How To Live Frugally and Achieve Financial Independence
This is a really cool topic: how to live frugally and achieve financial independence.
It’s actually very simple and not complicated at all.
I can explain everything you need to know in this one article, giving you all the steps.
Even though the ideas are easy, being financially independent often seems very hard for most people.
Why does it feel like you have to work for 40 years and only enjoy life when you're 65?
I don't think it has to be that way.
Now before we start, this is Ivan here from the Vanilla Investor, a former investment analyst and with over $100k invested in the markets.
My goal is to bring you simple finance at your fingertips.
So, I'll share some easy steps to become financially independent.
The first step is to save your money and spend less than you earn.
This is the most important step.
The second step is to reduce your expenses.
We will talk about different ways to do this, like with housing, cars, entertainment, food, travel, and clothing.
The third step is to avoid high-interest debt, and the last step is to invest your money!
So let’s start with the first step: saving money and spending less than you earn.
Step 1: Save Your Money
How long it takes to be financially independent depends on two things: how much you spend and how much you save.
Mr. Money Mustache, a blogger about money, calls this the "shockingly simple math behind early retirement."
You can figure out how long it will take to reach financial independence by looking at how much you earn and how much you spend.
For example, if you spend all your money, you'll never retire because you won't have any savings.
But if you save 25% of your money, you could retire in about 32 years and keep living the same way.
If you save 50%, you could retire in about 17 years, and if you save 70%, you could retire in about 8.5 years.
Before I learned about early retirement, I was always careful with money.
I learned to save and not buy things I didn't need.
I liked having money saved for emergencies instead of buying fancy things.
I saved every dollar I could, starting when I was young.
After saving for over three years, I bought my first stock at 21 years old.
Around that time, I found a group on Reddit called FIRE, which stands for Financially Independent Retire Early.
This group was full of people like me who loved saving money, investing, and living simply so they could retire early.
Finding this group made me feel understood and not alone.
People thought I was crazy for wanting to retire early.
When I was 23, someone asked about my plans, and I said I wanted to work as an investment analyst and retire by 35.
They laughed and said I should aim for 50 if I was lucky.
These were people spending all their money on big houses, new cars, and the latest iPhones.
Meanwhile, I saved almost everything, lived cheaply, and bought more stocks.
There's a saying, "The rich stay rich because they live like they're poor, and the poor stay poor because they live like they're rich."
This perfectly describes my approach and ties back to the second key to financial independence, which is cutting back expenses.
Step 2: Reduce Your Expenses
To be financially independent and retire early, you need to save more money and spend less than you make. I like living in a nice place, driving a nice car, and traveling anywhere I want, but these things don't have to be expensive. Here are some ways I've found to save money without giving up on these experiences.
Housing
The first and biggest expense for most of us is housing, and it's estimated that Americans spend about 25% of their incomes on it.
This is way too much! I think there's a better way called house hacking.
This is when you buy a multi-family home, like a duplex, triplex, or fourplex.
You live in one unit and rent out the others.
You can also do this with a single-family home that has a guest house or a basement you can rent out.
This way, you can make your housing costs almost nothing.
If you can't buy a property right now, you can try to lower your rent.
Ask for a longer lease in exchange for a lower monthly rent.
This helps both you and your landlord because they get a tenant for a longer time, and you save money.
It's a good idea to ask for this when your lease is almost up.
Landlords don't want to find new tenants, so they might agree to your request.
Some rental companies offer deals like 10% off the first month of a new lease, so check if your place will match that.
Timing matters too.
It's easier to negotiate in the winter because fewer people are looking for new places, so landlords are more willing to make deals.
If you can, offer to pay several months' rent upfront.
Landlords often need cash and might give you a discount for paying in advance.
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Car
Another big expense besides housing is our car.
Sometimes, having a nice car is important for your job, but it doesn't have to be expensive.
If you love cars and want to drive something cool or fancy, it doesn't need to cost a lot.
You can try car hacking, where you buy an exotic or any car when its value is low.
Drive it for a few years, and if you bought it right, you can sell it for almost the same price.
