sit in the recliner watching TV while eating pizza, chips, and drinking beer. The path is rather obvious, but we all have so many distractions and other things we’d rather do that we don’t change our ways.
The same is true for personal finance. I make about $115,000/year. In some areas, that would be a lot of money…but not where I am. I live in an expensive metropolitan area, and it’s easy to engage in lifestyle creep. God knows I’ve done that plenty. If I put away 5 percent to 10 percent of my money, I’ll eventually be able to retire. That’s where a lot of people that I know fall. They might be putting a way 10 percent in their 401K at work, and they have a home with a mortgage. But they are otherwise living expensive lives that will be a challenge to maintain during retirement. Thankfully, over the years, I’ve been consistent with putting money into my retirement accounts.
This year, I’m making a bigger effort. I’ve been focused on continuing to reduce my overall expenses such that it will take me less money to achieve financial independence. I’m planning to rely on the 4 percent rule to get me there. The 4 percent rule means that once you reach your financial independence (FI) money, you can withdraw 4 percent of the money for life. To determine what your FI number is, multiply your annual expenses by 25. So if you are living on $40,000 per year, you’ll need $1,000,000 to achieve financial independence.
I’m not going to lie. For years, I was living on more like $70,000 or so after taxes. This year, I’ve become completely obsessed with my budget, and I’m slowly cutting away at each category. After I pay off 2 debts (401K loan to get me into the condo and personal loan to pay off credit cards), I think I can realistically get my expenses down to $35,000/year…which would mean I would need $875,000 to reach financial independence. I’m about $200,000 away from that now. If I could also pay off my condo (still owe $344,000; yikes), I could live on $22,000/year.
I’m still tinkering, so I don’t have this completely set. But the thing that keeps me going is tracking my progress. Using the 4 percent rule, I now have enough money that I could live on about $24,000 per year! This not only gives me hope, but also confidence. I know that if I ever find myself in a difficult position like losing my job again, I have options. There would be no need to panic. I could take in a renter and reduce expenses further, or take a part-time job. Or I could sell the condo and move somewhere more affordable and live off the money.
I think I’m looking at about 5 years to reach financial independence. I feel good about the path I’m on, and I hope to enjoy the ride along the way.