Financial independence and the freedom to retire early may seem like an unrealistic goal, but with the right approach, it’s more attainable than you might think.
Unfortunately, we’re programmed to believe that working in the corporate world until our mid-’60s is necessary.
Still, countless people have proven that early retirement is, in fact, achievable with the right approach.
If you want to gain freedom over your time, work on your own terms, and retire much earlier than the average American, here are some practical tips you can start putting into practice today.
Tips For Reaching Financial Independence
1. Know Your Purpose
Reaching financial independence and gaining the freedom to retire early certainly is possible, but it’s not easy. Obviously, most people don’t accomplish this goal. If you want to succeed, you’ll need to be willing to work hard, maintain financial discipline, and stay committed long-term.
Before you begin your journey toward financial freedom, it’s essential to know your purpose or your “why.”
- Why is financial independence important to you?
- How would your life change if you were able to retire early?
- What’s going to motivate you to keep moving forward when things get challenging or frustrating?
If you have a clear purpose and you keep it at the front of your mind, you’ll be more likely to stick with the necessary lifestyle changes rather than giving up.
Once you’ve thought about your purpose and exactly why you want to retire early, it’s a good idea to write it down. Then, read it regularly to keep it on your mind.
2. Define Your Retirement
Retirement means something different to everyone. Not everyone defines retirement the same way. It’s helpful to think about what retirement means to you and how you picture your life in retirement.
- Does retirement mean you won’t be working at all?
- Do you plan to work part-time or have a side hustle that generates a smaller amount of money in your retirement?
- Would you consider yourself to be retired if you’re able to work in a job you enjoy and have the freedom to walk away whenever you choose?
Only you can answer the questions about how you view retirement. But thinking about these details now can help you to have a clear picture of what you’re working towards.
3. Set Goals
Financial goals are always important, especially if you want to accomplish something aggressive like early retirement.
Financial independence can have many meanings, but within the FIRE (financial independence, retire early) community, most people define FI as having an investment portfolio equal to 25 times your annual expenses. So if you spend $50,000 per year, your FI number would be $1,250,000. Once your investment portfolio reaches that amount, you have reached financial independence (assuming you maintain similar expenses in the future).
For many people, this definition of financial independence determines their goal. However, your goal could be different. For example, maybe you feel like you’ll need more or less for your retirement. In any case, it’s important to set financial goals, so you have something you’re working towards. Your goals should also be time-sensitive and have a deadline. If you miss the deadline, that’s ok. You can adjust it as needed.
An early retirement calculator like the one at Networthify helps determine your own goals.
4. Eliminate Debt
When it comes to building wealth, debt can be a major roadblock. So if you want to speed up your progress toward financial independence, paying off consumer debt like credit cards, car loans, student loans, and personal loans should be a priority. With no debt, you’ll be able to save and invest more money each month, allowing your net worth to grow exponentially faster.
Paying off your mortgage would be excellent as well, but mortgage debt is different from the other types of debt mentioned. Mortgage rates are generally very low, and you may be better off on paper by not paying off your mortgage early. Whether or not you want to work to pay off your mortgage is a personal choice, but since most mortgages charge a low interest rate, this debt isn’t nearly as damaging to your financial progress as other types of high-interest debt.
You can use a few different approaches to pay off debt, with the most popular options being the debt snowball and the debt avalanche. This article from Peter Anderson offers a helpful comparison of the two approaches so you can decide which is best for you: To Debt Snowball or Debt Avalanche, That is the Question.
5. Embrace Frugal Living
Achieving financial independence becomes much more realistic when you’re making the most of the money you have. You don’t have to be stingy or cheap, but living well within your means and adopting a frugal lifestyle will ensure that you’re spending only what’s necessary and you’re maximizing savings.
You’re likely to view your spending differently when you’ve got your eyes on the big picture. For example, spending $100 per month on cable TV may be something you’ve never thought twice about. But when you’re pursuing financial independence, and you see the impact of saving and investing that $1,200 per year instead of spending it, you might be far more motivated to cut the cord.
