Most people think about their course to retirement in basically the same way. You graduate from school and get a 9-to-5 job, then you work from about 21 years old to 65 years old. Then, you finally retire when you’re too old to enjoy your freedom. Sounds a little depressing, right?
Well, it’s time to start thinking about things differently. Instead of shooting toward retirement, start setting your sights on financial independence, the point where you can live the quality of life that you want without having to work anymore.
And that starts with figuring out what amount of money you’ll need to be financially free, and I’ll talk more about how to calculate that number later.
But, the whole point of this article is to help you come up with a plan, whatever your current financial situation is, that can help you reach the point of financial freedom where you don’t have to work anymore as soon as possible.
And this plan could help you get there in as little as 7 years, even if you’re starting with $0 dollars in savings. This is how to retire in 7 years, starting with $0.
Live Off 30% of Your Income
Alright, alright, I can feel the comments flying in already. “I can barely get by on 100% of my monthly income! How am I supposed to get by on just 30% of it?” But, the truth is that the majority of us could significantly cut back our expenses, we’re just accustomed to living a more costly lifestyle.
According to CNBC, 36% of people earning over $100,000 dollars a year are living paycheck to paycheck. You’re telling me that those people need to live on $100,000 a year? I don’t think so. And it really comes down to lifestyle choices. There’s nothing necessarily wrong with living on $100,000 a year. Maybe you want to enjoy your life and you aren’t as concerned with saving for retirement.
But, if you want to reach financial freedom at an early age, then you may need to cut back your expenses to the bare bones. And most financial advisors recommend living on 30% of your income. The average yearly salary in the U.S. for 2022 was around $53,000. If you multiply that by 30%, we get $15,900 to spend per year. If we divided that by 12 months, then that’s $1,325 to spend per month.
And, while that sounds like way too little to live on, especially because the average rent for a two-bedroom apartment in the U.S. is currently around $1,300, there are ways that you can cut your spending that much.
You can find a lower-rent apartment. While it’s pretty much impossible to find rent below $1,000 in some cities, there are plenty of cities in the U.S. where you can find a studio apartment for less than $600 a month, which leaves you $700 a month for the rest of your expenses. Grand Forks and Fargo, two cities in North Dakota, are currently great places to find low rent, and so is Baton Rouge, Louisiana. So, find a cheaper living situation.
Try cooking all of your meals and searching for the cheapest groceries in your area to cut back on food costs. Try carpooling to cut back on gas. Cancel your streaming subscriptions. If you’re really set on living on 30% of your budget, you can do it.
Yes, your lifestyle is going to take a hit. No more long nights at the bar, no more nice cars, no more fancy dinners. But, if your main objective is to spend as little of your life working as possible, this is how you do it.
Budget out all of your expenses and then reduce them as much as possible. In fact, we made an entire video about money-saving hacks that can help you reduce your spending as much as possible. Feel free to check it out.
If you want to spend more of your monthly income than 30% to have a better quality of life, that’s fine. But, it’s going to take you longer to retire.
Once you’ve freed up room in your budget by lowering your expenses, you should pay off your debts, starting with the ones with the highest interest. Trying to save money while paying interest on outstanding debt is like trying to run a race with ankle weights on. It’s only going to make things way more difficult.
So, before you even think about saving, it’s time to pay off those debts. In general, you should use what’s known as the avalanche method to pay off your debts. And this involves paying off your highest-interest debt first and then moving on to your second-highest-interest debt, and so on.
The kind of debt that carries the highest interest rate is generally going to be credit card debt. And the average interest on new credit card offers in July 2022 is around 17%, which translates to a whole lot of money lost to interest if you let your balance just sit there for months or years.
So, if you’re only spending 30% of your monthly income, then that leftover 70% should be going straight toward paying off your credit card balance until it’s completely gone. Then, once your credit card debt is paid off, move on to things like student loans, mortgage loans, and other types of high-interest debt.
Do this before you start investing money in the market! Think about it this way. If you have $1,000 in stocks earning 15% returns and a $1,000 credit card balance being charged 17% interest, then you’re still losing 2%! It’s better to get those high-interest debts paid off as soon as possible and then move on to investing.
Setting Your Freedom Number
So, before you start working toward retirement, you need to have an idea of what amount of money you’ll need to retire. But, how exactly do you come to that number? Well, one quick way to get there is by using the “25 Rule,” which is fairly simple. Calculate the amount of money that you’ll want to live off per year during retirement and then multiply that by 25.
Let’s say that you think you can live off of $50,000 per year. Well, multiply that by 25 and you have $1.25 million. And, for a lot of people, that number may seem unachievable. But, trust me, if you can cut back your expenses, come up with a solid savings plan and stick to it. This is definitely achievable in around 7 to 10 years.
The Investment Game
If you want to reach early retirement, it’s important that you don’t just let your money sit in a savings account where it will be collecting like 0.11% interest. That might as well not be collecting interest at all. You need to put your savings into the market where it’s going to make real gains in the long run and actually grow using compound interest.
