Imagine never worrying about money again.
Consider what it would be like to never think negatively about bills, about getting fired, or about recessions.
Picture what it would be like to be “work optional” for the rest of your life, because you have enough money stashed away, and enough passive income, to only work when and if you choose to.
That’s financial freedom. And this guide explains step-by-step how to achieve it for yourself from what I’ve learned so far.
Starting reading from the beginning, or jump to the section you want:
- What is Financial Freedom: The 101 Guide
- How To Become Financially Free
- From Rags to Relative Riches: My Personal Story
What is Financial Freedom: The 101 Guide
Financial freedom means having enough passive income to never have to work for a long time, or possibly ever again.
This passive income can come from bond interest, high dividend stocks, index funds, rental properties, or other reliable sources. As long as your passive income covers your expenses and keeps up with inflation with a margin of safety, you become “work optional”.
It’s not about whether you want to work. It’s about whether you have to.
There are, of course, several different degrees of financial freedom, just like there are different degrees of other types of freedom.
Level 1: Financially Solvent
A lot of people live paycheck to paycheck, have credit card debt, and are basically always one misstep away from financial ruin.
The first step towards becoming free is to become solvent, meaning you don’t have any high interest debt, and you have at least 3 months of expenses stashed away for emergencies. A lot of responsible people hang around at this level but never move up to higher degrees of freedom.
People at this level have their life together but likely still have some money stress, and don’t have significant retirement savings. A job loss would be a disaster, as would any major unexpected expense.
Level 2: Financially Robust
The next level occurs when you have about 6-12 months of savings stashed away, and a growing retirement hoard in a 401(k) or other retirement account.
You may still have some student loan debt, but any debt you have is low interest.
At this level, a job loss would be a moderate problem, and you’d start eating into your net worth to get by until you find another job.
Level 3: Financially Independent
This is where you’re pretty much free, and at a very comfortable place. You’re basically independent of any particular job or source of active income.
You have many years worth of savings stashed away, and a big retirement hoard. You could go 10 years without a job if you wanted.
In fact, you might have multiple income streams, like from a side hustle or a two-income family. If you were to lose a primary source of income, like a job, you might not even have your net worth go down; you could trim your expenses so that other houshold income streams could still support your daily needs.
Any debt you have at this point is purely for investment purposes, like a mortgage.
Level 4: Financially Free
The last stage, you never have to work again if you don’t want to.
Your portfolio is large enough that 3% of it could support your basic annual expenses forever:
In other words, a $1 million portfolio with a healthy allocation of stocks can reliably be expected to produce $30,000 in annual income over the long-term that grows at least as fast as inflation. Potentially more than that if you focus on income-generating investments.
If you need $60,000 in passive income, then your portfolio should be worth much more, like upwards of $2 million.
How To Become Financially Free
Most people never become financially free because their expenses keep increasing even as their income increases.
When they get promoted, or when their business becomes more successful, most people buy nicer homes, clothes, cars, gadgets and trips. They never put hundreds of thousands of dollars away into retirement savings at a fairly young age, and never start seriously compounding their wealth.
Most disciplined hardworking folks put 5-10% of their income towards retirement, which means they can’t retire until 60+ years of age. But if you put 30-50% of your income towards retirement, you may be able to retire as early as your 30’s or 40’s. Then you can do whatever you want.
See this chart for example, of how much you can save in 25 years (adjusted for 2.5% annual inflation), based on how much you invest per month and what your rate of return is:
It’s Not Usually About Sacrifice
A lot of people view the topic of saving as a question about whether to spend money now or later. Whether to sacrifice part of the present for a richer future, or not.
That has an element of truth to it but for the most part that’s not how it works.
It turns out that one of the strongest types of happiness is flow; the feeling you get when you are engaged in an interesting activity or project. Consumption doesn’t affect happiness as much for most people.
New cars, bigger homes, better jewelry- these things give people a flash of delight but due to hedonic adaptation, that delight fades quickly. We keep returning to our baseline level of happiness whether we have one car or five cars, a small home or a big home.
So, the key is to have hobbies that produce flow. Often these are inexpensive, or they could be side hustles that actually make money. Some people may have more expensive hobbies, which may mean certain trade-offs.
Achieving financial freedom doesn’t usually have to be boring or sacrificial. It’s not about denying happiness now to have happiness later.
Instead, it’s about optimizing happiness both now and later, by re-arranging priorities and realizing that what actually makes people happy is often very disconnected from money. It’s about doing things you’re excited about, with people you love.
Having free time, feeling no financial stress, spending time with loved ones, performing interesting work and hobbies, and getting enough exercise for all those brain endorphins- that’s what makes most people happy.
Now, for folks that are truly poor, that’s a different story. Those people can’t cut spending enough to be able to save money because there’s a baseline level of expenses to get by. The best thing they can focus on is increasing their income, either by getting more education or taking risks to find opportunities.