Reducing your expenses will have a double impact on your journey to financial independence.
- You’ll be able to save more and grow your net worth faster by cutting out unnecessary expenses.
- Your annual spending will decrease, which also reduces the amount you’ll need to reach financial independence.
Earlier, we looked at a fictional example where you would need to build a portfolio worth $1,250,000 to reach FI with annual expenses of $50,000. If you’re able to reduce your annual spending to $40,000, your FI number quickly drops to just $1,000,000 ($40,000 x 25).
You don’t need to practice extreme frugality and live on next to nothing, but most of us have plenty of areas where we could easily cut back. If you’re looking for some practical ideas, see 50 Easy Ways to Save Money Every Month.
6. Develop Your Investment Plan
Reducing your expenses is key to reaching financial independence, but what you do with the money you save is equally essential. Investing can be an intimidating topic for many people, but it doesn’t need to be complicated. Keeping things simple is often the best approach.
There are a few investment strategies that are very commonly practiced by those who are pursuing financial independence. Here are some of the best options.
Index Fund Investing
An index fund is a mutual fund or exchange-traded fund (ETF) that includes a portfolio of stocks designed to track or mimic a financial index like the S&P 500. Index funds are popular because:
- They tend to be strong long-term investments.
- Many index funds offer very low expense ratios.
- Investing in index funds is easy.
You can invest in index funds through an account with Fidelity or Vanguard or use apps like Robinhood, Public, or Webull.
There’s not a lot you need to think about when investing in index funds. Of course, you’ll need to choose the fund you want to invest in, but there are plenty of excellent options. Then, all you need to do is invest as much money as possible and keep adding to your investment. With a long-term approach, you don’t need to worry about selling or constantly evaluating your investments.
Another popular approach is buying stock in companies with solid track records for paying dividends to shareholders. When a publicly-traded company earns a profit, it can reinvest that money to grow the business, share the profit with investors by paying dividends, or both.
Most younger growth-oriented businesses tend to reinvest as much as possible to focus on maximizing growth. However, many well-established companies tend to pay dividends regularly (often quarterly). As a shareholder, you can use the dividends to purchase more shares to grow your investment or take it as cash. If you’re focusing on long-term growth, reinvesting the dividends is best because it will help to increase your net worth.
The types of companies that typically share dividends with investors are often viewed as lower-risk stocks to own, compared to growth stocks that are more likely to see extreme fluctuation in share price. It’s certainly possible to lose your money by investing in dividend stocks. Still, these companies tend to be solid financially and able to withstand the ups and downs of the economy.
Investing in dividend stocks can be done with a brokerage account at Fidelity, Vanguard, or any number of other places. Apps like Robinhood, Public, and Webull are also excellent choices for commission-free trades.
If you want to invest in dividend stocks, the first thing you’ll need to do is evaluate the companies that are known for paying dividends. These lists of dividend kings and dividend aristocrats will be an excellent starting point.
Another option for pursuing financial independence is to invest in real estate. Investing in rental properties is especially popular for those who want to retire early. Real estate is a proven investment that has made many millionaires, and you can use the cash flow from rental income to replace the income from a job.
Investing in rental properties will require a more hands-on approach than index funds or dividend stocks. It can be the perfect choice if you want to walk away from a traditional job as soon as possible.
If you’re interested in getting started, How Many Rental Properties Do You Need to Retire? is a helpful article written by successful real estate investor Chad Carson.
Investing in real estate can be done, even with a small amount of money. Check out real estate crowdfunding sites like Groundfloor, Fundrise, or Diversyfund. If you prefer, invest in farmland through a site like FarmTogether!
7. Maximize Your Retirement Contributions
Retirement accounts like 401(k)s and IRAs offer significant tax benefits, so it’s helpful to invest as much as possible into these accounts. The money you invest into a 401(k) or Traditional IRA can reduce your taxable income in the present. Roth IRAs won’t reduce your taxable income now, but you’ll owe no taxes on eligible withdrawals.
