Reach Financial Independence Even on an Average Income

08/04/2016 04:41 pm ET


This post was originally published on Modest Money

Reaching financial independence is simple: you need to save 25 times your living expenses, to create a nest egg that you can safely withdraw from for the rest of your day. Notice I said simple, and not easy. Financial independence requires a lot of discipline, patience, and commitment. How can you save 25 years worth of expenses? Well, you will need a combination of the following:

  • Live on as little as you can
  • Earn as much as you can
  • Invest as well as you can

Live on as little as you can

Let’s start with the living on less part. It is actually pretty important, and the reason why you hear about people becoming financially independent in the 40s or even 30s, in spite of a lifetime of average earnings. If you can live on 20% of your income, and save 80%, you can become financially independent in under 6 years. I do agree that it is pretty hard to achieve. On the other hand, saving half of your income is not that hard, especially if you live with a significant other who also works. Plenty of families make it work on one income, so why not save the other one? If you are able to live on half of your income, financial independence is 17 years away. For a person who started working at 23, that means being able to retire at 40! And while you add up a few years with a lower saving rate, even saving 20% of your income will allow you to retire at 60 if you start at 23.

So let’s start saving! Have a good look at your expenses, and see where you can cut some fat. Food waste, poor driving habits, too big a house, unused memberships and subscriptions come to mind. You will barely notice the changes since that was mostly waste. If you are ready to tighten the belt some more, you can pack your lunch to work, cycle to work, stop having a car altogether, or finding cheap and free hobbies. Like I said, early financial independence requires dedication. But every dollar you save buys you freedom down the road. So stay strong and keep your eyes on the goal.

Earn as much as you can

Because there is actually a limit to how little you can live on every month, the fastest way to become financially independent quickly is to make more money. Again, not that easy, but doable. You can ask your boss for a raise, start a side business or study some more so you can apply to better paying job. If you are able to live on your current income, you can try saving the full amount you make on the side, all your raises and bonuses, and boost your savings without feeling the pinch.

Lifestyle inflation is tempting, but if you can delay big purchases by a few months or even a year, drive that car a bit longer, wait until your kids are three to upgrade your house… while making more, you will see your savings growing faster than you ever thought possible.

Invest as well as you can

Investing can be as demanding or as hands off as you make it. The one thing you don’t want is having your savings depreciate on a 0% current account. At the very least, look for a high interest savings account to make sure your cash keeps up with inflation.

But to grow your nest egg to financial independence levels quickly, you will need to invest your money. Every investment carries a level of risk, but you can still get decent returns investing in low cost index funds through a robo-advisor without gambling your financial future. The key here is patience. You have decades until retirement, so try to invest monthly to dollar average your positions, and resist the urge to sell when the markets tank. You can become more conservative when you get closer to retirement.

Make sure you get your company match and max out your tax free investment accounts before anything else.

You don’t need lots of money to invest, contrary to popular belief, you can get started with less than $100.

Another asset class I often recommend for wealth buuilding is real estate. With the current low interest rates, if you can find a house that is cash flow positive, in 30 years, your tenants will have paid your house off and you will have 100% of the rent as a retirement income.

You can also consider your house an investment and pay off your mortgage early, getting an instant return on your money in the form of saved interest.


If you are able to combine these three steps, the road to financial independence shouldn’t last more than a couple of decades. As your net worth grows, so will passive income, soon replacing your job income, meaning you don’t have to work any more if you don’t want to!

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