Early Retirement Case Study: James from Free in Ten Years
This is a guest post from James at Free In Ten Years. Click here to read my guest post on his blog that he published today.
Bio: James is a 27 year old professional from Australia who is getting ready to retire. He will be retiring early without the help of a high income or an inheritance. He’s using the power of frugality and good old-fashioned hard work. He blogs about his journey to financial independence at Free in Ten Years. You can follow him on Twitter here.
I have a dream – I want to retire in ten years.
The reason is very simple. I want to spend my very limited time here on earth doing what I enjoy doing, not working for someone else. Rather than being intensely focused on saving money, I prefer to think of it as being focused on saving time.
Conventional wisdom says to work very hard until you are 60, save a considerable amount of money through long-term investing while working and then retire. Freedom at last! But is it? It’s a conditional freedom – freedom at 60. Freedom with a zimmer frame. Freedom with adult underwear and liver-spots. It’s a fine brand of freedom to be sure, but it doesn’t compare to being free from work during your prime adult years.
There is so much of the world to discover and it’s possible if you’re not at work all day.
I have made the decision to follow an unconventional path, one that involves attempting to live on 25% of my salary so that I can rapidly save enough money to live on. The secret of how to retire in ten years is very simple and not particularly secretive:
- Live on 25% of your wage
- Invest the 75%
- Wait until the income from the investment exceeds your expenses
- Retire!
This should happen in about ten years given average market conditions, although of course, past returns are not necessarily indicative of future returns.
The method is based on mathematics and doesn’t require a high income (although it’s helpful) or any starting capital. It is difficult though. It’s hard to live on such a small percentage of your wage when you’re not used to it. But it’s certainly possible. It involves significant sacrifice and turning your back on many of the so-called must have modern conveniences. There is no room to be a modern consumer if early retirement is your goal. You have to get creative and Do It Yourself.
Keeping track of your progress
This is fundamental to attaining financial independence. I use the method spelled out in the fantastic book, Your Money or Your Life, which is to create a graphical overview of your finances. You can see mine below. At the time of publishing, this will be current to December 2012, but will update itself as I do – so check back with this article to see how I’m doing, or visit me at my site.
I don’t reveal my actual dollar figures, because I’m interested in the trends and believe that almost anyone can do what I’m doing. For your chart you should have the dollars on the vertical axis. You can see that in December I spent more than normal which was largely due to Christmas.
The wall chart immediately shows you a number of things:
- The gap between the income and expense line is the amount of money you have saved.
- The gap between the investment line and the expense line is how close you are to financial independence.
- If your investment line is regularly higher than your expenses line, you are financially independent!
This is an incredibly motivating chart to keep and I’d encourage you to start one if you are interested in seeing where your finances are at a glance. I keep a number of different stats and charts because I’m a nerd and like seeing the progress.
How much are you willing to sacrifice to avoid a life of work?
I don’t want to become financially independent only to be stuck at home, too poor to do anything fun or meaningful. The whole purpose of my aim is to give me the time to do the things I love.
It’s important to factor into your early retirement budget money for travel, books, cheap hobbies and healthy food. There isn’t any point restricting spending to the point where you can’t do anything.
Having said that, most people can drastically reduce spending, without it having any material impact on their standard of living, on things like:
- Cable television
- Maids
- New cars
- DVDs
- Take away
- Brand name clothes
- Hotels
- Excessive alcohol consumption
- Tobacco
Are all largely dispensable because they provide marginal or negative utility and cost a lot of money. They are all capable of being swapped for cheaper, more satisfying alternatives. The joy of working within a tight budget can actually be rewarding and a challenge that is fun to take on.
I have certainly become significantly happier since I made the decision to focus properly on getting to financial independence. I have a goal that isn’t too far away and it’s incredibly liberating. I don’t see a takeaway coffee as being particularly appealing any more because I see it as an obstacle to my early retirement goal.
In summary
- Lower your spending
- Swap expensive hobbies, services and products with your own hard work and imagination
- Invest for the long term
- Track your progress (like a nerd!)
- Count down the days to financial independence
Category: Getting Ahead
The fact that people are sitting around wasting money on maids, listed as frivolous expenditure number 2, is…silly. Otherwise I think the author is doing well!
Yeah, I feel like that whole argument of “outsource when you can pay someone to do it for cheap” is crazy thinking. I feel like it adds value to our lives when we can do many of the things we need ourselves.
Thanks Jenny.
That list wasn’t meant to be in any particular order – but yes, it’s amazing to think what people will waste their money on instead of doing a little bit of hard work themselves.
The more I do myself, the more I enjoy life. It’s weird, but there is a peacefulness that comes with living simply.
I enjoyed the article and can see where you’re coming from with the idea that taking care of things yourself is rewarding.
However, aren’t you missing the idea of opportunity cost? If I can earn more money in two hours than it costs me to get my house cleaned for two hours then I have a net income gain from delegating this task.
I really like the idea of saving substantially more than you earn. Although I’m not sure the wife would see it in the same way.
Benjamin,
It can be a tough conversation to have but I’ve found that focusing on all the positive benefits (freedom from work, time to work on hobbies, travel) makes the whole thing more palatable in the beginning. Once you both commit to it, it gets easier and easier.
Start small and build. Good luck!
Great post James! The whole eating out thing, especially takeout lunches at work, is the one that always baffles me. I feel like shaking my coworkers sometimes (they buy cafeteria food each day) and asking them why they just paid $10 for a slice of lasagna :S
Thanks CF. It baffles me too. It’s the culinary equivalent to setting fire to money. The stuff you bring from work is normally way tastier as well.
It sounds a good plan but (a) life doesn’t end when you are 60 as many 60+ year olds are healthy sans Zimmer frames, spending an enjoyable ‘retirement’, (b) there are advantages to working, both through the work you do if you enjoy it and to social life that is an important component for many people. ‘Retiring’ from working within an organisation can leave you very much on your own without the cohesion that colleagues can bring.
Clearly if you are working in dead-end job, that is probably not a problem and you would be glad to be rid of it and possible colleagues as well but people working in intellectually stimulating environment frequently enjoy work.
On the other hand amassing a good sised investment pot at a young age does give you the option.
Hi John,
My comment about zimmer frames was sarcastic – of course it’s possible to live happily and healthily well past 60. My point really was that being so liberated and free at an earlier age is preferable because more activities are available because the vast majority of people will be healthier and more able at a younger age.
You raise a good point about the social aspect of working. My plans are firstly to attain financial independence so that I have the choice of whether I want to work or not. Then I can weigh up the options and retire if I want to, or have several mini-retirements while travelling. It’s the option that I want rather than being stuck (or feeling stuck).
Inflation will eat up anything you save. In the US, if you’d bought property for $100,000 in 2002, sold it for $150,000 in 2005, ‘real” inflation would have left you ‘even’. With taxes on your imaginary profit, you’d have a net LOSS of over $8,000.00. You must have a growing source on income.
I have enjoyed following James’ blog. Right up the ERE alley, it is true; if you are willing to modify your behaviors enough, you can become financially independent quite early. The million dollar question is: will you miss working? Wait and see!
Thanks for stopping by, Tony. Of course, the good news is that if we miss working, we can always go work. But if you hate working, you can’t just stop.
He’s a really good writer. Kind of inspired me to make a graph of expenses vs. investment income. Right now my investment income is probably only about $1,000 a year, but I didn’t start too long ago. I’m on the road to FI as well. Good luck!