Financial Management,
July 25, 2020

Financial Freedom - How to Retire Before Age 40

Gregory Weiss
Financial Freedom - How to Retire Before Age 40

Before you start reading this article, I suggest you take something into account: What you've learned so far about money, financial freedom, and wealth may not be quite right.

And I clarify that at no time is my intention to discredit the knowledge you acquired, much less those who imparted it to you, but it is likely that those who taught you about the subject, have a fairly traditional view of the subject, having completely ignored a huge and relatively new possibility, whose information many in our region still do not know.

What I want to achieve with this comment is that you read my article with an open mind to all possibilities because, although they may seem crazy to you or too good to be true, I can assure you that they have already given great results to thousands of people, including me.

IT'S ALL UP TO YOU

If you have read me before, you surely know that I have achieved my dream of living traveling, thanks to my digital endeavors (and of course, a lot of work that comes included).

But even though I earn enough to live a "rich" life, and when I was 30 years old I managed to pay all my debts (car, credit cards and even have enough money to pay the full mortgage of my new home in Panama) I don't do it. And I haven't done this because I'm a minimalist, although it helps a little bit.

I live traveling, yes, but I do it because besides being my dream (I love to know new places, living as a local in each of the destinations I visit) I almost always find it cheaper to be in other countries where the exchange rate of the dollar yields me much more than mine.

I travel with miles and always stay within a fixed budget to decide where to live.

All my belongings literally fit in a suitcase, and I have almost nothing at home. I buy my clothes three times a year and base myself on a budget for all my expenses (including eating out, gifts for my family, visits to the beauty salon, etc.).

And before you call me weird for not giving me the luxuries that others would give to my financial position, I ask you to read this entire article so that you understand what I intend to accomplish with all of this.

WHAT IS FINANCIAL FREEDOM?

It is the state in which a person or family has sufficient economic solvency to be able to live without depending on income from some form of employment.

Because of this definition, many people tend to confuse financial freedom with retirement, and it's not the same thing. Retirement is the end of working life because of age, and is usually obtained after you have worked virtually your entire life.

Financial freedom, on the other hand, is the end of compulsory work, whether you're 65 or just turned 30. When you achieve financial freedom, you decide whether or not you want to continue working, whether you retire for a few years and then return to the ring, or whether you knit for the rest of your life.

IT'S NOT THAT YOU STOP WORKING, IT'S THAT YOU DON'T NEED TO.

I want to make it clear that my goal has never been to stop working completely, as long as things continue as they have been (I'm very young, with a head full of ideas and a lot of energy).

But I do look forward to the time to continue doing this just for personal satisfaction and without having to worry about money.

My goal is that, even if I stop working for the rest of my life, I should never have to worry about money not being enough to take a vacation, or to cover any financial obligation that comes my way.

Sounds amazing, doesn't it? Well, I'll tell you that every day there are more people who do it at an early age, without having to wait until retirement age.

And I'm not talking about singers or actors in film and television, but about ordinary people, just like you and me, who adjusted their pants and made the decision to improve their finances and their quality of life in a radical way.

Those people are the followers of a movement called FIRE (Financial Independence - Withdraw Early), which I want to talk to you about today.

THE FIRE MOVEMENT AND ITS CURRENTS

There are several interesting styles within this movement.

Some practice "Lean FIRE" (living with extreme frugality), others "Fat FIRE" (maintaining a regular standard of living, while saving and investing), and others "Barista FIRE" (deciding to continue working part-time or generating passive income, even after getting the necessary investment to retire).

Personally, I feel that I am a mixture of the 3.

HOW TO GET FINANCIAL FREEDOM?

As you may have already been able to deduce, financial freedom is mainly based on cutting expenses, earning more money and investing.

CUTTING EXPENSES

Many of those who practice this movement try to save 50% or more of their income.

I know it sounds like a giant number, but from my own experience I can tell you that cutting our expenses, increasing our income and saving as much money as possible is really possible. Someone who has managed to save up to 80% of their total income tells you this, all while living the life of their dreams, thanks to their extra income.

At first, it's very likely that you won't be able to save such high amounts, especially as long as you don't manage to generate additional income to your traditional salary. But if you try to save 2% or 3% of your monthly income, until you can generate all the money you need to be able to save more, it will make it much easier (instead of looking for 50% from day one, which will only bring you frustration).

When you can save/invest 50% of your income, you can achieve your number of financial independence in 15 years. By saving 60%, you can do it in less than a decade and so on. The more you accumulate each year, the faster you will reach your goal.

EARN MORE MONEY

Keep in mind that due to the large sums of money you will have to save in order to invest, and if you depend solely on a salary equal to most of the salaries that exist in Latin America, it would be almost impossible for you to achieve financial independence. Therefore, my interest is to teach you how to earn extra money online.

INVEST

You can do this either in indexed funds, stocks, real estate, creating non-traditional and diversified passive income, or with a mix of all of the above.

