What I Wish I’d Learned About Financial Independence Twenty Years Ago By Sydney Everson
If I had a time machine to go back and talk to myself as a younger woman, there’s a lot of advice I’d give myself. Hey girl, I’d say if I was trying to sound cool (and failing), go easy on your 21st birthday, okay? It’s a marathon, not a sprint. That job offer? Not as good as it sounds, hold out for a better one. And that guy from the office upstairs…just no. Walk away. But the most important advice I’d give myself would be about financial independence – specifically what it is, how to reach it, and why starting early is crucial to getting there.
Financial independence, or financial freedom, occurs when your savings, investments, and any income from your business or real estate investments cover your annual living expenses. Setting aside, for a moment, income from a business, dividends, or from real estate rentals (all of which help you reach financial freedom sooner), a general principal of the financial independence movement dictates that once your investments reach a certain amount, you can withdraw 4% a year to cover your annual expenses and your portfolio will continue to grow and outpace inflation. That strategy is called the 4% Rule. According to this rule, you can estimate the amount you need to have to retire by multiplying your annual expenses by twenty-five. It’s a rough estimate, but let’s stick with it for the purposes of this explanation.
Once your passive income, your business income, or your investments can cover your annual expenses, you’re free. You don’t have to spend ten hours a day sitting in an office making money for someone else. You can spend your time however you want to, so long as you’ve planned ahead to ensure that your savings and investments can cover your expenses for as long as you’re not working, which may be twenty, thirty, or forty years.
When I first learned about the F.I.R.E. (“financial independence, retire early”) movement, it blew my mind. You mean people as young as forty are ditching the rat race to live in places like Costa Rica and spend their days kite-surfing, hiking, enjoying time with their families, or doing whatever they want to do with their time? Shocking.
Through aggressive saving, increasing income through side hustles, real estate, investing, and many other tools, it is possible, but the most powerful tool to getting there is time. It’s crucial to look at money not just as something to support your lifestyle, but as a tool that can work for you to make more money, and the more time it has to do that work, the more your wealth will grow.
So to my younger self, or to anyone starting out in the working world, my advice from the future is this:
Strategy #1 – Start Beast-Mode Level Saving Now
You know saving money is important. What you may not realize though is how much you are capable of saving and why you should save so much of your income. Thanks to compounding interest and the long-term growth of the stock market, you money grows exponentially over time. It may start slow, but the more you save, the faster your savings will continue to grow, which is why it’s so important to save as much as possible as early as possible. If you’re twenty-five, forty may seem unimaginably far away, but take it from me, it comes a lot faster than you think and you can’t get back that time you spent frittering money away on restaurants, weekly drinks with friends, movies, and whatever else instead of putting your money to work for you during those years.
Read my post on Stealth Savings
Legendary investor, Warren Buffet, said, “Do not save what is left after spending, spend what is left after saving.” Calculate your savings rate ((savings/ income) x 100). Now pick a goal – can you save 25% of your income? 50%? 75%? What’s leftover is what you have to budget for everything else. Save hard, save ‘til it hurts, and after you’ve created an emergency fund, invest it. Every dollar you save immediately goes to work for you, making you more money, especially if you invest it (more on investing in a moment).
Strategy #2 – House-Hacking is Genius
House-hacking goes hand-in-hand with beast-mode saving. Our twenties are a time of transition – moves, new jobs, renting places to live. Do you rent your room or apartment? Do you have a roommate? Here’s a question for you then: Why are you paying all that rent to someone else? Someone’s making money off you, your roommate, and a lot of other renters. Why isn’t that person you?
House-hacking in a common strategy in FIRE. It means buying a house and renting out rooms, or buying a multi-family property, like a duplex or four-plex, and living in one unit while renting out the others. The income from the rent you bring in offsets your mortgage payments, taxes, and insurance.
Often, if you’re a first-time home buyer, you can make a smaller down payment than the standard 20% so purchasing a property is not as far out of reach as you might think, especially if you’ve been saving like a beast since you started working. It may seem like a big, out-there idea, but if it’s even remotely possible, it’s a fantastic way to save a lot of money and to start building serious wealth.
This strategy is a lot easier when you’re young. You may be accustomed to having roommates, many of your peers are renters, you might even be able to live with some friends you rent rooms to. There are a lot of options. When you’re older, married with kids, your options become more limited. It’s harder to downsize, less feasible to have roommates or renters living in a house with you, your spouse, and your children, and factors like school districts come into play. But when you’re young, house-hacking is a great option and a smart way to start building wealth. It may even lead to more property investments in your future.
Strategy #3 – Hustler Harder
Your job pays the bills (hopefully), but to save and invest as much as possible to reach financial independence and possibly early retirement, you need more. Decreasing your expenses is one side of the coin. Increasing your income is the other. There are infinite ways to bring in more money these days, both online and offline.
Read my post on Why You NEED a Side Hustle.
If you have skills like graphic design, copywriting, or building websites, freelance sites offer ways to find clients for your services or you can build and brand your own business to sell your services. There’s e-commerce, developing courses for Udemy and similar teaching sites, event photography, blogging, driving for Uber and Instacart, and a thousand other ways to generate supplemental income. The more you make, the sooner you can pay off any debt you have (which is a huge obstacle to building wealth) and the more you can aggressively save and invest.
Again, youth is an advantage here. While you might make less than someone with more years of experience, you may also have more spare hours of the day to work on a side hustle if you don’t have kids to help with their homework, a family to make dinner for, and little ones put to bed. This is speaking generally of course. It’s not possible for everyone to fit in a side hustle, it depends on your job, your hours, the length of your commute, what other responsibilities you have, and more. If, however, you find yourself with a few extra hours in a day or on the weekends, now is the time to learn new skills, try new ventures, and develop a side business, ideally one that could someday provide enough income to be your main hustle or enough passive income to help cover your expenses while you do other things, things you actually want to do.