Take almost all of that money that you save and put it straight into a Roth IRA account. And, if you want to know more about Roth IRAs, then watch this video we made about how to open one and grow your wealth. Then, once your money is in that Roth IRA account, invest it in a low-cost S&P 500 index fund.
Then, once you’ve maxed out your Roth IRA contributions for the year (since there’s a $6,000 limit), open a normal brokerage account and invest even more money into a low-cost S&P 500 index fund through that. That investment strategy doesn’t come from me; it comes from Warren Buffet, and I’d say he probably knows what he’s talking about.
Of course, no one can predict the market. So, I can’t say what your returns will be. But, putting your money in these funds has historically had a return of about 8% over long periods. In fact, over the last decade, the S&P 500 has returned around 14.7% annually. Feel free to do your own research, but most serious investors agree that the smartest thing you can do with your money is to take a long-term strategy and invest in a low-cost S&P 500 index fund.
For this example, let’s say that you do invest in one of those funds and you get a return of 8%, which is very achievable as long as the market doesn’t absolutely tank for a decade straight. If you want to reach that retirement goal of $1.25 million and you’re starting from $0, you’re going to have to put $7,000 a month into your S&P index fund for 10 years.
And, of course, this is no easy task. $7,000 a month translates to $84,000 a year. And that’s more money than a lot of people make in a year. If you want to get to that $1.25 million retirement in 7 years, well, you’re going to have to contribute around $11,500 to your index fund of choice, which translates to $138,000 per year. For a lot of us, that’s just not possible.
So, you have a few options here if you really want to retire in the next decade. You can either make that retirement goal a little smaller, as in, you can look at your estimated retirement expenses and try to make them smaller by accepting the fact that your retirement may be a little less lavish than you wanted.
But that option doesn’t sound that appealing to me, personally. When I’m retired, I don’t want to be cutting corners to save money. I want to be able to enjoy myself. Your second option, then, is to make more money.
Generate Multiple Income Streams
If you want to start making enough money to retire in the next 7 years to a decade, you’re either going to have to find a job that’s going to pay you a large salary so that you can be putting away thousands of dollars each month or you can find other streams of income to supplement whatever you get paid at your job.
It’s not easy to find a high-paying job by any means. But, once you do, it’s not hard to save for retirement quickly. The investment banking industry notoriously has high salaries. An analyst, who’s between 22 and 27 years old, is probably raking in around $200,000 a year. Let’s say they choose to live on 30% of their salary, which would mean they’re spending $60,000 a year or $5,000 a month, and they’re putting the other $140,000 they make per year into investments, which comes out to $11,666 a month.
If they contribute that $11,666 a month to an S&P 500 index fund and we assume 8% growth over 7 years, that person is going to end up with $1.29 million at the end of 7 years. And that’s not even taking into account that their salary will probably go up during that time and they’ll be able to save even more.
With that $1.29 million, they can afford to retire for 25 years, spending $51,760 per year. And, in reality, it’s probably going to be more like 30 years because, even when you take out that first $51,000 during your first year of retirement, the rest of the money in your account is still going to be in there growing and benefitting from compound interest.
But, for most of us, a job that pays $200,000 a year is a distant dream and we all can’t be investment bankers. In fact, only the top 10.3% of Americans make over $200,000 a year. So, what are your other options for making enough money to retire early if can’t land a cushy investment banking job?
Well, you can create multiple income streams. And, honestly, I like this method more than just having one single high-paying job because of a little thing called income security. Think about it this way: if you have only one large stream flowing into the pond and that one stream gets blocked off, then it’s only a matter of time until the pond dries up.
If you have several different streams going into the pond and one of the streams gets blocked up, the pond’s water level might drop, but there’s still going to be water coming in. Do you see what I’m saying? Having multiple income streams ensures that, even if you get fired from your main job, there’s still going to be money coming in. And this is great for peace of mind.
So, keep your day job. But, when work gets out at 5 o’clock, start figuring out some other ways to make income. Watch one of the videos we have about building income streams or starting side hustles. There are tons of ways to make money to supplement the income from your day job.
Get into dropshipping, start writing online content, become a social media marketer or start and sell social media accounts, start flipping stuff on eBay and Facebook Marketplace, buy or rent a property and then rent it out to tenants. Trust me, if you put in the work, there are plenty of different things you can do to generate multiple income streams and a lot of them are passive income, meaning you shouldn’t have to put in much time regularly for it to keep earning you money.
The other great thing about passive income is that you can keep generating money even in retirement with little maintenance. That means that, if your freedom number or retirement goal is $50,000 a year, and you’re earning $30,000 a year from passive income, you can lower that freedom number to $20,000, which is a whole lot more achievable in a short period of time.
So, personally, I’d suggest figuring out how to create multiple income streams, regardless of how high your salary job’s pay is. It’s a way to ensure your financial safety if you lose your job and it’s a great way to keep the money coming in even during retirement.
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