But most people within the middle class can be saving a lot more than they are.
Five Ways to Save Money
Based on data from the Bureau of Labor Statistics, and put into a pie chart by me, this is how Americans spend their money on average:
A lot of money-saving tips focus on small things. Skip a latte here, save a couple gallons of gas there, and sure it adds up.
But focusing on the highest-impact things is where real money is saved. Trimming costs on housing, cars, and restaurants is where a small change makes a five or six-figure difference over time.
Here, for example, is a chart I made of how much inflation-adjusted money you can save by reducing a few expenses and investing that saved money at a 7% annual rate of return:
Of course, everyone’s lifestyle varies and you may be able to save more or less in any given area, but here’s an outline.
1) Save $50/month on restaurants (as little as one fewer restaurant night for two per month), and spend a bit more time preparing your own dinners, which is usually healthier and far less expensive. Cultivating a good skill to cook is priceless and rewarding, and you’ll have an extra $39k after 30 years.
2) Earn an extra $400/month on the side doing something you enjoy. Maybe it’s making crafts and selling them on Etsy. Maybe it’s doing freelance writing. Maybe it’s helping people with their taxes. Or, instead of a side hustle, maybe it’s going out of your way to get one job, promotion, or raise that boosts your salary by $400/month. Either way, this could translate into an extra $313k after 30 years.
3) Spend $5,000 less on a car every 10 years. On the first year this assumes one car, and then every decade after that it assumes two cars per decade for a household. After 30 years, that’s an extra $72k.
4) Live in a slightly more modest home or apartment, and save $300/month in housing costs and $5,000 less on a down payment. You could have an extra $256k after 30 years. Housing sizes keep expanding over the years despite how much debt people have and how little they have saved for retirement:
Source: Star Tribune
5) The average wedding in the United States costs over $33,000 according to the Knot and other surveys. The chart assumes you get married on year 5 and spend $12,000 less on a wedding than average. Due to that one decision to save some money on a single day, you’d have an extra $39k for retirement.
If you were to do all of those things starting at 25, and save the money into a portfolio that earns 7% per year, then you’d have well over $700,000 in 30 years on top of whatever you’re already saving in a 401(k) or other core retirement plan. And that number is adjusted for 2% annual inflation, so it’s actually $700,000 in today’s dollars (well over a million future dollars).
Many people reading this are older than that, into your 30’s, 40’s, 50’s, or 60’s or more. And that’s fine. Wherever you are in life it’s better to start now than never.
From Rags to (Relative) Riches: My Story
When I was a child, my mother and I were homeless for several years.
We bounced around to various homeless shelters, lived out of a cheap motel for a while, and eventually lived out of a car.
After that, my parental custody changed and I grew up with my father in a trailer park. We didn’t have much money, but at least we had the basics. My father was a working single parent in his 60’s, so despite being a child I was often left alone, and was responsible for cooking and cleaning. By necessity, I was treated like a small adult. In some ways, this was a blessing, because for better or worse it forced me to become self-sufficient as a child.
I saved virtually all the money I ever received from gifts, allowances, or part-time work (teaching martial arts was my first job), and became interested in investing. I was that weird kid that loved reading the Wall Street Journal or watching the economic portion of the TV news, and began investing in stocks as a teenager.
The idea of earning money, saving money, and making that money grow was incredibly appealing to me both for practical benefit and simply because as a math nerd I found exponential compounding to be fascinating. I bought my first stocks while I was in high school, and invested in some gold coins.
When I was 18, I moved away from home for college, and became self-sufficient. I paid my way through college to earn an engineering degree with part-time jobs, internships, and $50,000 of student debt. But feeling so indebted with a negative net worth, graduating in a weak economy, felt terrible.
I had about $10,000 in savings, and when the U.S. stock market bottomed in spring of 2009, I started investing aggressively into it, knowing this was a rare opportunity.
When I was 22, I got a job as an entry level electrical engineer building aircraft simulators, and rented my own apartment. This was in 2010, right after the global financial crisis, so jobs were scarce and salaries grew slowly. I had a constant feeling of financial vulnerability. So I began building websites and doing freelance financial writing on the side to earn more money to help accelerate my student loan payoff. And I continued investing aggressively with every dollar I earned.
My 20’s were a rough period in my life, with periods of depression. I was working and going to graduate school, studying engineering management and finance. My father died, and my disabled mother began requiring permanent financial support.
Millennials as a generation have a reputation of living at home and being lazy, but that’s not the case for a lot people. I was living on my own and supporting a parent in another state from a young age. It weighed hard on my finances and made saving more difficult. In addition, I ran into health problems of my own, and despite having health insurance I had to pay several thousand dollars per year for treatment.
But I made it a principle that whenever I ran into extra expenses, I would increase my income to cover them, and keep my savings rate high. Either from side hustles or from continually working towards higher salaries at work. These expenses slowed me down but I did the best I could to make it so it never stopped me.
