Today, the financial independence, retire early (FIRE) movement is gaining popularity very quickly. Although a lot of people are working towards the same goal of financial freedom or financial independence (FI), there are several different paths you can take to get there.
You don’t have to be a high-income earner in order to have a chance to reach FI.
In this article, we’ll look at 7 different paths that you can take on your journey to financial independence. This isn’t intended to be an all-inclusive list that covers every possible approach, but it does cover some of the most common and more realistic options.
Before we dive into the details, there are some important things that need to be mentioned.
First, terms like “financial independence” and “retirement” have different meanings to different people. For the purpose of this article, we’ll go with the definition of financial independence that is most commonly used in the FI community, which means that you have a net worth exceeding 25 times your annual living expenses. This definition is based on the Trinity Study, which found that you can safely withdraw 4% of your nest egg to cover your living expenses with a reasonable expectation (but not 100% certainty) that you won’t run out of money.
Second, this article includes some fictional examples along with calculations for demonstration purposes. The calculations were done with the Financial Independence Calculator from Financial Toolbelt. Although you can customize the calculator according to your needs, I left most of the default settings, including:
- Inflation rate of 1.9%
- Wage growth rate of 4%
- Drawdown rate (or withdrawal rate) of 4%
- Investment growth rate of 6%
Now, let’s move on and take a look at the different paths you can take to reach financial independence. (It’s also possible to combine these approaches, so you may fit into more than one category.)
1. Steady Saver
The steady saver is someone who consistently lives below his or her means and saves and invests on a regular basis. The goal here isn’t really early retirement. The steady saver is preparing for retirement at age 65, or somewhere around that age.
Being a steady saver doesn’t require you to be a high-income earner or to be a minimalist that cuts all expenses that aren’t absolutely necessary. It’s possible to have a moderate income and reach financial independence by choosing a lifestyle that allows you to save and invest every month.
Fictional Example of the Steady Saver
The typical financial advice is that you should aim to save around 15% of your income, so let’s take a look at an example that fits this advice.
Stanley Saver is 30 years old and currently has $50,000 saved for retirement. He makes $60,000 per year and he contributes 10% of his salary to a 401(k). He also saves 5% of his after-tax pay for other investments. Additionally, his employer will provide a 3% matching contribution to his 401(k).
At this rate, Stanley Saver is 34 years away from financial independence, which means he would reach FI at the age of 64.
While Stanley’s approach is nothing drastic, it does give him the possibility for a very comfortable retirement.
If Stanley wanted to reach financial independence earlier, he could increase his savings rate. Also, this example assumes a 4% wage growth rate. If Stanley is able to progress in his career and maintain the same savings rate, he’ll reach FI faster.
Overview of the Steady Saver Approach
- Doesn’t require a high income
- Doesn’t require extreme frugality
- Does require consistency and discipline
- Great approach for retiring at a traditional age
2. High-Paid Professional
While the steady saver path doesn’t require a high income, having extra income can certainly help to accelerate the progress. In the world of financial independence blogs, there are several that are run by doctors. A physician is one example, but others include attorneys, executives, and other high-paid professionals.
A higher income gives the potential to save more money, but of course, that’s not always the case. There are plenty of high-income individuals and families who are spending everything they’re making and even living above their means. A high income doesn’t eliminate the need to live within your means and save money.
Fictional Example of the High-Paid Professional
High-Paid Hannah is an attorney with a salary of $150,000 per year. She’s 30 years old and currently has $50,000 saved for retirement.
Hannah will be contributing 12% of her salary to a 401(k) and her employer provides a 3% match. She’ll also be saving 30% of her after-tax pay. This means she’ll be saving $52,596 per year with a take-home pay of $70,224 (24% tax bracket).
At this rate, she’ll be able to reach financial independence in 20 years, or at age 50.
Real-Life Example of the High-Paid Professional
A great real-life example of this approach is John from ESI Money. John retired at 52 years old (with a net worth of over $3 million) after working as an executive. John is still active and makes money from a few different websites that he owns and manages, but he chooses to work on passion projects more out of desire than need.
Overview of the High-Paid Professional Approach
- High income allows for the potential to save and accumulate wealth quickly
- Financial discipline is still required
- Early retirement is very realistic with an above-average savings rate
The high-paid professional approach sounds great because everyone would love a high income. Although it’s a legit option, it’s not for everyone.
Another option for earning an above average income is to start a business. Of course, not every business is successful, but if you’re able to have some success as an entrepreneur, you may be able to reach an income level that most people won’t reach in a more traditional career.
While the high-paid professional approach and the entrepreneurial approach both provide the possibility of high income, the details of the approaches are much different.
