Don’t like your job? Here’s How You Can Stop “Working” In 10 Years – Part 2

In my last post, I discussed what financial independence (a.k.a financial freedom or early retirement) is, and why it’s something that many people should strive for, even if they have never really taken it seriously or they enjoy their jobs. In this post, we’ll break down the numbers on how it is possible for the average person to reach financial freedom in 10-15 years.

How Can I Do It?

There’s a 3 steps processes for calculating your path to financial independence, and those steps are:

• Know Your Expenses
• Estimate Income
• Save And Grow Your Money

 

First, you need to know your monthly expenses. If you were to stop working today, how much money would you need every month to get by? If you already have a monthly budget it’s pretty easy. Just take the total of all your bills, spending, etc. If you don’t have a budget (first, read this post), take some time to review the items from the list below:

• Rent/Mortgage
• Utilities
• Health Insurance
• Taxes
• Food
• Transportation
• Entertainment
• Household Items

 

Adding these items together gives you an estimate of how much money you need every month. For our example, let’s say that number is $3000/month.

Second, you need to calculate your income. For most people, even if you quit your job and stopped “working”, you would still be spending your time doing something that would likely generate income. I doubt very many of us would sit around sipping cocktails on the beach all day. After 2 weeks of this, most people would be bored out of their minds! Whether it be selling homemade jewelry, tutoring high school students, freelance work, starting a travel blog, owning a rental property, most of us would use our new free time to pursue a passion project that could generate some income. Making $1000/month is pretty easy if you just dedicate your time to doing something. For our example, we will estimate that we can earn $1000/month on top of our $2000/month income from our savings to meet our $3000/month requirement.

Lastly, we need to start saving money today and have the discipline to follow through on our savings goals in order to generate a large enough nest egg to fund our lifestyle. So here is where it gets interesting. How can I possibly turn my savings from today into enough money to live off of in just 10, 12 or 15 years of work? Here’s how:

Let’s say you have $3000 that you can put into an savings account this month (Such as Wealthfront. See this post on investing options), and you can commit to saving another $3000/month for the next 10-15 years. Assuming a 7% interest rate (S&P 500 average return), you would have have $525k at 10 years, $681k at 12 years, or $959k at 15 years. (Just search “Compound Interest Calculator” in Google to plug in your numbers)

The widely-accepted rule is that we could withdraw 4% each year from this account and not run out of money (Check out this article by Mr. Money Mustache which gives a great explanation that I won’t go into now). In the case of our example, that would be monthly income of $1,650 at 10 years, $2,250 at 12 years or $3,167 at 15 years.

Add this to our $1000/month of supplemental income, and we would have $2,750/month at 10 years, $3,250/month at 12 years or $4,167/month at 15 years. And drawing on this income will not decrease the value of our nest egg under our current assumptions, and it has accounted for inflation, fees and taxes.

A quick and easy way to determine how much money you need in your nest egg is take your annual spending and multiply by 25 (Because we are withdrawing 4% per year). So for our example it would be:

($3000-$1000) x 12 x 25 = $600k

$3000 is our monthly requirement, subtracting the $1000 of supplemental income, multiplying by 12 months per year, then multiplying by 25. Our nest egg needs to hit the $600k mark for us to reach financial independence, which would happen in about 11 years.

Disclosure: These numbers are calculated based on past market conditions. Past market returns cannot predict future market returns so please make investment decisions wisely. If the market goes into a recession during these 10-15 years, it could likely increase your working period :(.

The Most Important Factor

So now that you see the numbers on how it works, you may be thinking “This would never work for me. I need more than $3000/month”, “I don’t make that much money” or “I can’t save that much”. But before you go thinking anything like that (Stay positive my friends!), there are really only two factors that improve how quickly you can reach this state of financial independence. These factors are:

Make More Money or Spend Less Money

Obviously if you make more money then you have more than you can stash away into your savings account to build your nest egg more quickly, but this isn’t the easiest option for everyone due to bosses and companies controlling your pay. However, if you find a way to spend less money, the benefit is twofold. You increase the amount of money available to you that you can stash away into your savings account, but also you need less money per month once you stop working. So if you currently spend $4000/month, but you can find a way to cut back and spend only $3000/month. Now you can stash away an extra $1000/month into your savings, and also you will only need $3000/month once you stop working instead of $4000, so your nest egg can be smaller. Because of these numbers, the only factor that really matters is the percentage of your take-home pay that you save. Saving 30% of your income gets you to financial freedom faster than 20%, and saving 50-60% can get you there even faster yet.

The numbers will vary depending on your income and lifestyle so play around with the process and see what works for you, but either way, it is possible for anyone to reach financial independence and live the life they desire. It’s not easy or quick, and it requires discipline and perseverance. But if you stick with the process, you will find that you can pursue a life without money worries sooner than you’d think!

Would love to hear your stories on saving for your dreams or reaching financial independence, so leave a comment or shoot me an email!

-NYPFGuy