Achieving Financial Freedom One Expense At A Time

By Pinyo, on June 24, 2009

Most people think about financial freedom, or retirement, as a point in time when they can fully cover their living expenses with some sort of passive income. This usually involves saving a significant amount of money so that a small percentage could be safely withdrawn to cover living expenses each year. To many people, this seems impossible and out of reach. However, have you considered taking baby steps and retiring just one expense at a time?

Multiply-By-25 Rule

A few days ago, I was lucky enough to see ABC interview of Rob Bennett. Rob is the author of Passion Saving and has a blog called A Rich Life. During the interview he shares the Multiply-By-25 Rule. The premise of this rule is to save 25 times the annual amount of an expense. If your savings earn 4% real return, then the expense is paid for life — effectively, getting you one step closer to retirement.

For example, if you spends $100 on books a year, you can save $2,500 and the 4% return will give you $100 per year to spend on books for the rest of your life. Of course, there are caveats like earning 4% consistently, inflation, and taxes. This simply means that you have to save a little more or earn more from your savings.

The Psychological Power of Baby Steps

Anyway, I think the idea is really powerful. Similar to the Debt Snowball, it forces you to tackle one big goal in small steps. Instead of feeling helpless looking at the big number, you can work toward retiring one expense at a time until all of your expenses are paid for and you ultimately reach your financial freedom.

For example, look at your budget and start by retiring your smallest expense category first. Once it’s “paid for” move to the next smallest category. As you do this you’ll also intuitively realize that you can retire faster by reducing your expenses. Retiring faster by spending less — what a concept!

Anyway, I hope you love this idea as much as I do because I think it’s pretty awesome.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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8 Comments

Miranda
June 25, 2009, 8:07

I really like the multiply by 25 rule. It gives you a way of figuring out how to save for your expenses. Another angle is the fact that it shows you how much you are likely to spend on something over your lifetime. That way you can determine whether it really is worth the expense.
Nicki at Domestic Cents
June 25, 2009, 8:32

I think this is great. It seems like there are more and more people out there nearing retirement age without having the money saved to be able to retire. Plans like this can instill some hope I think. I have a grandmother in her late 70s who still works 30 hours a week because she has nothing in retirement.
DivorcedDadFrugalDad
June 28, 2009, 10:46

Interesting approach. I always talk to people (lately a friend who wants to start side businesses) in terms of creating monthly passive income to replace monthly expenses . . . a system and some discipline goes a long way.
Mikael @ Retire Early
June 29, 2009, 6:54

Taking small steps is the only way to go. Actually I don’t know of anyone that has moved ahead taking giant steps. Sure you can argue that for some people their steps might be smaller than other people’s steps and in comparison they might look giant but I am sure that the people taking the steps will still see them as small.

The cumulative effect of small steps is enormous. Great post and a good reminder!

Mikael
Matt Jabs
June 30, 2009, 1:06

I saw the video a few days ago and was impressed with a few of Robs techniques. I always appreciate the counsel of someone who has already achieved a goal that I am currently striving for!

My two favorite points he brought up were:

1. Calculating money spent as hours of your life spent earning that money. This is a great concept & one that should be brought to everyone’s attention. Since our culture has such a problem with impulse purchasing, this is an effective way to educate and provide concrete evidence for the true, long-term effects of our spending.

2. Importance of short term savings goals. This has been a key to success for my wife & I because we are able to see progress on a steady basis. I believe if you try to do too much too fast, without setting small attainable goals along the way… you risk burnout!
Pinyo
June 30, 2009, 9:12

@Matt – I agree. A lot of nice tips in that short video. I am planning to write more about them.
Steve
July 4, 2009, 23:11

This is a helpful way to look at spending patterns. Anything that breaks down the big picture into small, easy steps is worthwhile. I guess that for those of us who like Starbucks, we will have a lot to save for that Starbucks retirement account
Pinyo
July 6, 2009, 12:44

@Steve – Yes, smaller is better when it comes to making financial progress. I don’t know about Starbucks, I brew my own coffee and it’s paid for life.

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