Of course, there are a wide variety of types of businesses, and entrepreneurs can come in many different forms. Regardless, a successful business that generates a high income for the entrepreneur provides the opportunity to save and invest. Sometimes that involves traditional investments, and other times the entrepreneur may invest in his or her own business, or by acquiring other businesses.
One of the keys to the entrepreneurial approach to financial independence is that a business is an asset that can be sold. Not only can an entrepreneur earn a high income while running a successful business, but that business can be sold when the entrepreneur is ready to move on. This type or payday is capable of getting an entrepreneur to financial independence very quickly.
Although we looked at fictional examples with the financial independence calculator for the first two paths, the entrepreneurial path doesn’t work very well with that type of calculation. The income for an entrepreneur or business owner isn’t steady, which means that savings rates also will not be steady or predictable. Throw in a lump sum from selling a business and you can see why it’s difficult to calculate using a generic approach.
Real-Life Examples of the Entrepreneurial Approach
The entrepreneurial approach is the path that I’ve chosen to pursue. I’ve been running my own online business since 2008 and it’s had a huge impact on my finances and my outlook for the future. I’m currently 40 years old with a goal of retiring at age 55, and we’re (my wife and I) on track to meet that goal. A big part of my net worth has come from websites and online businesses that I’ve sold, which is a huge perk of my line of work. Currently, Vital Dollar is my main project.
A real-world example of an entrepreneur who has already reach financial independence is Michael from Financially Alert. Michael co-founded an IT support company, sold it after 10 years, and took early retirement at 36 years old. Michael has a net worth of over $2,000,000 and is an active investor and blogger.
Overview of the Entrepreneurial Approach:
- Possibility for high income with a successful business
- Possibility to sell a successful business for a lump sum
- Involves an inconsistent income and is not for everyone
- Early retirement is realistic for those who have a successful business
4. Real Estate Investor
One of the common paths to financial independence is to invest in real estate. While there are a number of different ways to invest in real estate, owning rental properties is one of the most popular options.
Rental properties can provide a steady cash flow month-after-month. Additionally, the tenants are covering the costs of the mortgage and as the owner, you’re benefiting from appreciation over a period of time.
There’s no doubt that owning rental properties and investing in real estate is a proven path towards financial independence. The rental income that your properties generate can be an excellent source of income after you’ve retired.
Investing in real estate is something that can be done as a side hustle while still working a full-time job. You can slowly build up your portfolio of properties until you reach the point where the income will cover your living expenses.
Although investing in real estate is a great option, there are some things you should consider before jumping into it. Most significantly, being a landlord is a commitment that you may or may not be ready for. If you’re not willing to take calls from tenants about leaky pipes or other types of problems, you should consider hiring a property manager (of course, this will cut into your profit).
Real-Life Example of the Real Estate Investor Approach
Overview of the Real Estate Investor Approach
- Proven path that is used by many millionaires
- Can be done part-time, on top of a full-time job
- Rental properties produce cash flow that can be used to cover your living expenses
- Hire a property manager to handle the details if you want passive income
5. Extreme Frugality
While the steady saver approach is ideal for achieving a comfortable retirement on a moderate income, it’s unlikely to lead to an early retirement without a significant pay increase.
If you have a moderate income and you want to reach financial independence faster, another option is to take the path of extreme frugality.
Extreme frugality involves eliminating or reducing as many expenses as possible in order to reach a very high savings rate. While it’s not easy, it is possible, and many people have done it.
Minimizing expenses leads to two significant benefits that are both equally important:
- You can save a very high percentage of your current income
- It reduces the amount of money that you need for living expenses
Achieving a very high savings rate will allow you to build up an investment portfolio quickly, and if you’re able to maintain the same lifestyle, you won’t need a lot of money to cover your living expenses.
With the extreme frugality approach, you don’t need a high income to reach financial independence and retire early. Of course, the higher your income the more you’ll be able to save, but even an average income will do.
Extreme frugality involves minimizing some of the biggest items in the budget like housing, transportation, food, and entertainment.
Housing is the biggest expense in many family budgets. The options with this approach would include things like buying/renting a tiny house, renting out rooms or part of the house through Airbnb, or buying a multi-unit house and renting out the other unit(s).
In terms of transportation, you could opt for a bike instead of a car. If you do own a car, it should be as inexpensive as possible.
Fictional Example of the Extreme Frugality Approach
The Frugal Franklins are a family that has chosen a minimalist lifestyle in order to reach financial independence. Sticking with the starting points of the other fictional examples, Mr. and Mrs. Franklin are both 30 years old and they currently have $50,000 saved for retirement.
Mr. and Mrs. Franklin both currently work, and they have a combined annual income of $75,000. They save 10% of their salary in 401(k) plans, but they get no match from their employers. They also save 40% of their after-tax pay.
