Achieving financial independence seems an impossible task if you've got a mountain of debt and an average income. However, the truth lies in the formula, and there are many who have done it. The good news, is regardless of your financial situation, early financial freedom is achievable. It all starts with a plan and a proven process.
There is no way to achieve financial independence by cutting corners. There aren't any secret actions to take that only the financially free know about and are keeping it secret from the rest of the world. There is a proven process that is guaranteed to work, if you follow it. Here's the logical approach on how to achieve early financial freedom.
What Is Early Financial Freedom?
In short, early financial freedom is when one accumulates enough money to support their desired lifestyle without ever running out of wealth. In other words, its another term for early retirement. How is one to ever attain enough money and never run out of it?
If one is able to accumulate $1,000,000 in wealth (for example), and that wealth is invested into a diversified investment portfolio that generates a 6% rate of return each year, and that same individual withdraws only 4% of their wealth each year to live on ($40,000 per year), your net result would still be an increase of 2% growth (Investment return of 6% – withdraw of 4% = 2% net return). In other words, you will never run out of money!
The Formula To Achieve Early Financial Freedom
Early financial freedom is really just a simple math equation. All one needs to do is determine how much money they are comfortable living on each year, then calculate how much you need to save and invest to maintain that income! Here's how it works:
- Determine how much per year you are comfortable living on
- Use the 4% withdraw rule to determine how much you need to accumulate total
- Determine how you're going to get there!
It's obviously a lot easier said than done, but when laid out in a simple formula it makes it look less intimidating. The hardest part is step 3, which we will also discuss in detail to help accelerate the process.
Determine how much annual income you are comfortable living on
Of course we all would love to live on a million dollar per year lifestyle, but be realistic here. If your average living expenses per year are $40,000 per year, and you expect your income to increase over the years, you might be comfortable saying you would feel comfortable living on $60,000 per year. You be the judge, but keep it realistic.
How to apply the 4% withdrawal rule
The 4% withdrawal rule is the average amount financial advisers usually recommend someone entering retirement withdraw each year in retirement. Why 4%? Generally speaking, its not uncommon to have a diversified investment portfolio that generates a 5% – 6% return each year. Thus if you withdraw only 4% each year, you will never run out of money.
Should you want to be a bit more conservative, you might use 3%. Should you believe you can achieve a better annual return in retirement, you might use 5%. Either way, 4% is the general rule of thumb.
Lets say your living expenses you are comfortable living on is $80,000 per year, and you plan to withdraw only 4% of your total balance each year when you achieve early financial freedom, you can calculate how much money you need to accumulate.
- $80,000 ÷ 4% = $2,000,000
In order to live on $80,000 per year, you will need to accumulate a total of $2,000,000 total to ensure you never run out of money in retirement.
The hard part – determine how to get there
The formula is an easy one, but actually accumulating the amount of money needed to achieve early financial freedom is no easy task. However, many entrepreneurs have shown us how to accelerate the process to achieving early financial freedom.
They all have one thing in common, and that is they created multiple streams of income throughout their lives. The more streams of income you have the quicker you will get there. Here are some revealed income streams with great rates of return.
Get rid of your bad debt
First and foremost, bad debt is only slowing down your progress towards early financial freedom. What is bad debt? We define bad debt as debt that has high interest rates and most often is non secured. Examples of bad debt may be:
- Credit cards
- Unsecured personal loans and lines of credit
- Car loans
Each of the above types of debts either have a high interest rate nature (credit cards, personal loans and lines of credit), or are used to purchase a depreciating asset (car loans, boat loans, etc.).
By paying off your 25% interest rate credit cards, you are in essence, making a 25% return in the form of interest that you “otherwise would have paid” to the credit card company. You are saving yourself from paying the cost of high interest bearing debt, by paying that debt off as quick as possible.
In many cases, using a debt consolidation loan may save you money on your high interest bearing debt by combining all your high interest credit cards into one lower interest loan with one payment.
House hacking for passive income
This process is taught in greater detail by the real estate investing community BiggerPockets. I first learned how house hacking works from reading “Set For Life” by Scott Trench, the Vice President of BiggerPockets.
By purchasing a multi unit home such as a duplex or triplex, you can easily live in one unit while renting out the other, generating much higher than average return on investment. That along with your regular income from your full time job will accelerate your progress to achieving early financial freedom by tens of years!
Early financial freedom requires regular investing
Regardless of how much extra money you have available to invest, the important thing is to begin investing what you can today. Whether you are working towards early financial freedom or simply being able to retire by age 65, you will not get there without investing regularly.
Recommended Reading: How To Invest In The Stock Market For Beginners
If you're new to investing or have less than $25,000 of investable assets, your choice of investment vehicles in the stock market are not as important since the difference in rates of returns on a relatively small balance will not change your progress by anything worth noting.
If this is you, your best option is to begin investing with a trusted robo advisor. Robo advisors allow you to invest in a professionally diversified portfolio with as little as $5, and even have access to professional help. The portfolios are put together for you by a professional financial expert, and are customized to you based on your investment goals.
Once you've attained larger amounts of investable assets (above $25,000, or even $100,000 and above), what you invest in becomes more relevant. As you attain larger amounts of investments, be sure to seek the advice of trusted financial experts.
Personal Capital, an automatic budgeting software, allows anyone to use free financial tools to track their financial progress. They give you access to expert financial professionals who help you choose and plan for your investments, allowing you to ensure your path to early financial freedom is well planned.
Be an ambitious entrepreneur
Being an entrepreneur doesn't require that you quit your day job and pursue your new invention idea full time. Rather, you can keep your salaried job to help you apply the above listed steps, while dedicating just an hour or two each day to creating multiple streams of income.
These come in the form of building an online business, doing freelance work, working on your next big idea/invention, and continually educating yourself to expand your entrepreneurial mind.
Some examples of easy to start entrepreneur businesses are:
- Build an ecommerce store
- Create an affiliate marketing website
- Make money email marketing
- Start a blog
- Build a freelance business
The options are many, and your potential is nearly unlimited.
The Secret To Achieving Early Financial Freedom
The truth is, there is no secret to early financial freedom, that is in the sense of a magic formula or trick that will make you rich overnight. There is, however, a guaranteed result of consistent effort in applying the above formula. That result is called “compound interest”.
Progress may seem slow in the beginning, but as you grow your overall net worth, pay off more debt, and start making more money, numbers begin to work in your favor very very quickly. Allow me to illustrate in the following example:
If you were given one cent ($0.01) and it doubled in value every day for 31 days, how much money would you have after 30 days?
The answer: $10,737,418.20
Would you have believed me if I told you that before you knew the answer? The point is, doubling your money when you have $0.01 vs. doubling your money when you have $5 million dollars is drastically different.
The more money you accumulate, the bigger and faster your progress will become towards early financial freedom. The more streams of income you create, the quicker your progress will be as well. Notice that the biggest changes didn't happen until the last couple days of the month!
Many entrepreneurs have proven that it doesn't take an entire 40 year career to retire, but rather when you use math to your advantage and work hard, you can easily achieve financial freedom at a much earlier age.
What is your biggest obstacle in achieving early financial freedom and why? Post your answers, questions and comments below and i'll personally respond asap!