I had always had the thought that I’d become “financially independent” before I hit the age of 45. By financially independent I mean that even if I chose not to work another day in my life, my expenses would still be less than my income; this income will come not from full-time work, but rather, in the form of “passive income”, income I receive though not actively involved in the work generating the income (e.g. rental income; dividends; and coupon payments via bonds).
In my mind it meant that I had to generate a relatively high income (probably through salaried work) during my working years, and regularly put part of that into income generating vehicles like stocks, bond, property and their derivatives. But what I failed to realise was that income was only part of the equation in financial independence. It is always better to have more income than less, but what I had not seriously considered was what my expenses were.
I suppose part of my oversight was due to complacency: I’ve always been frugal (though LiShya and Athena prefer to say stingy) with my money; it has always come oh-so-naturally to me, and I have thus never truly considered its impact on my networth. That was until I came across the book You Can Retire Young by Larry A. Ferstenou, who writes that the amount of expenses you have, which in turn impacts how much you save/invest, are often more consequential than the amount you income you may be able to bring in.
That was a paradigm shift for me, a whole new way of looking at the retirement equation — that the key in an early retirement depended not so much (not as much I had initially thought, anyway) on how much you made, but rather how much you saved (and subsequently invested). It simply didn’t matter if you were earning $4,000 or $40,000 a month if you spent everything every time you received it. What is more remarkable is that spending less per month by choice may actually make you happier by releasing you from the grips of mindless consumption!
Ferstenou as an Example
Ferstenou cited himself as an example of how you might retire young. He never earned what many would consider a high income, but he was always careful with his money and to a certain extent got lucky with his investments (which from what I gather gave him typically about 10% returns, managing to largely avoid the precipitous drops in the stock market in the 2001-2003 period). Saving at least 30% of his income since he first started working, by the time he was into his 40s he realised that he could retire and live off the income generated by his investments, especially since his expenditures were so low (he made frugal living a way of life, and though married had no children).
Although not all of us will be happy earning just enough to get by, saving and investment our income (and curbing unnecessary expenses) is something we all can and should do. Even if an early retirement is not your goal, following Ferstenou‘s example will most definitely help you live a more comfortable life.