This means that they’ll save $28,560 per year and they’ll have $31,590 to live on. At this pace, they’ll reach financial independence in 18 years at the age of 48. So even without a high income, they’re able to reach their goal of early retirement.
The key here is that their frugal lifestyle means that their living expenses in retirement will be low. Of course, that means they’ll need to be able to continue with this lifestyle in order for the numbers to work.
Real-Life Example of Extreme Frugality
Liz and Nate from Frugalwoods used extreme frugality to reach financial independence in their 30’s. Liz is also the author of Meet the Frugalwoods: Achieving Financial Independence Through Simple Living.
Overview of the Extreme Frugality Approach
- Drastically reducing expenses leads to a very high savings rate
- A high savings rate allows you to grow your investments and net worth quickly
- Low living expenses mean that you’ll need less money in retirement (if you are able to keep your living expenses at the same level)
- It’s not easy, but it makes early retirement possible even on an average income
It’s clear that making money gives you the opportunity to save more and build up your net worth faster. But making more money at your job isn’t always an option. Regardless of what you do for your full-time job, one option is to start a side hustle.
A side hustle can be anything that allows you to make money outside of a job, and there are plenty of possibilities. The money that you make from a side hustle can increase your income, increase your savings rate (assuming you’re saving that money), and allow you to reach financial independence faster.
A side hustle can turn an average income into an above-average income.
Fictional Example of the Hustler Approach
Henry Hustler has an average job, but he has dreams of being able to retire early. His situation is the same as our friend Stanley Saver that we looked at in the first point of this article. Henry is 30 years old with $50,000 already saved for retirement, and he has an income of $60,000. He contributes 10% of his salary to his 401(k), and his employer gives a 3% match. He also saves 5% of his after-tax pay.
Like Stanley Saver, this would put Henry at 34 years away from retirement, which would be at age 64. Henry doesn’t want to work until he’s 64, so he decided to start a side hustle as a freelance writer.
Henry’s freelance writing side hustle increases his income by $1,200 per month. He maintains the same living expenses, but his numbers are different now. His total income is $74,400 and he contributes 10% of his salary (or 8% of his total income, including side hustle) to his 401(k) and gets the 3% match from his employer. He’s now able to save 24% of his after-tax income, thanks to his side hustle income.
With these numbers, Henry is on pace to reach financial independence in 24 years, at age 54 instead of age 64. Henry will need to continue to side hustle, but he can change from freelance writing to something else if he wants to. His side hustle has cut 10 years off his journey to financial independence!
Real-Life Example of the Hustler Approach
Kevin from Financial Panther is an avid hustler. He does everything from charging electric scooters to renting a room on Airbnb to delivering food. In 2018, Kevin made more than $26,000 from side hustles, on top of a full-time job! As Kevin explains in his article on the value of a side hustle, that ability to earn income outside of a job is worth hundreds of thousands of dollars in retirement.
Overview of the Hustler Approach
- A side hustle increases your income and allows you to save more and reach financial independence faster
- You can take an average income to an above-average income with a side hustle
- There are endless options
- A side hustle can also be used as a source of income after “retirement”
7. Geo Arbitrage
The area where you live will have a big impact on your living expenses, and that can be used to your advantage.
The idea behind the geographic arbitrate approach is to move to a lower cost of living area for retirement. The lower cost of living can allow you to retire earlier and/or have a higher standard of living at a lower cost.
Some people use this approach and move to another city/town or state, and some people even move to another country with a significantly lower cost of living.
For example, $1 million may not be enough to retire in San Francisco, but it can be enough to retire to Costa Rica, thanks to a much lower cost of living.
Fictional Example of the Geo Arbitrage Approach
Geo George lives in New York City. He’s 40 years old and has a net worth of $1,000,000. His annual living expenses in NYC equal $100,000, so going by the 4% rule, he would need $2,500,000 to reach financial independence.
He decides to move to Costa Rica where he can live on $30,000 per year. In Costa Rica, his net worth will be equal to 33 times his annual expenses, which puts him comfortably into financial independence according to the 4% rule.
Real-Life Example of the Geo Arbitrage Approach
Jim from Route to Retire retired from his job at the end of 2019. He and his family are moving to Panama, a country with a much lower cost of living than the US.
Overview of the Geo Arbitrage Approach
- Moving to a lower cost of living area can reduce the amount that you need for retirement
- You may be able to retire earlier by moving
- This can involve a move within the country or outside of the country
While this is not an exhaustive look at all of the different ways that you could possibly reach financial independence, hopefully it has given you some options to consider. If financial independence is your goal, make sure you have a path and a plan that gives you a chance to reach that goal.