HOW TO ACHIEVE FINANCIAL INDEPENDENCE AND RETIRE EARLY (FIRE)

 From our recent trip to Iceland (2017), and I'm happy to report the vacation didn't make a dent in our finances.

From our recent trip to Iceland (2017), and I'm happy to report the vacation didn't make a dent in our finances.

Keep your lifestyle in check and invest your money (the younger you do this, the better)

As a millennial, almost everyone you know will work until they are well over 65+ years old before they can afford to retire. But I need you to understand, there is another way —you can easily retire by 40 — and you don’t need to invent Facebook or Uber to do it. All you need to do is invest your money, let me tell you how.

I need to preface this by saying - the danger of knowing only a little bit about a topic is that you usually hear about all the extreme positive or negative effects without knowing all the details in between. For instance, anyone can tell you about the amazing profit they made in the stock market, or about their brother-in-law who lost it all when the market crashed. I would only trust experienced investors who are true practitioners with their own money.

Early retirement sounds like a get rich quick scheme - so I will tell you right now, there is nothing quick about financial independence. But it is simple.

BTW - winning the lottery is not a solid retirement plan — yes I’m talking to you.

Gaining your freedom and independence will take:

  1. Time

  2. Dedication

  3. A change in mindset

Mindset is probably the single thing that prevents most people from really dedicating themselves towards freedom.

Don’t worry, while it is not fast it can be easy, which often surprises people, so let me explain.

Becoming financially independent requires dedication and a healthy attitude towards money.

The journey may seem long, but it always begins with a single step — take it today. Your future bank account will love you.

 The road to financial independence is long, but you are not alone.

The road to financial independence is long, but you are not alone.

 

Time is Money

You know the saying, and it’s 100% true.

If you want to know how long you can survive financially (how much time you can buy) you only really need to know 2 things:

  1. How much money you have (Liquid Assets)
  2. How much money you spend in your current lifestyle every monthly (Monthly Expenses)

With these you can calculate how much time you can buy:

Liquid Assets / Monthly Expenses = Time

Example 1

Jane has been saving for years and has a total of $8,000 in her savings account. Her monthly expenses are $4,000.

Liquid Assets / Monthly Expenses = Time

($8,000) / ($4,000) = 2 months

Keeping her lifestyle the same, Jane has only bought herself 2 months before she runs out of money and has to seek other options for financial assistance. This is pretty close to living paycheck to paycheck.

This equation is the simplest form and we can add other aspects to it, like passive or semi-passive income.

Liquid Assets / (Monthly Expenses — Passive Income) = Time

Example 2

Mary has a side hustle and knows a lot more about investments, in fact she currently has some money in the stock market, runs her own Instagram account with affiliated ad revenue, and sells water paintings on the side, all the tune of $2,000 every month.

Liquid Assets / (Monthly Expenses — Passive Income) = Time

($8,000) / ($4,000-$2,000) = 4 months

Both Jane and Mary have the same amount of assets and monthly expenses, but you can see that Mary’s semi-passive income from secondary income streams effectively doubles her time.

But not much, right?

So what’s the goal here? Let’s look at the 3rd example.

Example 3

Zoe has $10,000 in a savings account, a $20,000 TFSA investing account and $20,000 in a diversified portfolio of index funds held in her RRSP (she’s Canadian, and if you don’t know what these acronyms are, don’t worry about it for now). Her liquid assets total $50,000. Her living expenses are $6,000 per month. Zoe invests in dividend paying stocks, ETFs, and is a silent investor in 2 businesses. Her ventures collectively yield an average of $10,000 per month in passive and semi-passive income. Zoe is a master of her own finances — let’s look at her formula.

Liquid Assets / (Monthly Expenses — Passive Income) = Time

($50,000) / ($6,000 — $10,000) = ?

Expenses minus Passive Income has reached and exceeded zero. Therefore Zoe has bought herself an undefinable amount of time — she’s actually making money every month without having to work.

Since Zoe has passive and semi-passive income streams that exceed her living costs, she has reached Financial Independence. At this point, she no longer needs to exchange time for money. If she does not feel inspired to continue working a regular job, she has the freedom to quit, with no adverse effect on her lifestyle.

Wikipedia defines Financial Independence as:

The state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.

Perhaps one of the biggest misconceptions in life, is that you need to be a millionaire to achieve financial independence, you only need to counterbalance your expenses.

Benjamin Garden

Want to retire early? Keep your expenses low, and your lifestyle in check.

It’s a common trap to “improve” your lifestyle every time you get a raise, or a promotion or when life throws you a bonus.

Remember this lesson the next time you want to improve your life — when you spend your money on material items you’ve materialized it, and it can no longer generate more money for you in the future. Instead, if you buy assets that make you more money, you will forever be closer to your own financial independence. Buy assets that generate passive income, and then let those investments grow over time.

The best time to start investing your money was yesterday. The next best time is today.

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