9 Steps to Financial Independence (How to Retire Early)

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9 Steps to Financial Independence (How to Retire Early)

Most Americans consider retirement age to be 65, or somewhere in that ballpark. Early retirement might be considered 55 – 60.

Yet, there are plenty of people in their 30’s and 40’s (and sometimes even younger) who are able to achieve financial independence.

Reaching financial independence doesn’t necessarily mean that these people are completely retired from all work (although that can be the case), but it does mean that they have freedom and flexibility to work on their own terms. That could be a job that they love, even if it doesn’t pay very well. It could be a part-time job rather than a full-time job. It could involve running their own business and having a flexible schedule.

Of course, financial independence or financial freedom sounds good to all of us. Who wouldn’t want it?

Most people would believe that reaching financial independence at a young age is impossible unless you have an extremely high income.

But the truth is, reaching financial freedom is possible even on an average income, and in some cases even below average.

In this article, we’ll take a look at the specific steps you can take to work towards financial independence and how to retire early, but first let’s take an introductory look at the topic.

Introduction to Financial Independence

You may have read an article or listened to podcasts that mentioned Financial Independence (FI) or FIRE (Financial Independence, Retire Early). There is a growing community online, and that means even more articles from fire blogs, more resources, and more information available.

The label of financial independence typically applies to anyone whose net worth equals or exceeds 25 times their annual expenses.

Of course, that’s just a definition on paper. In reality, the whole point of financial independence is to have and feel freedom. Financial independence can be different from one person to the next.

This definition is based on details from the Trinity Study that indicates 4% is a safe withdrawal rate. This study and the topic of the safe withdrawal rate is too much to get into here, but basically, if you have $1,000,000 you could (in theory) withdraw 4% of that amount per year, or $40,000, and have a 95% chance that your money will not be depleted to $0 during your retirement (based on a 30 year period).

The goal of this article is to help you reach financial independence, whatever it means to you, as fast as possible. One of the key terms that is mentioned several times throughout this article is savings rate. Your savings rate is simply the percentage of money that you are saving from your disposable income. According to Investopedia, the savings rate in the U.S. in 2018 is only 3.1%. With stats like that, it’s no wonder many people will never be able to retire.

→ Related reading: How to Calculate Your Net Worth

Our Fictional Example

Throughout this article, I’ll use sample numbers to explain and demonstrate. To make it easier to follow I’d like to work with one consistent example. Here are the details of this fictional example that I will be using:

  • Family of 3
  • Brian (husband) is 30 years old, Heather (wife) is 30 years old, and they have a one-year old daughter
  • Brian works as a teacher and has an after-tax income of $45,000
  • Heather is currently a stay-at-home mom with no income
  • Their current net worth is $75,000

Brian and Heather are interested in retiring early, but they never thought it was possible. They’ve recently started to look into it and they realize that it is possible with the right approach.

And let’s use this stock photo to represent the fictional family.

Mom and dad with daughter

Key Steps to Reaching Financial Freedom

Now, let’s move on to the details of how you can achieve financial freedom at a young age, even if you don’t have a high income.

Step 1. Understand Your Motivation

The first step towards financial independence is knowing your motivation, or your “why”. Why do you want financial freedom?

It could be that you want to be able to retire young enough to be able to travel and enjoy your retirement. Or maybe your motivation is to spend more time with your family. Or maybe you just really hate your job and can’t imagine spending 40 or more years on your career.

The steps that we’ll be covering in this article are not that complicated. Even though anyone can grasp the concepts, the process of pursuing financial independence will come with some challenges. One of the biggest challenges is simply sticking with it and staying dedicated to saving for the future rather than living in the moment.

When you face challenges, frustrations, and even setbacks, it’s helpful to think about your motivation and why you want to do this in the first place. Putting things into perspective can make all the difference.

So, if you haven’t already, take some time to think about your own motivation to pursue financial freedom and why it’s important to you (and worth the short-term sacrifice). If it’s something you really want to do, commit yourself to making it happen.

Step 2. Track Your Spending

If you don’t already track your spending you might be surprised at how your money is actually being spent. You can’t get the most out of your money without a solid understanding of how you’re currently using it.