If you don't care much about cars, a five to eight-year-old Honda or Toyota keeps its value well and is cheap to drive for a long time.
Entertainment
Now, let's talk about entertainment.
When aiming for financial independence, you need to find a balance.
I think you should go out and have fun; you don't need to stay inside all day just to save money.
But it's important to spend on things that matter to you.
For example, when I was young, I saw my friends spending $100 on a Friday or Saturday night just for going out.
This included Ubers, drinks, food, and another Uber back.
It amazed me how they would spend so much at a bar when they could just buy a bottle for $18 at the store, drink before going out, and then just get water at the bar.
What I'm saying is that I've found ways to have the same fun as my friends but at 10% of the cost.
Food
When it comes to food, those $15 to $20 lunches every day at work can add up fast.
So, I decided to make my meals at home and bring them to work, which cut my lunch costs down to about $5.
And let’s be honest, I’m a guy in my 20s.
If my friends are going out to dinner, I don't say no.
I think it’s important to enjoy life.
Personally, I don't care much about food.
I get the same enjoyment from a fancy steak as I do from scrambled eggs at home.
So, when I go out with friends, I usually just get an appetizer instead of a full meal.
It lets me have the same fun without spending as much, and I save the rest.
Travel
Besides, travel can be really expensive, especially if you love to travel like me.
If I travel twice a year and each round trip costs $1,000, it adds up fast.
But it doesn't have to be that way.
You can use credit card churning.
This means signing up for credit cards to get reward points, and then using those points for free travel.
Suddenly, all your travel can be free.
Clothing
Clothing is another area where I save a lot.
Most of what I buy is from H&M or Zara, and I usually spend less than $100 on jackets and other stuff.
I've kept most of my clothes for years because I buy them on sale, like on Black Friday.
No one can tell if I'm wearing a $50 shirt or one that cost $5 from H&M.
Fashion changes a lot, so I don't spend $500 on something that might look old soon.
It's important not to buy new things just because you can.
I'd rather spend my money on things I really care about, like having the freedom to do whatever I want without money holding me back.
That's what I think true enjoyment is all about.
Step 3: Avoid High-Interest Debt
But now let's talk about the third step to reach financial independence, which is avoiding high-interest debt.
This kind of debt can really slow down your progress.
Some people don't realize how much credit card debt, medical bills with high interest, or student loans can tie up your money and hold you back for many years.
All my life, I've made sure not to take on any debt that isn't a low-interest mortgage with fixed rates.
Also, I always pay off my credit card bills in full and avoid borrowing money for things I can't afford right away.
Sometimes I use loans to make more money, like in real estate.
But if you're paying more than a 5 percent interest rate, it's usually better to pay off that debt quickly.
After cutting back and saving money, which is the main part of financial independence, it's also important to move on to the fourth step: investing.
Step 4: Invest Your Money
It's easy! First, use special accounts like a Roth IRA, 401k, or HSA to save on taxes.
Second, keep putting some of your paycheck into investments for a long time.
Start with at least 20 percent of your paycheck, but more is better if you can.
Third, don't try to pick the perfect time to invest—just keep doing it regularly.
Fourth, pick a mix of low-fee and well-diversified index funds that spread your money out, like with Vanguard or Fidelity.
Lastly, stay steady and let your investments grow.
For most people, that's all you need to do.
Now, here's how to know when you're financially independent: your portfolio should be worth 25 times your annual expenses.
If you spend $50,000 a year, you need to have $1.25 million invested.
For $80,000, you need $2 million.
For $200,000, you need $5 million.
This is from the Trinity study, which says you can take out 4% of your investment each year without running out of money.
It's simple: spend less, save more, and wait until your portfolio is 25 times what you spend each year to retire.
Getting to retire early and be financially free will be different for everyone.
You don’t have to do everything exactly like the examples you hear about.
Just find out what matters most to you, spend money on that, and cut back on things that don’t mean as much.
The main idea of this article, and the entire financial independence retire early (FIRE) community, is simple: save money by spending less, so you can invest it.
When your investments are worth 25 times what you spend each year, you can retire.
Thank you for reading, cheers!
- Ivan