Welcome one and all to Live On Half, a website dedicated to disseminating information that will help you become financially independent. I am sure some readers who stumble onto this blog are already financial independence (FI) junkies, and in a hurry to achieve FI. Others are maybe just curious about what is involved and where to start.
For the purpose of my writing I define FI as being able to live the lifestyle that you want to without the need to work. The desired lifestyle is an important component. If the only goal was not needing a job the rest of your life you could go out and commit a felony right now, and your life of financial independence would begin as soon as the police arrive to arrest you. If your desired lifestyle involves living in a 10,000 square foot house and an addiction to high fashion and high technology then your road to FI will be longer than most if you are earning a middle class income.
I think what drives most of us who are seeking FI is a desire to spend our time doing what we want to instead of ‘needing’ to spend it doing something we don’t want to. Most of you (us) spend a lot of our time working for an hourly wage. Regardless of whether or not you ‘love your job’, you probably would not show up tomorrow if you weren’t being paid.
I first heard idea of living on half of your income (and investing the rest) from consumer advocate Clark Howard (who has a really great radio show - podcasts available here). The idea was you can save 10% to 15% of your income to retire comfortably at the traditional age of 60 or so. But if you can save 50% of your income (and live on the other half) then you can retire ‘early’.
Do you want a shortcut? Save even more. This is certainly demonstrated by the Great Ones – FI gurus like Mr. Money Mustache and Jacob at Early Retirement Extreme. The most powerful principle they teach is that the power of saving is greater than the power of earning. It breaks down like this:
X is the amount of money you need to live on each year.
Y is the amount of money you need to have saved in order to be FI.
In order for Y to last forever you live only on the interest it earns. A conservative assumption is that you can withdraw 4% forever and it will never shrink. Thus Y equals 4% times X. If you can hack the typical middle class life and spending patterns to make X smaller, then Y can be smaller and you can save for it much faster.
A young person starting a professional career can achieve FI very quickly. Mr. Money Mustache retired around age 30, acquiring real estate and a few toys along the way. Jacob achieved a more modest result after working for only 5 years. It is truly inspiring to read their stories. But many of us are not at the same starting point as they were. Our life circumstances may include
- bad debt, including credit card balances and automobile loans
- better debt, including mortgages and student loans
- other costs such as ongoing medical bills and feeding and caring for dependents.
With the exception of ongoing medical bills I have had to deal with all of the above. I am currently 38 years old and still dealing with at least one from each category:
- automobile loan
- student loan and mortgage
- my wife and I have 4 kids – and 3 cats – and a dog
You may ask yourself, “How serious is this joker about FI if he has an automobile loan? Has he learned nothing? He probably buys all of his groceries at Whole Foods too.” It is a chosen luxury and I fully acknowledge that it makes my path to FI longer. This demonstrates my point above – true FI allows you to not work but also live the lifestyle you want.
The student loan is what it is – the follies of youth – my wife and I were not as frugal as we should have been when were in college.
The mortgage is bigger than it needs to be. But the (relatively) big house is another luxury we are willing to work for. Six people sharing 2800 square feet is very comfortable but not what I would consider to be over the top consumerism. We live in Idaho – real estate is cheap, natural gas is cheap, electricity is cheap, property taxes are low – it is a paradise for people who don’t like to spend money and enjoy playing outside.
We are learning to apply the principles we have learned to our situation, and achieve FI a helluva lot faster than most people. I suspect there others out there in a similar situation (large family, etc.) who are after the same goal and I look forward to being able to interact with and learn from them through this website.