How to become financially independent in 5 years
Done with the job? Ready to do your own thing?
Those who are on track to be “financially independent and retiring early” — or “FIRE” — are.
You’d need to be fired up to sock away enough money to quit your job and retire in just five years. But it’s not impossible.
Some people, like Claudia and Garrett Pennington take extreme measures like saving 67% of their income and making big lifestyle choices. They almost never eat out, have no cable subscriptions and even dramatically downsized their home.
While that’s probably too much sacrifice for most people, see if you’re on track to make it to financial freedom in 10, 15 or 20 years.
Being financially independent means that income from your investments alone is enough to cover all your expenses.
So how do you get there?
The sunshine that makes most retirement funds grow is compound interest. And it takes time to grow. But if you plan to retire early, you might not have as much time as someone targeting a traditional retirement.
As a result, the most important accelerant when working to be on “FIRE” is your savings rate. Most people targeting FIRE are living well below their means and saving more than half their income.
Identifying the percentage of your after-tax income that you’re saving to get to your retirement target is key. Finding the right savings rate will get you to financial independence whether you’re earning $50,000, $100,000 or $200,000 a year.
In order to make simplified calculation, we’ll start with your after-tax income. We’ll also assume you have nothing saved right now. You’re starting from zero. And we’ll assume that your investments earn a rate of return of 5%, and that you’ll take 4% a year from your investments to cover your expenses.
You can also use an early retirement calculator like the one at Networthify to fill in your own numbers.
But given our assumptions, here are your target savings rates and a simplified financial picture of what it would take to retire in 5, 10, 15 and 20 years.
To retire 5 years from now
In order to be financially independent in five years, you’re going to need to ratchet your savings rate all the way up to 82% of your income.
It’s a pretty spartan life if you’re earning $50,000 after taxes. Your annual expenses will need to squeeze in under $9,000. Yes, that’s for the whole year. It is the sacrifice you’d need to make so that you can bank the other $41,000. Out of your monthly income, about $3,500 will go to savings. You’ll need to have a sharp plan to get by on just $750 a month.
Even if you earn closer to $100,000 after taxes, you’ll still be living a fairly basic existence on $18,000 a year while pocketing $82,000. Start thinking of creative living arrangements to stretch that monthly living budget of $1,500.