If your employer offers a 401(k), be sure that you’re taking advantage of it. Many employers will match employee contributions up to a certain amount, so it’s a good idea to contribute at least enough to get the entire match. The employer match is essentially free money, and not contributing enough to get the full match is like voluntarily passing up a raise. Those who are self-employed can consider a SEP IRA or individual 401(k).
You should also contribute to a Roth IRA if you’re eligible. However, if your income is too high, there’s a way to convert a Traditional IRA (known as a backdoor Roth IRA).
8. Focus On Maximizing Your Income
While frugal living and making the most of the money you have is essential, increasing your income can also be extremely powerful. Unfortunately, there are only so many different ways you can cut costs and reduce your living expense. At some point, you either run out of ways to save more, or the amount that you save from new changes becomes minimal. However, you can always make more money.
If you’re able to increase your income while also reducing expenses, this is where you’ll make speedy progress toward your financial goals. However, you don’t want to increase your income and then also increase your living expenses at the same rate. That won’t help you to save or get ahead.
There are a few different ways to maximize your income, but starting a business is a common approach. There are many kinds of online businesses you can start with a very modest investment. Then, you could either run the business as a side hustle, make money on top of your full-time job, or grow it into a full-time income.
Here are a few of the best opportunities available for starting an online business.
Start A Blog
It’s possible to run a blog part-time to make some extra money or make it bigger and turn it into a six or seven-figure business. You can start a blog on a topic that interests you, and it’s a fun business to run (although it’s still hard work).
Bloggers can make money from advertisements, sponsorships, affiliate programs, selling their own products, or offering services. Blogs are also easy and inexpensive to start, so it’s ideal for a side hustle.
Anyone interested in early retirement will love the flexibility of running a blog. You could retire from your career and continue running the blog by working either full-time or part-time hours. You can also outsource every aspect of running the blog, so you don’t even have to be the one doing the work.
For more details, see How to Make Money Blogging as a Side Hustle.
Start A YouTube Channel
While blogging has been a popular side hustle for the past decade, starting a YouTube channel has increased in popularity over the past few years. With video content becoming more and more in-demand, the rewards for successful YouTubers are highly enticing.
There are several ways to make money with a YouTube channel, including advertising, direct sponsorships, and affiliate marketing. If you enjoy being in front of the camera, this is an ideal opportunity you should consider.
Much like blogging, you can start a YouTube channel on just about any topic of your choice, as long as people search for the type of content you’re creating.
Running a YouTube channel is also something that could be done part-time or full-time, so it’s perfect for increasing your income while you’re still working or for a retirement income after you’ve left your job.
If you’re interested in getting started, be sure to check out YouTube for Beginners, which covers everything you need to know to start growing your channel.
Become A Virtual Assistant
One of the best opportunities to make money online as a beginner is to work as a virtual assistant (VA). Chances are, you have some existing skills that could be put to good use for clients, allowing you to make money with flexible work that you do around your current schedule.
Virtual assistants can offer many different services like writing, editing, administrative tasks, managing social media profiles, moderating forums or Facebook Groups, providing customer service, and much more.
Currently, there’s plenty of demand for skilled VAs, with many companies looking to outsource work to contractors rather than hiring more employees.
Working as a VA can be done part-time or full-time, so it can be whatever you want it to be. You can also get started quickly and with very low startup costs.
If you’re interested in making money as a virtual assistant, Gina Horkey’s Fully-Booked VA is an outstanding resource that you’ll want to check out. You’ll learn how to promote your services and find clients, how to manage your business, how to scale to a full-time income, and more.
For more ideas, see 13 Good Side Hustles from Home You Can Start This Weekend.
9. Create Multiple Streams Of Income
Part of maximizing your overall income involves creating multiple streams of income. Instead of relying on your full-time job for 100% of your income, it’s wise to work on making money in other ways as well. The possibilities include things like:
- Starting a side hustle
- Starting a part-time business
- Developing passive income
- Focusing on an investment plan that creates portfolio income
Side hustles are a vital part of the plan for many people who are pursuing financial independence. There are countless ways to make extra money on the side, and if you’re investing all of that extra money, it can have a massive impact on the growth of your portfolio.
