There are a lot of things in life that aren’t easy to understand when you’re doing them for the first time: US health insurance, picking funds for your very first 401k when you’re 20, or switching from an iPhone to an Android (seriously, why is the learning curve so steep for making that change?!)
Financial independence isn’t one of them. The math is basic. You only need to understand these key points:
Retiring early is basic middle school math.
This doesn’t make it easy but the concept is simple: The more of your earnings that you invest, the shorter the time that you have to work. Your investments will eventually generate enough to cover your cost of living.
It does not actually matter how much you earn.
The formula works because you can only spend what you’re earning so
earnings – investing = savings rate as a percentage (e.g. Earning 100k and investing 50k = 50% savings rate)
savings rate correlates to years to retirement (savings rate = how long until your portfolio can generate that amount passively).
I tend to focus on maintaining extremely high savings rates (over 50%) for two reasons:
That’s an entire $250k less that you have to save up in order to reach FI.
That drop alone shaves 5 years of your working time to 12.5 years to retirement.
For simplicity, let’s assume an annual salary of $100k.
If you spend 90k and invest 10k, you’ll have to work for about 45 years to build up a portfolio that generates 90k annually.
Most of us can aim for 50-50, especially if you’re in a dual-income relationship: live on one person’s salary, and invest the other person salary.
We just sent you an email. Please click the link in the email to confirm your subscription!