You can either start tracking your expenses going forward, or go back and try to see where your money went the past few months. Looking back is a lot easier if you typically pay with credit cards or checks. Cash can be harder to track. You can go through your credit card statements and checkbook, record your expenses, and put the expenses into categories for each month.

If you’re not sure how to track your expenses, you can use a simple spreadsheet (we have a free spending log that can help), Mint, or one of several other budgeting apps.

Categorize your expenses so you know how much you are spending on things like housing, groceries, eating at restaurants, gas, etc.

Step 3. Start Tracking Your Net Worth

Your net worth is one of the most important ways you can know where you stand financially. If you’re not sure of your current net worth, this is an important step.

You should also track your net worth over time so you can gauge the progress that you’re making on your journey towards financial independence.

Calculating your net worth is pretty simple. Essentially, you’ll add up your assets and then subtract your liabilities. The difference is your net worth. To keep things simple, only count assets like equity in your home, investment accounts, savings accounts and other cash, and possibly some other valuable assets if you have them. You don’t need to try to calculate the value of all the “stuff” that you own. If you happen to have something really valuable outside of cash, investments, and real estate (for example, a very valuable car that you own outright), you can add that as well.

Empower is a great free app that makes it very easy to calculate and track your net worth. You can link it to your back accounts, investments, and credit cards and it will provide you with a ton of useful information and data, including your net worth. I started using Empower a few years ago and I love being able to get a high level view of my finances, including my net worth.

Knowing your current net worth is important, but you’ll also want to track it over time. You don’t need to spend a lot of time on it, especially if you’re using Empower. Your net worth will serve as a measuring stick to show how close you are getting to financial independence.

Step 4. Set Financial Goals

At this point, you should know how much money you are spending each month and your current net worth. As I mentioned in the introduction, the standard definition of financial independence is 25 times your annual spending. So take your yearly expenses, multiply that number by 25 and you’ll know the amount of money that you need to reach financial independence according to the typical definition.

Let’s turn to our fictional example of Brian and Heather. If their annual spending is $38,000 per year ($3,167 per month) their FI number would be $950,000 ($38,000 x 25). With $950,000 they will reach financial independence.

At this time you need to set your own goals, and the goals don’t need to be dictated by anyone’s definition of financial independence. Personally, I set my my target much higher than 25 times annual expenses, because I anticipate my family’s expenses to increase significantly with 2 young kids and because I like to play things safe.

Choose your target net worth and a date that you want to achieve it. Knowing your own number for financial independence will help to motivate you and keep you moving in the right direction.

For the case of this example, we’ll say that Brian and Heather have set the goal of reaching financial independence within 15 years, which would put them at 45 years old. They’ll be going by the standard definition of 25 times their annual expenses. That means their goal, based on their current expenses is $950,000.

Step 5. Create a Monthly Budget

After you have tracked and categorized the expenses you currently have, the next step is to set up a budget. When you’re tracking expenses you’re simply looking at the ways that you are actually spending money. The budget, on the other hand, will be a guide that shows an optimal way to actually spend your money.

In order for a budget to be effective it needs to be realistic, which is why we start by tracking our expenses. If you create a budget before tracking your actual expenses you may find that your budget is not realistic and there’s no way you can stick to it. That type of budget doesn’t do you any good.

Also, tracking expenses is usually eye opening. You may be shocked to see how much you are spending in certain categories, and it can serve as good motivation to change your habits.

An effective budget will help you to eliminate excess spending, but still allow you some freedom. Don’t make the budget so restrictive that life becomes miserable.

I won’t go into all of the details in this article, but you can enter your email address below to get a budget spreadsheet template that you can download and use to create your own budget.

You can also use Mint or other budgeting apps if you’d like.

An important part of your budget is the amount that you will be saving or investing. Too many people spend money on bills and everything else first, and then only save whatever is left over. The problem is, with this approach there is not usually much left over to save. In order to reach financial independence you need to prioritize savings and investing.

Your savings rate is the percentage of disposable income that you are saving each month. Typical financial advice is to save anywhere from 10% – 20% of your income. If your goal is to reach financial independence and to retire early, your savings rate should be much higher, like in the 40% – 50% range.

When you first set up your budget your savings rate is highly unlikely to be in the 40% – 50% range. Don’t worry. In the next few steps we’ll look at some realistic ways to increase that savings rate and accelerate your progress.

