First, what is Financial Independence? It’s that euphoric state where you don’t have to worry about money (much) anymore. Your passive income is higher than your expenses and you don’t have to work if you don’t want to. I have been sharing my views on Retire By 40 for 3 years now and many of our readers are actively pursuing financial independence (FI henceforth.)
Most people think they need to achieve FI before quitting their job/career. This is one path to follow, but it’s not the only way. Personally, I think it is a huge misconception and I would like to change that.
Reach for FI
FI is pretty simple and there are only two ways to reach it. There are only two variables – income and expense.
- Increase your passive income. It takes money to make money and you need to work your ass off to build up your passive income streams. We have income from rental properties, dividend stocks, peer to peer lending, and interest bearing accounts. These are not quite enough to pay for our cost of living yet, but we made up for that in other ways.
- Cut your expenses. If you cut your living expense enough, you’ll reach financial independence pretty quickly. This is extremely difficult for us because we like the way we live now. We could buy an RV and instantly become financially independent, but we don’t want to live that lifestyle at this point (or ever says Mrs. RB40.) I’m sure most of you are in the same boat.
FI is not easy
While FI is a simple concept, it is not easy to get there. Most people work all their lives and don’t have much retirement savings by the time they turn 65. FI is even more difficult for people who want to retire early. If you want to retire by 40, your time line is compressed in half and it’s practically impossible to reach FI unless you work hard and are really lucky.
Fortunately, you don’t have to reach FI to retire from your career. You just need to get close and then use other means to bridge the gap. Let’s explore a few options.
Protip – Take your yearly expense and multiply it by 25. If the result is lower than your net worth, then you are close to Financial Independence.
Work part time
First of all, I am very glad I am not an engineer anymore. It’s stressful and it’s a lot of work. Our family is much happier overall now that I’m a stay at home dad/blogger. Our monthly expense is actually not that high and I only need to make about $500/month to help cover it. For most of us, it should not be difficult to make $500/month. If you play your card right, that’s just a few hours of consulting per month.
I wouldn’t have been able to stop working completely anyway. Think about it. If someone works hard enough to approach FI, they must have been very industrious. It’s not easy to just stop working completely and I’m sure none of us would want to at the young age of 40. It’s better to downshift and coast a bit by working less.
Take advantage of the workaholics
Our family is extremely fortunate that Mrs. RB40 is a workaholic. She likes working and she doesn’t know how to stop. Maybe when she is older, she’ll learn how to relax. This is good for our family though. She can work and enjoy the professional life for 12 more years. Her income enables me to leave my career without having to worry too much.
Generate future passive income
You can spend your time creating future passive income streams. You can invest some time into creating a product like a book, a course, or an app. If you are lucky, you will be able to sell these products and generate some passive income. There are endless ways to make money, you just need to go and do it.
Cut expense drastically
Of course, you can cut your expense drastically, too. This one is easier if you’re single. You can relocate to a cheaper country like Thailand and enjoy a comfortable standard of living on the cheap. Good luck convincing your spouse and kids though. One of my college roommates has been trying to convince his family to move to Belize for years without success.
Quit before reaching FI?
Here is the bottom line – it is entirely doable to retire from your corporate career before reaching financial independence. You just need to get close and figure out how to bridge the expense gap. Working part time is the easiest way, but it is not the only solution. If you don’t like your stressful job/career anymore, then it might not be worth it to stick around 3-4 more years to achieve FI.
Do you plan to be financially independent before you retire? How much more time do you need to get there?