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When the hubs and I first started this journey a little over a year ago, we just wanted to pay down some of our debts and be able to travel a little more. Our goal wasn’t to become financially independent or retire early (“FIRE”). We didn’t even know what the term “FIRE” meant. We knew we just didn’t want to be paying our student loans until we were in our 50’s. We figured if we could just pay down a little more on the principal of our loans we would be more comfortable and every little bit extra would put us in a better place. Within the past few months, riding the “high” of paying off a ton of debt this year, we’ve begun to look at multiple different strategies to reach financial independence sooner.

What exactly is financial independence?

Financial independence is when you have enough assets that generate income that at least covers your expenses. Financially independent people don’t have to rely on a W2 job to be able to cover their expenses and afford their lifestyle. Now, if you’re like me with a ton of student loans, this almost seems impossible. I thought so too! We have to pay off so much debt over a period of years before we even get to a net worth of $0, THEN we have to continue to save to hit our “financial independence number”. This number is the amount you need to have saved before you can consider yourself financially independent and can live your life without relying on a W2 job. For those in their 40’s and 50’s it might seem “too late” to start saving for an early retirement, but it might surprise you that it’s actually not!

How do I know how much money I need?

I’m a numbers gal. I could crunch numbers all day (sometimes I do!), but if you want to become financially independent, you’ll at least have to tolerate number crunching. To find out how far off you are from financial independence, you’ll need to figure out what your “number” is. To do this, you’ll first need to know what your monthly expenses are. If you don’t know what your monthly expenses are, you’ll first and foremost need to set up a budget. If you don’t know where to begin, check out my free downloadable budget worksheets here that includes a tutorial on how to implement a budget. After you’ve established what your total monthly expenses are, you want to multiply that number by 12 months to figure out how much your expenses cost you on a yearly basis, then multiply that number again by 25 years (I’ll come back to this math in a minute). This is your financial independence “number”. This is the amount of money you need to have saved in order to be able to retire early.

For example, if your household expenses are $2000 per month multiplied by 12 months, your yearly expenses total $24000. If you multiply your yearly expenses ($24000) by 25 years you’ll need $600,000 saved to be financially independent. If your monthly expenses are $3000, then you’ll need $900,000 saved to be considered financially independent. By now, you are probably wondering why we are only calculating our expenses for 25 years, yes? I mean, if our ultimate goal is to retire early, we are going to need a lot more money to cover more than 25 years, right? Even if we retired at age 65, with modern medicine we could easily live to be over 90 years old, and then we’d still be out of our money, correct? I’m not even 30 years old yet. If my goal was to be financially independent and “retired” by the time I’m 45, it would appear that I would only be to afford my lifestyle until I’m 70. By then, modern medicine could keep us alive well into our 100’s! So what gives!?!?!?

If we assume your investments return 7% and inflation is 3%, you can safely withdraw 4% yearly to cover your expenses. Since you’d be living off the interest only and we’ve taken into account inflation, your investments will continue to grow and you’d theoretically have enough money to last you forever. You do need to understand that during during a bull market your investments could return more than 7%, while in a bear market or recession your investments could return less than 7%.

There are also a couple of caveats to this as well. If you are calculating your financial independence number off of your current expenses, then you would need to have the same expenses in retirement. If you save a ton of money now to reach your “number” and then go ahead and excessively spend during retirement (more than what you did when you calculated your number), you will absolutely not be financially independent and will run out of money. It works in reverse as well. If I were to calculate my “number” off of my current expenses, it would be falsely elevated. My student loan payments are exactly half of my monthly expenses. After my student loan payments go away my monthly expenses will be significantly lower. I also do not anticipate that once we are financially independent we will start spending significantly more. What I need saved up to retire is actually half of what my calculation would be if I were to use my current expenses. If I thought we would take way more extravagant vacations and pick up expensive hobbies like flying planes in retirement then I might want to keep my current financial independence number based off of my current spending.

How much do you have saved?

The first thing after you determine what your financial independent number is will be to actually look at how much you have saved across all of your investments. If you contribute to a 401k or 403b through your employer or a Roth IRA on your own, see how much you currently have saved, determine how much more you will need, and then construct a plan. You might be surprised how much you already have saved or notice that you might need to start contributing a little more to get you to your intended goal.

How to Maximize your Money

1. Decrease Expenses – If you’ve already created a budget then you are already on the right path. Review your budget and see if there’s anything else you can trim down or get rid. We recently cut the cord on cable (finally!) and I’ve also refinanced my student loans multiple times for lower interest rates. Read “Easy Ways to Save” for more ideas on how you can cut costs on a daily basis. If you are just starting out and need to set up a budget see my tutorial here and get your free downloadable budget sheets.
2. Increase Income – As long as you increase your income and don’t increase your expenses, you’ll be able to save more money. There are plenty of jobs you can do on your own time (babysitting and dog walking) in addition to traditional side hustles like waitressing or picking up a per diem job in the field you currently work in. There are also non-traditional ways to make extra income such as driving for Uber or Lyft, renting out your camper or car for individuals visiting your area, and AirBnB. The opportunities are endless. Find something that you enjoy that let’s you work when you want to and also puts more money in your pocket!
3. Pay Down Debt – The longer you keep making only the minimum payment on your debts, whether that be student loans, credit cards, or a mortgage, etc., the longer it will take you to reach financial freedom. Even just $50-100 extra per month can significantly decrease the amount of money you are paying over the life of the loan. If you have credit card debt it might make sense to transfer your credit card debt to another credit card with an 0% introductory interest rate or take out a personal loan which will have a lower interest rate and pay them off.
4. Maximize Your Money – You should be contributing enough to your 401k or 403b to receive your employer’s match if they offer it – even if you are working on paying off your debt! This is where compounded interest works in your favor! While paying off debt you don’t need to maximize your retirement, but even a little bit invested now is worth more than investing more later, especially if it’s going to take you years to pay off your debt! Invest enough to take advantage of the match and use the rest to pay down debt. You can max out your retirement after you’ve paid off your debt. Use your money to best benefit you!
   1. Speaking of investments, since they are what will be funding your retirement, make sure you know what you are investing in! Get educated! I’ve been doing a lot of research and my returns weren’t working for me! Many of us just put money in and hope for the best. Talk to your financial advisor and make sure you aren’t in high fee funds and that you are getting the most out of your portfolio! My personal returns were only ~2%! That doesn’t even keep up with inflation! Just imagine with a portfolio with better returns can get you! Here’s a 15 minute podcast you can listen to show you just how much your fees could be costing you! They only discuss one low cost mutual fund, but there are a few others that are good too. Check out Fidelity and their no cost funds, Charles Schwab, and Vanguard for the lowest fees.
5. Travel for Free – When I refinanced my SOFI loans I received 50,000 JetBlue points because I refinanced through JetBlue’s TruBlue Portal. That can get us 2 round trip tickets to almost anywhere. I’m even thinking about picking up the JetBlue credit card to earn more points for flights. Travel hacking is a thing and I’m just starting to learn about it, but I’m so excited! There are so many people using credit cards to get free flights and hotel stays! Listen to these podcasts for an introduction into travel hacking. There’s also a free course on it as well!

While we have a ways to go before the hubs and I retire, I feel more informed and in control of my finances. Being financially independent at a reasonable age with the option to retire early feels like such a dream but now obtainable. If you could retire early what would you end up doing?