Step 6. Reduce Your Expenses

Since your savings rate is one of the most important factors to determine how quickly you can reach financial independence, we’ll need to make it possible to increase that savings rate. The first way is to reduce your expenses.

Reducing expenses is important for a few reasons.

  1. If you spend less money you’ll be able to save and invest more (increasing your savings rate).
  2. Reducing expenses can reduce your FI number if you are able to sustain those reduced expenses.

To illustrate those two points, let’s go back to the fictional example of Brian and Heather. Brian’s after-tax income is $45,000 and they are spending $38,000 per year. That means they are saving $7,000 per year, which gives them a savings rate of a little over 15%. If they were able to reduce their expenses to $34,000 per year (a reduction of $4,000) their savings rate would jump all the way up to 24%.

That’s powerful and will speed up their progress significantly, but that’s not the full impact. By cutting expenses they also reduce their FI number, assuming they can sustain those lower expenses. That difference of $4,000 per year in spending knocks $100,000 off their FI number, and drops it down to $850,000 ($34,000 x 25).

Ok, so we know that cutting expenses is important and it can have a huge impact on your quest to financial freedom. But most of us are already living on a tight budget, so how can we make it happen? Here are a few keys:

Lower Your Housing Costs

Housing is one of the biggest expenses in most budgets. If you own a home you probably have a mortgage, property taxes, homeowner’s insurance, utilities, upkeep and maintenance, and maybe a homeowner’s association (HOA) fee. If you don’t own a home you probably pay rent, utilities, and maybe renter’s insurance.

One of the keys to minimizing expenses is to keep your housing costs as low as possible. This might mean passing on your dream home to live in a much more affordable home or apartment. It might mean choosing a neighboring town that has lower property taxes.

One of the best ways to lower your housing costs is to rent out part of your home and use that money towards the mortgage payments. You could rent out a single room, or buy a duplex or multi-unit building to get more rental income. House hacking is one of the most popular and effective ways to cut costs and speed up the amount of time needed to reach financial independence.

Eliminate or Reduce Your Recurring Bills and Subscriptions

Recurring payments have a huge impact on your finances. If you get rid of a few subscriptions that you don’t need you can save that much more each month and the impact can be pretty big. Here are a few ideas.

Gym Membership – If you pay for a gym membership, be sure that you use it. Too many people pay each month with the intention of using it in the future, and then they rarely do. Even if you do use the gym you may be able to cut this expense and simply exercise at home.

Insurance – Shop around to make sure you are getting the best rates on all of your insurance policies. Insurance is a very competitive market and you can often find better rates without too much effort.

Cable – Cable TV is a huge expense for many people/families. We cancelled our cable subscription a few years ago and we’ve never missed it. Instead of paying $75 per month for cable plus $11 per month for Netflix we only pay the $11 for Netflix. In the fall I pay another $25 per month for Sling so I can watch football on ESPN. There are all kinds of great cable alternatives like Sling, Netflix, Hulu, and Amazon Prime.

Cell Phone – How much do you pay for your mobile phone each month? My wife and I cut our bill in half a few years ago by switching carriers. Now we’re with Cricket Wireless. Our coverage is just as good, if not better, and we save money every month. Other carriers like FreedomPop and Republic Wireless are good options too. (If you sign up for Cricket through my referral link you’ll get a $25 account credit).

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Maximize Cash Back and Rewards

One of my favorite ways to reduce expenses is to take advantage of cash back and rewards offers. This includes cash back credit cards, travel rewards credit cards, cash back apps like Rakuten, and loyalty programs.

I pay for just about everything on credit card, and I can get 2% cash back on any purchase. That may not sound like a lot, but over the course of a year it really adds up.

I also use other cards like the Chase Freedom card that earns 5% cash back on purchases in categories that rotate each month.

For a more detailed look at the topic read my articles 11 Ways to Maximize Your Credit Card Rewards and How to Stack Rewards and Cash Back.

Of course, you should pay your credit card balance in full each month and avoid debt, interest, and late fees. If you think having a credit card will lead to you getting in debt, don’t get the credit card.

