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
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
- New cars
- Take away
- Brand name clothes
- Excessive alcohol consumption
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.
- 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