At work, I was promoted quickly through the ranks. I actively sought out ways to acquire more responsibilities and grow my understanding of the industry. There’s an old quote that goes, “most of success is just showing up“, which is true. A lot of workers just focus on their own projects quietly at their desks, so if you actively seek out responsibility, you’ll stand out and it will often be given to you.
So I simply asked to be given more responsibility, and always asked how things in the organization worked beyond my own particular job. I asked my manager what managerial tasks I can start to do for him to get hands-on experience as I worked on my management graduate degree. I stayed late when necessary to make sure my work was always on time and in good order. I listened to colleagues discuss problems in our facility and volunteered to do what was necessary to solve them. I became the default “go-to” person in the facility when people weren’t sure who to go to.
In addition, I always was just as passionate about finance as I was about engineering, so I began shifting my career more and more towards managing the money of an engineering facility and away from designing electrical projects. I began overseeing all technical procurement in the facility, and then eventually came to manage the organization’s line of credit. Then, my boss asked me to start overseeing all of our contracts and several engineering project teams as the head engineer. At age 30, I applied for an internal promotion and was put in charge of the full finances and day-to-day operations of the facility.
On the side, I became relatively wealthy. I gained more than a decade of investing experience, investing my own money as well as researching/writing about hundreds of companies and investment topics on the side. I saved money and invested a massive percentage of my income each year, and kept my housing expenses relatively flat even as my income doubled and tripled.
For example, while the average American spends 37% of their income on housing, I got that number down to 10%. While people spend an average of 19% of their income on transportation, mine was well under 5%. But I still spent money on things that truly made me happy, like travel. I fly to a new country every two years or so.
I now have hundreds of thousands of dollars stashed away growing and paying dividends, enough to cover my expenses for many years. In addition, I have multiple side income streams that diversify and increase my total income, and that I can focus on and grow if any of my other income streams dry up.
I love my job in the field of simulation and engineering/financial management, but part of what makes me love it is that I don’t need it. It’s something I choose to do because it interests me, because it’s rewarding, and because I love my colleagues. Most of our simulation work is focused on research to make the sky a safer place, and that’s really rewarding.
I’m a fairly private person, and my reason for sharing this is to point out that you don’t need to come from privilege to reach higher degrees of financial freedom. Hard work, constructive principles, and a bit of good fortune here and there can go a long way.
In late 2016, I started this website to share what I’ve learned, and it has grown exponentially ever since.
Final Thoughts, and Positive Examples
By actively growing your income, keeping your savings rate high, and investing wisely, you can start drastically increasing your financial independence from any job or individual source of income.
Jason Fieber- retired at 33
Take Jason Fieber for example. He retired at 33 with hundreds of thousands of dollars, after working for a middle-class income at a car dealership.
His method was simple- he cut his expenses to very low levels, and used his free cash flow to buy and hold a collection of dividend growth stocks. He read books on investing and taught himself basic stock valuation techniques which allows him to understand and own a wonderful portfolio.
His wealth and passive income grew exponentially until his monthly dividends began to cover his monthly expenses.
Andrew Hallam- the millionaire teacher
Andrew Hallam became a millionaire by around 36 by investing primarily in index funds. He and his wife kept working for a few more years, and by their early forties were together worth a couple million dollars.
He and his wife did this without an inheritance, and both of them worked as teachers.
Now they travel around public speaking and enjoying life, and might teach again one day if they want to.
You can do it too
There are countless ways to boost your income, and even with a middle class income you can save and invest and become financially independent in a decade or two. You can do it with index funds, dividend stocks, or even real estate, although those three methods require increasing levels of hands-on activity.
How long it takes depends on how extreme you are with it (I prefer a more casual approach, personally), how high you can push your income, how the economy behaves, and how resilient your investing approach is to a weaker economy.
And that last point is something to be aware of. One thing that concerns me is that this “FIRE” (financially independent retire early) movement on the internet is a rather new phenomenon. A lot of people promise the ability to retire early quickly, but it’s partially because they’ve enjoyed a 9-year bull market in what is so far the second-longest continuous economic expansion in U.S. history. And many people in the community come from a somewhat privileged background.
I think a lot of people are going to be in for a shock when they see first hand that yes, markets can go down too.
That’s why, personally, I view the dividend stock approach as being more resilient than the index fund approach, although a combination of both is great too.
And always factor in a big margin of safety before making any major decisions like leaving a job. Imagine getting the equity portion of your portfolio cut in half during a market crash, or losing a quarter of your dividend income, and think about how it would impact your lifestyle.
The best way to approach this, I think, is to focus on moving from the middle class to the investor class. From someone who makes money from labor to someone who makes money from money, and from labor only if and when they choose.
Whether you go slow or fast, aggressive or conservative, the path to financial freedom within a decade or two from your starting point is a real possibility, and it’s up to you.