Avoid Expensive Cars

Another big expense in many budgets is a car loan or lease. A common theme among people in the FIRE community is driving older cars and avoiding car payments as much as possible. If you have a car it should be something reliable that won’t cost you a lot of money on upkeep and repairs, but you also want to avoid spending more than necessary. The purpose of a car is to get you from point A to point B. If you look at a car as a status symbol you’re almost certainly going to be spending more on your car than you should. The ideal situation is to drive your car for as long as possible before replacing it.

For many more ideas on how to reduce expenses see my post 101 Practical and Realistic Ways to Save Money. 

Step 7. Save and Invest

Of course, in order to build your net worth and reach financial independence, you will need to invest the money that you’re saving each month. Earlier I mentioned that ideally you should have a savings rate of 40% – 50% in order to reach financial independence quickly. If you’ve done a great job of minimizing expenses and you’re now achieving that savings rate, you may be wondering what you should do with that money.

Emergency Fund

For starters, your first priority should be to establish an emergency fund. This will be money set aside that should not be used unless you have a true emergency, like a loss of a job, serious illness, or something else that significantly impacts your life. How much you want or need in your emergency fund will depend on you and your situation. As a bare minimum, you should have $1,000 – $2,000 set aside for an emergency.

In my case, I support a family of 4 on one income, and that income is up and down. My wife and I choose to keep enough in emergency savings to cover at least 6 months of living expenses for our family. Three months is a pretty typical number.

The money in your emergency fund should be easy to access quickly, but it’s nice if you can earn some interest on it. A high-yield savings account or money market account is ideal. We keep our emergency fund in a savings account with CIT Bank because they offer interest rates that are always among the best in the industry and the account is very easy to manage online.

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Pay Off Debt

Another priority is to pay off debt, especially high-interest debt. If you have credit card debt or student loans you should work to get that paid off as soon as possible. Aside from your emergency fund, you should prioritize paying off this debt over investing.

Whether or not you want to work to pay off your mortgage early is a personal choice. Mortgage interest rates are generally low, and if you itemize your tax deductions your mortgage interest can reduce your taxes a little. However, not having a mortgage can definitely help to speed up the process to financial freedom.


Investing is a huge topic that can’t be covered in much detail in this article, but your investment strategy doesn’t need to be complicated. In fact, many people in the FIRE community have a very simple investing strategy. Low-fee index funds are a staple of these portfolios for a few reasons. First, investment fees can have a huge impact on long-term gains, so keeping fees as low as possible is ideal. Second, index funds are easy to invest in and the performance is tough to beat over the long run. I personally use Vanguard, but there are other good options like Fidelity and Charles Schwab.

If you value simplicity, Physician on Fire has an excellent article on a three-fund portfolio or this list of the best Vanguard index funds.

401(k) – Most employees in the U.S. have access to a 401(k) plan through their employer. And most employers will match employee contributions to a certain point. The 401(k) is a great savings tool because:

  1. It’s automatic. Your contributions will be taken out before you get your paycheck, so it requires less discipline on your part.
  2. Your contributions will reduce your taxable income.
  3. The matching contribution from your employer is free money.

I suggest maximizing your 401(k) contributions if possible, but at least be sure that you are putting enough in your 401(k) to take advantage of the full match offered by your employer.

IRAs – Individual Retirement Accounts (IRAs) are another great way to save or invest for retirement. Just like the 401(k), contributions to a Traditional IRA will reduce your taxable income. Contributions to a Roth IRA will not reduce your taxable income now, but earnings and withdrawals will be tax-free.

For 2018 the IRA contribution limit is $5,500, or $6,500 if you’re 50 or over. There are income limitations though.

Passive Income

Sources of passive income can be a huge factor in reaching financial independence. Passive income is any sort of income that only requires minimal work and effort on your part. For many people, passive income is what makes early retirement possible. This could include things like dividend stocks, real estate investing, peer-to-peer lending, and others. For a detailed look at the topic please see 33 of the Best Passive Income Ideas.

Step 8: Increase Your Income

Remember, your savings rate is a key factor in determining how quickly you are able to reach financial independence. The two basic ways to increase your savings rate are 1) reduce your expenses, and 2) increase your income. In step #6 we looked at a lot of ways to reduce expenses, so now let’s turn our focus to increasing income.