Strategy #4 – Don’t Keep Up with the Jones
Lifestyle creep is real. Those who make more, spend more. You move up to bigger houses, nicer neighborhoods, fancier cars. You eat at better restaurants, shop in more expensive stores. It happens to most people. But what if you didn’t let it? What if every raise you got, you added the increased amount to your automatic savings plan? What if your expenses stayed the same for as long as you could keep them that way, and you banked more and more money, invested it, and put it to work for you?
Read my post about Women Who Always Have Money
By thirty-five, forty, or forty-five you could have hundreds of thousands of dollars in the bank. Maybe you could even be a millionaire. You could be well on your way to freedom or already there. Sure, your friends might be driving fancy cars, but they might also be up to their eyebrows in debt, struggling to sleep at night because they’re worried about how little is in their investment account, if they even have one, while you, my friend, are sleeping just fine with your paid-off, well-used car downstairs and your investment account growing every day.
Strategy #5 – Make Retirement Accounts Work for You Now
If you’re still in your twenties, a retirement account seems fairly irrelevant to your life right now. Sure, you know it’s a good idea to have one so that someday, far off in the distant future, you have an account with some money in it you can use to live on after you retire. What you might be surprised to learn though is that it can help actually you now. The government taxes you on all the money you make…except what you put into a pre-tax retirement account like that 401(k) your office offers or a traditional IRA.
Read my post on How I Retired 7 Years Early.
That money doesn’t get taxed until you take it out of the fund. The result is that, as far as the government’s concerned, you look like you make less that you really do. If you make $55,000 and you put $5,000 in an IRA, the government only taxes you on $50,000. This means you get to keep more of what you earn. This is a generalized explanation of course, there are tax bracket details and rules about how much you can contribute, income limits, and more, so research it, but it’s definitely worth looking into. By investing in an IRA when you start working, not only will you save more money for later, but you’ll also reduce the amount of taxes you pay now, which means you can save even more.
Strategy #6 – Don’t Fear the Stock Market
Many younger people avoid investing because it can be confusing to get started; it’s daunting if you’re not sure what you’re doing and you worry about picking the right stocks, losing money, or running afoul of tax or trading laws. These days, though, investing is easier than ever thanks to online brokerages and commission-free trading.
Many people in the financial independence community advise keeping it simple – just pick a total stock market or S&P 500 index fund and hold onto it. That can be a mutual fund, which often require a minimum investment, or an ETF. When you invest in funds, you’re not just buying a piece of one company, you’re buying pieces of thousands. That means your money is safer in case one company goes under. Index funds are not actively managed by a person whose job it is to pick which stocks will do well and which won’t. It just tracks an index, like the S&P 500, so that helps keep the costs down and index funds tend to do just as well, if not better, than many actively managed funds. Many FIRE folks tend to like Vanguard funds because of their low expense ratios.
Another frequent phrase in financial communities is, “Time in the market is more important than timing the market.” Start early, go online and open an account with any reputable brokerage, like Vanguard, Fidelity, Schwab, eTrade, Robin Hood, etc. Pick a low cost index ETF or mutual fund that tracks the total stock market or S&P 500, and add to it regularly, every two weeks or every month, even if you only buy a small amount.
The important thing is just to start investing as early as possible. Ride the roller coaster, there will be dips, maybe even crashes, but leave your money there and the market will recover. You can even take advantage of those dips and crashes by investing more while prices are low. You have time to ride it out and over time, your money will grow in the market far more than it would sitting in the bank with a negligible interest rate.
Strategy #7 – Find Your People
Living frugally, saving hard, house-hacking, learning to invest in index funds – it’s not always an easy road. It gets easier though if you don’t have to travel it alone. Find friends that are like-minded, join groups online, or look into local finance clubs. Find or build a community of people that have similar goals, that understand why you’re doing all this, that cheer for you when you hit $25,000 in your investment account or build your emergency fund up to where it could last you three months. Surrounding yourself with people who get it, who push you, who teach you, and who show you what’s possible, will make all the difference and motivate you to keep going on days when it gets hard. Like you, they’re making sacrifices and playing the long game, and like you, they know it will pay off.
There is so much more information, like how debt is to be avoided at all costs of course, but if you have it, strategies like the Snowball Method or the Pyramid Method can help you tackle it, and how travel-hacking can save you thousands and let you travel the world for almost nothing.
These are lessons from the financial independence movement that will pay dividends if you start implementing them as early as possible. The more time your money has to grow in the stock market and through compounding interest, the better your chances will be of reaching financial independence well before typical retirement age. By your late thirties or forties, it could be you kite-surfing off a beach in Costa Rica.
If you’re interested in learning more about financial freedom and early retirement, or just improving your finances, I encourage you to read more articles on financial independence, to listen to podcasts like ChooseFI, Bigger Pockets, and the Mad Fientist, to watch YouTube channels like, “Our Rich Journey,” to join financial independence Facebook groups like the ChooseFI groups, and to check out my FIRE workbook, “Chasing Fire,” available on Amazon, to help you start planning the steps to saving and investing your way to financial independence.
This is a guest post by Sydney Everson
Sydney Everson is an entrepreneur, author, and recovering lawyer living in Northern Virginia. She combines her love of writing and design with a passion for business through several e-commerce product lines including an Esty shop as well as notebooks, workbooks, and apparel on Amazon. Her financial independence workbook, “Chasing FIRE,” explains the principles of the F.I.R.E. movement and guides readers through the steps of budgeting, reducing debt, saving, and investing their way to greater financial stability and financial freedom.