Ingredients to early financial independence

Posted by Jonathan Weyermann on December 19, 2017 at 12:00 AM

Baking ingredients on table

While for most the idea of early financial independence or retirement may only be a dream, I believe it is within the realm of possibility for many. There is no question that it requires some sacrifices and tradeoffs,  but I believe that these are worth it. 

Here are some of the ingredients for early financial independence. While you don't need to do all of these, the more of them you do successfully, the faster you will be financially independent.

1) spend less than you earn, much less

The more you save and invest, the earlier you will reach financial independence. This is because you not only save more when you spend less, you require less resources to be financially independent. If you're used to living on less, and thus your costs are lower, you will also need less in retirement. A good post to explain this can be found here

2) Invest in yourself through education

It is extremely difficult to retire early if your income is really low. There are some minimum expenses that are difficult to avoid, without which living requires too much sacrifice. For instance, you'll need somewhere to live,  regardless if you decide to rent or buy. Unless you're business savvy,  it's going to be hard to make sufficient income without some form of education. Learning a trade works too. Education isn't necessarily something you do at school, but is a lifelong process.

3) Get your partner on board

Regardless if how much you earn, it's not going result in financial independence if your partner is not on board. This has more to do with philosophy than earnings. If your partner doesn't believe in saving for the future as much as you do, they will expect earnings to be spent on the conveniences of today, and it will be difficult to put away enough money to retire early. 

4) invest early,  invest often, don't pay too many fees

The safest way to invests is to frequently purchase broad market index funds through ETFs which have low fees. You get the benefit of diversification and cost averaging,  and you avoid paying someone a large chunk of money to invest. You don't try to predict the market, but frequently add to your positions regardless if the market goes up or down

Bonus Points

These will help, but are definitely not mandatory. 

I) owning your own home

Over the long term,  this is a significant hedge against inflation at least. While it may not seem like a slam dunk before its paid off, rent keep going up over the long haul,  and never goes away. While it can be somewhat cheaper initially, eventually the cost of renting will go up,  whereas the amount you owe on a mortgage goes down, and the payment is less of a burden due to inflation (wages rise, but cost of rent will rise with it) 

II) owning a rental property or two

Assuming you get a good deal on it and it's at least somewhat cash flow positive, the return on your initial down-payment can be much higher than you may get in the stock market due to the leverage of borrowed money.  This is not without some work though. While investing in the stock market can be done completely passively, real estate is not without some required work. Also, it's unlikely you will make money on it if you outsource the property management. At the very least,  you will give up a large chunk of your profits

III) have a side hustle

Whether it's an online business, a traditional business or you freelance or consult, or you have a blog or drive a taxi, a side gig can give you some additional income to accelerate your investment gains.