Some excellent passive income ideas allow you to generate money without a direct correlation to the number of hours you work. Some of these options involve investing your money in ways that create more income, and other options involve upfront work that sets you up for passive income in the future.
For more, please read How to Develop Multiple Streams of Income.
10. Plan For A Retirement Side Hustle
Most people who choose to retire early do not completely retire from all work. Having a side hustle in retirement is ideal for generating some money, so you’re not drawing down your investment balances so fast. A side hustle will also keep you active and give you something fun to do with your time, as long as you enjoy what you’re working on.
We’ve already looked at a few options like blogging, starting a YouTube channel, and working as a VA. Of course, all of those could be excellent options once you’re retired. Other possibilities include:
Depending on the type of work you did during your career, you may be able to leverage that experience and make money part-time by starting a consulting business.
You could offer many services as a freelancer like writing, editing, proofreading, design, coding, and more. Think about the skills and experience you already have and see if there’s a way to offer services as a freelancer.
Taking Online Surveys
It may not be the side hustle with the highest earning potential, but taking online surveys is a flexible way to make some extra money in your spare time. You can use sites like:
Dog Walking And Pet Sitting
Many pet owners don’t have time to walk their dogs, or maybe they have health issues that prevent them from doing it. You can make good money by walking dogs in your spare time, and there’s plenty of demand for this service. You can also offer pet sitting services, either during the day or overnight. Rover is an excellent app for connecting with pet owners who are looking for your services.
11. Prioritize Your Health
One of the biggest challenges for many people who want to retire early involves paying for health care. Most Americans have health insurance through their employer, and if you right before you’re able to go on Medicare, you’ll have some decisions to make.
There are options for retirees, including the marketplace and health share plans instead of traditional insurance. The better health you’re in, the easier these decisions will be and the lower expenses you’ll have in retirement. So start by taking care of your health now.
12. Be Willing To Make Sacrifices
Reaching financial freedom isn’t easy. If it were easy, everyone would do it. Unfortunately, sometimes you have to make sacrifices for the things that are important to you.
If you really want to retire early, there are some sacrifices you can make to give yourself a much better chance. One of the most noteworthy possibilities relates to housing. The most significant expense for most individuals and families is housing. If you’re willing to make a sacrifice here, you can save a lot of money and grow your investment portfolio faster. For example, you might choose to live in a smaller home or a neighborhood with lower property values to cut back on housing costs.
Another possibility involves cars. Most Americans borrow money to purchase a car, and monthly car payments are assumed to be a line item in most budgets today. However, spending less on a vehicle and paying cash is one of the best things you can do if you want to maximize savings.
13. Keep Your Options Open
Early retirement becomes significantly more realistic if you’re willing to relocate. The amount of money you need to retire comfortably has a lot to do with the cost of living in the area where you live. If you’re willing to move somewhere with a lower cost of living, your money will go much further.
Moving to a place with a lower cost of living is sometimes referred to as geographic arbitrage. It’s one of the best strategies you can use to reach financial independence faster. For example, you could move to a lower cost of living area with the US, or even move to another country. This list features 10 countries where you can live on $2,000 per month.
Financial Independence Is An Achievable Goal
While achieving financial independence and having the option to retire early may not be easy, it’s more realistic than you might think. However, it doesn’t happen by accident.
You’ll need to plan and work for it, and the tips covered in this article will get you started on the right path.
AJ Tobing - Mondo AJ says
Hi Marc. This is a great list.. These really are all the keys to financial security.
Frugal living and making sacrifices (and having a plan, of course) have been really essential in the last couple years, and helped us strengthen our financial foundation. And I love that you also mention health!
That’s been huge for me recently. As I continue to work and could not isolate at home like most folks, I got sick a few months back. It was tough but I bounced back fast. I think it’s because the family has been more focused on good diet and nutrition.
Healthy body, healthy budget.. Both are important! Keep up the great work.