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For many, the idea of working full-time into our 60’s or even 70’s seems dreadful. The thought of toiling away at a stressful job for 10 plus hours a day, balancing a demanding family life, and never feeling like you have enough time over the course of a 40-year career is hard to fathom.
The freedom to live the life we want is what drives us to work hard. The constant desire to want something better is the engine that keeps the economy moving. While career success, moving up the corporate ladder, or building a successful business may be the goal for some, many more are working for the freedom and security only financial independence can bring.
Reaching financial independence early in life, in one’s 40s, 30s or even 20s, was unheard of in previous generations. Even today, many think that the only way to be financially independent is to receive a huge financial windfall from an inheritance, a long shot investment or, by winning the lottery. While it does happen, the chances of striking it big overnight are not likely.
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There are some strategies that can get you to financial independence sooner than you think.
What is FIRE?
FIRE (Financial Independence/Retire Early) is a movement that has gained popularity in recent years. The goal of FIRE is to have the financial means to retire well before the usual age, which is typically predicated on when a person can start to receive Social Security benefits (62) or withdraw penalty free from their Individual Retirement Account (59 ½).
Financial independence is defined by having enough money to cover your living expenses for the rest of your life. Many financial advisors use a simple rule to calculate the amount of money needed for early retirement. The 25x rule states that a person’s net worth needs to exceed at least 25 times annual expenses for financial independence to occur.
The calculation is based on the idea that in retirement, no matter the age, one should only withdraw 4% of their nest egg per year and stick to advised with draw rates that keep up with inflation in order to have enough money to last their lifetime.
Reduce Expenses
As mentioned, the goal of FIRE is to attain a net worth that is much, much higher than annual expenses. Conventional wisdom says the quickest and easiest means to financial independence is to reduce monthly expenses. There are some within the FIRE that adhere to this approach and cut expenses drastically. They call this extreme frugality and it is a strategy that can assist in reaching financial goals, but, on its own, will not suffice for most people.
For most of us, the thought of living a life of frugality, counting every penny, does not equate to a happy sustainable situation. There needs to be a balance between saving for tomorrow and enjoying the money we work hard for today.
Even though living as a pauper may be out of the question, there are ways to trim expenses without sacrificing quality of life. The goal should be to make enough room in your budget to invest in other revenue streams to sustain your lifestyle when you stop working. In cutting expenses, you will reduce the total amount needed for financial independence at the same time you are building your wealth.
Housing is one of the major monthly expenses present in every family’s budget. If possible, consider selling your home to downsize, using your equity to pay cash for a smaller home or at least reduce your monthly payment.
A few other ways to cut expenses and add a little extra to your investments are to push off purchasing a brand-new car, or at least opt for one without the expensive options. Cutting down on the number of times you eat out, bargain shopping, and getting rid of cable, are just a few other ways to cut down expenses now.
Aggressive Saving
Closely tied to reducing expenses is aggressive saving. This strategy requires a person or family to save more than 50% of their income for retirement.
The idea is that if you can place 50% of your income in savings, you will save for one year of retirement. For example, if you work 15 years, placing half the income in savings, you will have 15 years of retirement income available. If a pre-tax household income is $240,000, and the family can live off $80,000 a year, save $80,000 a year, they will be on their way to achieving this goal. All of this without considering interest that may be accrued from the savings if invested.
This strategy may seem a little slow, as it will requires discipline and each year worked will only result in one year of retirement. Again, by itself may not allow for the attainment of one’s financial goals but if used to compliment to other strategies, success is very possible.
Eliminate Debt
In order to reach financial independence, you cannot have debt, or at least too much of it. Reducing or eliminating debt can seem like a major challenge, especially for those carrying a significant amount of student loans and/or a hefty mortgage. It may seem impossible to pay off a mortgage in years as opposed to decades, but it can and is done.
There are many strategies to paying off debt and there is not a lack of experts out there offering advice on how to do it. Dave Ramsey, for example, has made a name for himself with the “snowball method” that has assisted countless individuals.
Whatever strategy you use to reduce debt, make sure you have a plan in place to aggressively attack the loan balances. Use caution when faced with offers to eliminate or forgive debt in relatively short amounts of time. Make a plan and stick to it.
Invest in the Stock Market
The stock market is one of the most popular means of investing and can provide the income needed to achieve financial independence. Investing in the stock market is a strategy on its own, but it is complimented by the other methods above as it is a vehicle to increase wealth by leveraging the money saved. The capital saved through living a more frugal lifestyle or aggressive saving should be invested to speed up the accumulation of wealth.
Long term, the stock market proves to be a great vehicle for creating wealth. However, it does carry a significant amount of risk. Low cost index funds are very popular with those in the FIRE movement. The average increase in the funds is consistent and has been approximately 10% per year for the S&P 500 since 1928.
Index funds are a type of mutual fund that pools money from a lot of different investors to purchase a diversified selection of stocks representing a portion of the overall stock market. They are low cost and allow for a diversified investment.
As with all investing, there is some risk. If an investor needs to pull cash out immediately, and the market is down, they will be forced to sell their fund at a loss.
So, while index funds are a great strategy, it is wise to diversify beyond the stock market.
Real Estate Investing
While cutting spending and investing in the stock market is a great way to increase your savings and wealth, developing passive income streams are the best way to achieve financial independence. There are reasons people with ultra-high net worth, in excess of $5 million, have 25%-30% of their investments in commercial real estate.
Possessing commercial real estate in your portfolio, if managed correctly, will provide financial benefits for years to come and give the diversification that is needed for financial security.
One of the most lucrative forms of real estate investing is referred to as value add. Value add occurs when improvements are made, or efficiencies are maximized, that increase the net operating income of a property. Improvements may be in the form of renovations, upgrades, improved management of the property, the addition of quality tenants, lower operating expenses, or anything else that will contribute to the ability to command higher rents and reduce vacancy.
The outlook is good for commercial real estate, especially in the multi-family sector. The market is projected to remain strong over the next decade as the country will see a demand for an additional 4.6 million new apartment homes by 2030.
There are many options when it comes to investing in commercial real estate and Iconic Capital Group offers its investors turn-key investment opportunities that provide the highest risk-adjusted returns through proven strategies. Iconic Capital Group’s clients invest in individual properties, have direct ownership, allowing them to reap all the cash flow and tax benefits. The direct ownership allows for a more control when compared to other popular methods of real estate investing such as Real Estate Investment Trusts (REITs) or crowdfunding.
Typically, investors view real estate investing as a hands on, time consuming, and complicated process. The need to research the market, locate lucrative investment opportunities, develop/renovate the property, and locate tenants seems overly burdensome. Iconic Capital Group takes all the hassle away as they do the work while you enjoy the benefits of a truly passive income stream.
As you look to position yourself for financial independence, remember that the key to success for any plan is a disciplined and effective execution. In leveraging the strategies above, focusing on the ones most adaptable to your lifestyle, you will be on the way to the living the life of your dreams.
If you have any questions or would like more information about how you can be on your way to financial freedom, contact us today!