Career Advancement

The most obvious way to increase your income is to get a raise or a promotion at your current job. If you feel that you are underpaid and you think you can make a justifiable case to get paid more, don’t be afraid to ask your employer for a raise. A raise will obviously allow you to save money, but it can also have a compounding effect in the future.

If getting a raise in your current role isn’t a good option, you may be able to increase your income by getting a promotion or moving to a different department within your company. Of course, in order to get a promotion, you’ll need to be seen by your employer as being worthy of the promotion. Some people choose to work towards some type of certification or develop new skills in order to increase their earning potential.

Sometimes it’s easier to increase your salary by taking a job with another company.

Side Hustle

A side hustle is anything that helps you to earn money aside from your job. You’ll find many, if not most, people in the FIRE community have some sort of side hustle. The extra income can be invested, and even a relatively small amount each month can have a drastic impact over a period of time.

What should you choose as a side hustle? Well, the possibilities are almost endless. Things like flipping furniture, working as a transcriptionist, and selling on Amazon are just a few of the possibilities.

Not only can extra income from a side hustle allow you to save and invest more, but if you’re willing and able to continue the side hustle after leaving your full-time job it can actually reduce the amount of money that you need in order to reach financial independence.

Let’s take a look at the power of a side hustle by using our fictional example of Brian and Heather. Let’s say Heather, while being a stay-at-home mom, starts a side hustle as a virtual assistant and makes $1,500 per month after taxes.

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The last time we looked at Brian and Heather they had a disposable income of $45,000 from Brian’s teaching job and they had cut their expenses down to $34,000, giving them a savings rate of 24%. With annual expenses of $34,000 their FI number was at $850,00.

After the side hustle their disposable income is now $63,000. If they save all of the $1,500 per month ($18,000 per year) that Heather is making with her side hustle they will be saving $29,000 per year. That gives them a savings rate of 46%!

They’ve now hit the ideal 40% – 50% range simply by cutting $4,000 per year in expenses and adding a side hustle.

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Step 9: Avoid Lifestyle Creep

Ok, so now that you’ve cut expenses and increased your income your savings rate should be well within the 40% – 50% range, which is right where you want to be. The problem now is that if you’re not careful lifestyle creep will set in and mess with your progress.

Lifestyle creep is when your standard of living improves along with your income. Although part of our goal is to make more money, the main purpose of that is to be able to increase our savings rate. If you increase your expenses at the same rate that you increase your income, you won’t actually be saving and investing any more than you were before.

The key is to keep your standard of living the same, or as close as possible, even after your income rises. If you can do that, you’re well on your way to financial independence.

Ok, now let’s wrap things up by looking at the end result with our fictional couple Brian and Heather. As a reminder, here are the details when they started their FI journey. 

  • Family of 3
  • Brian (husband) is 30 years old, Heather (wife) is 30 years old, and they have a one-year-old daughter
  • Brian works as a teacher and has an after-tax income of $45,000
  • Heather is currently a stay-at-home mom with no income
  • $38,000 in yearly expenses
  • $7,000 per year in savings (15% savings rate)
  • Their current net worth is $75,000

After cutting their expenses by $4,000 per year and adding Heather’s side hustle income of $1,500 (after tax) per month, here is their scenario:

  • Combined after tax income of $63,000
  • $34,000 in yearly expenses
  • $29,000 per year in savings (46% savings rate)

After running these numbers through the FI calculator with a starting net worth 0f $75,000, an expected growth rate of 6% per year (the growth in their investments), and a withdrawal rate of 4% (the amount they will withdraw from their accounts during early retirement), that puts Brian and Heather only 14 years and 7 months away from financial independence! Since they are 30 years old now, that means they can achieve the goal before turning 45.

But let’s say they want to be a little more cautious and only assume a withdrawal rate of 3%. That changes the length of time to 17 years and 10 months, which allows them to reach financial independence before turning 48.

As you can see through the steps outlined in this article and the fictional example, achieving financial freedom is possible. If you’re interested in financial independence but you haven’t yet taken any action, bookmark this page and start working through the steps. Sign up for a free Empower account to start tracking your net worth and I think you’ll be hooked.

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  • Fractional shares
  • Access alternative investments
  • High-yield treasuries accounts
  • Social community of investors
  • User-friendly interface
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  • Powerful screening and charting tools
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  • AI-powered price forecasts
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