Reader Question: How to Become Financially Independent

Q: I read your page on how you became independently financially secure and how you are doing it. I was trying to figure out today how as a low wage worker I or anyone in my shoes could do that. I also noticed you have a lot self control. I am not there yet but I hope to get that kind of self control. How did you use self control to get to where you are today? -M.A.

M.A. – Thank you so much for reading and for the question! Or rather two questions, which I’ll address one at a time.

Anyone can become financially independent in a reasonable period of time in an economy like that of the United States. It is harder if you make a low wage, or even a minimum wage, but it is still possible.

The first step in this process is figuring out how much you need.  The best way to do that is to figure out how much you really spend!  So starting today, write down every dollar you spend, and what you spend it on.  After a month, you’ll have a good idea of what you need to live on.  After 3 months, you’ll have a very good idea.  After a year, you’ll be set.  You’ll know exactly how much you spent over the course of a year, and why, with hard data to back it up.

To consider yourself financially independent you basically need the equivalent of 20-33 times your annual expenses in savings or passive income.

Yes, 20-33 years is a wide range. It means someone spending $25,000 per year needs to save between $500,000 and $825,000. How do you pick the right number for you?

You choose where in the range you should fall based on:

1) Your ability to generate side income should you need it. The easier you can drum up extra bucks, the less you need. The harder it is, the more you need. This is probably the most important thing to consider.

2) Your age. You don’t need quite as much if you’re older, because there is less time for things to go wrong for you.

3) What form your investments take. What would make your investments lose money, and why? If you happen to have all of your investments in magic paper that can never lose value and will return 5% annually even if the zombie apocalypse occurs, you could easily quit with a 20 year emergency fund (or less). The more volatile and risky your investments are (they are riskier than zombie proof magic paper, I promise) the more you should probably save.

Okay so, after all that, take your annual expenses (or, if you haven’t been tracking your expenses for very long, your best guess as to what your annual expenses are), choose a number between 20 and 33, multiple the two together, and that is your rough goal as to how much you need.  Don’t worry, you will change it later as you refine your lifestyle.  But this is just to give you a general idea.

(Side Note:  Do you have this much already?  If so, congratulations, you’re financially independent.  You’d be surprised how often that happens.)

….Okay you’re still reading so you’re probably not financially independent yet.  That’s okay, that’s why we’re here.

So if you’re still reading this, your expenses are too high and your savings are too low for your current situation.

Therefore is a puzzle you can attack from two angles.  You can either increase your income, or decrease your expenses.  Most people really want to focus on one side and not the other side.  They either really loathe to think about adding side income, changing jobs, or even changing careers, or they hate the idea of cutting their budget back in any significant way at all.

I really want to discourage you from this sort of tunnel vision, and ask that you keep an open mind.  Most people can, if they try, find a way to both make a bit of side cash, and trim their budget, without hardly any effort at all once they figure it out.  If you can manage to do both, you will super charge your results and get on the fast track to early retirement.

I’ve tried kind of an amazing number of ways to drum up side income, and cut tons of  things out of my budget, and that’s how I was able to semi-retire in two years, and become fully financially independent in five.  Not all of the side income attempts panned out (actually, most didn’t) and I did end up cutting out some things that in the end, I added back into my budget.  Guess what, that’s okay!  It’s all about figuring out what your personal balance is.  And guess what, I did finally get side income, and I did end up cutting some things out that I don’t even care about or miss any more.

So to answer your question M.A. – if you’re a low wage worker, or an ANY wage worker- you work on both sides!

Do your very, very best to increase your income if you can at all.  Try to get a promotion at work or get into another minimum wage job that has some mobility.  As an example, theoretically you could start working at a gas station and within five years, manage one.  A gas station manager makes roughly $30,000-$35,000 annually, which is enough to pursue an early retirement if you live leanly.  You can also work on developing side income using your interests and skills, whatever they may be, on your off days.

At the same time, look at your expenses.  The big three are housing, transportation, and food – can you cut these at all?  Can you get roommates?  Can you get less space?  Can you sell your car and ride a bike or take a bus?  Can you move somewhere so you CAN sell your car and ride your bike?  Can you stop eating out?  Also look at any expenses that fall outside of these big 3… some of them are smart to keep (health insurance) but probably most of them are completely superfluous.  Ask yourself if the enjoyment you get out of them is really worth delaying your retirement.  Maybe that $50 video game is going to give you 500 hours of entertainment.  I’d say that was probably worth it.  But that $50 night out at the bar where the music sucked and you ended up going home early, maybe not so much.  These are the judgement calls you need to start making on every dollar you spend.  And once you start seeing the power of cutting the things that don’t really matter out of your life, you’ll get motivated to do it more, and more, and before you know it, you’ll be on your way! 🙂 When I was pursuing this goal relentlessly, I managed to consistently spend less than $1200 per month. I could have gone lower, but it wasn’t worth it to me to make those life changes. Maybe you’ll spend more, maybe you’ll spend less, but the less you spend, the less you need to save, and the sooner you can retire. Only you can decide what things are worth cutting in light of that goal.

Let me know how it goes ya’ll!  I’ll answer Part 2 of your question tomorrow.


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