YOU WON'T DAWN FINANCIALLY FREE, OVERNIGHT

Obviously, you can't get to that point overnight, unless you receive a million-dollar inheritance. Achieving financial freedom requires proper planning and the discipline to stick to the plan, even if things get tough.

You'll have to make several sacrifices, but all that will be rewarded when you gain complete control of your life and finances, without being chained to credit card debt, car loans, a huge mortgage and a working life.

STEPS TO FINANCIAL FREEDOM

1. GET CONTROL OF YOUR MONEY

Simply put, this means that you must spend less than you earn.

First you have to find out how much you spend per year on everything, approximately (rent, food, utilities, fuel, education, recreation, etc.). And be sure to include absolutely everything.

To help you with this, you can do the exercise of writing down on your cell phone every expense you have (for at least a month or two), including the chocolate that you said you weren't going to buy again, but in the end you always end up adding to the grocery cart.

Once you get this information, you can start working on your budget.

A good rule of thumb is the 50-30-20 method:

  1. 50% is for essential expenses (rent, food, utilities, etc.)
  2. 30% for debt payments (mortgage, car loan, credit cards, etc.)
  3. And 20% for "other expenses" (clothing, departures, savings, etc.).

You should always remember that what you want to achieve is financial independence, so the idea is to save as much money as possible.

Then, set up your budget categories. It may take a few weeks (or even months) of follow-up to see your patterns, but it will be worth it.

Living each month costs money, and if your debts are holding you back, you won't be able to become financially free. Credit card debt is the most serious, because it generally has the highest interest rate. You should get rid of this debt as quickly as possible.

2. REDUCE/ELIMINATE EXPENSES

Now that you know where your money is going you have 25% of the battle won, but another big part of the plan is to reduce expenses. Remember that nobody gets rich while they are spending all their money.

This is not always easy, but we already said that some habit changes are necessary. Once you manage to make cuts and reductions to your budget, you'll see that your money begins to accumulate much faster and you'll feel that it's all worth it.

You'll probably find it overwhelming at first, but you can choose one category per week and concentrate on finding ways to make it more economical, or if possible, even eliminate that expense. Looking at things differently might help.

For example, you want to buy a new car and you have two options: either you buy the car you want, or you get a year closer to quitting work. Remember, you're not only saving, you're working toward financial independence.

SAVE ON FOOD

Food is always a good place to start trimming, as a lot of our money goes there. Bringing lunch to work, finding a supermarket with better deals, buying cheaper brands, and not dining out are all things that could help you make a significant change.

Seeing how much you save each week will always be a great incentive to move forward, and even become more creative when looking for ways to cut costs.

ELIMINATE SUBSCRIPTIONS

Eliminate recurring expenses for secondary things, such as magazine subscriptions, gym memberships (you can exercise without paying anyone), or cable tv services (with Netflix and online news, almost no one watches tv anymore).

Although not large amounts of money, when you strive for financial independence these are luxuries you can do without and which, added together, can result in a monthly increase for your pocket or piggy bank of $100.00, or perhaps more.

Another thing to try is to negotiate lower prices for things like the Internet signal. If you threaten to cancel your service or change your provider, they'll probably offer you a better plan.

Automated payments from the online banking systems maintained by most banks also help a lot, especially compulsive shoppers. If you schedule your monthly payments to be transferred as soon as you receive your money, you won't have to worry if you'll be able to pay the rent because you're looking at a new cell phone.

3. EARN MORE MONEY

There will come a time when, no matter how hard you try, there will be nothing else to cut, and in order for you to achieve financial independence, you will have to earn extra money.

Maybe you should start from wherever you are and ask, for example, for a pay raise.

Many people wait until the company they work for decides to give them a promotion or to open a better position to compete for the position. Even if there's no such vacancy, if you're prepared and have compelling reasons why you know you deserve a pay raise, you'll probably get it.

If you still couldn't get the increase you deserve, you could look for another job or generate extra money in non-traditional ways, and lack of time is no excuse.

INVEST YOUR TIME BETTER

Many studies have shown that people watch television for an average of 4 hours a day, which accumulates about 28 hours a week, very similar to a part-time job. If you're really committed to your goals, this is a huge waste of time.

I don't mean to say that you should spend all your free time working, but if you spend half your time productively on that or another hobby, you could see great results.

We should all have more than one source of income (driving a Uber, babysitting, selling used items online, etc.), but that's doubly important for those of us who seek to be financially independent.

Here are some items with various options that allow you to work from home while earning money online:

And if you are completely determined to achieve your goals and can invest a little more time in earning extra money, you could also opt to start your own business.

4. INVEST AND GENERATE PASSIVE INCOME

If you've already started the process, there will come a time when you won't be able to make any more cuts in the budget and you'll have to generate other income; and later there will also come a day when you won't have any more free time to earn that extra money. Then you will have to find suitable ways to earn much more money, and that they do not require of your time.

This is called passive income, and one of the best methods to generate this type of income is to invest.

When you invest your money you multiply it and, contrary to what everyone thinks, you don't need a high sum to start, as there are many forms of investment (stock market, mutual funds, index funds, rental properties, etc.).

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