Most people think about financial freedom as a point in time when you can fully cover your living expenses with non-job income. This usually involves saving and investing a significant amount of money so that a small percentage could be safely withdrawn to cover living expenses each year. To many people, this is just hard to image and the endpoint seems impossible to reach.
However, have you considered taking baby steps and retiring just one expense at a time?
The Multiply-By-25 Rule
The Multiply-By-25 Rule basically states that you need to save and invest 25 times the amount you need. For example, if you are planning to retire and live on $50,000 annually, your investment portfolio should be at least $1,250,00 (e.g., $50,000 x 25). This idea ties to another related rule, 4% Safe Withdrawal Rule, which states that you should be able to live on your retirement savings if you withdraw 4% of your initial retirement portfolio each year.
How to Eat an Elephant
How do you eat an elephant? Easy…just take one bite at a time.
Instead of trying to save $1.25 million so that you can retire. How about taking it one step at a time and retire just one expense?
For example, if you spend $800 a year on your homeowner’s insurance, how about making a goal to save $20,000 in “homeowner’s insurance fund” — effectively retiring one of your expenses.
Putting It to Practice
I think this is a powerful idea to help motivate you to save toward financial freedom AND to force you to take a critical look at each expense you’re incurring. With a proper budget, you can actually see how close you’re getting toward financial independence with each expense you “retire.”
Of course, there is one huge caveat; you’re most likely a long way away from retirement so that you will be investing with growth (and not current income) in mind. This means that your asset allocation will be leaning toward growing your portfolio size and not investing in income-producing investments.
This is perfectly fine…as long as you have that $20,000 saved and invested, you know that you have retired that one expense.
How to Retire Your Expense One at a Time
- Take a look at your budget
- Sort your expenses from the biggest ones to the smallest ones.
- Make a goal to retire your smallest expense first by saving and investing 25 times the expense amount.
- Once that expense is retired, move to the next smallest one.
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!
The Psychological Power of Baby Steps
Anyway, I think the idea is compelling. Similar to the Debt Snowball, it forces you to break down one big goal in small achievable steps. Instead of feeling helpless looking at a humongous number, you can work toward retiring one expense at a time by working with smaller numbers.
Try it! Make a list of all your essential expenses, and you can see how close you get to financial freedom as each is retired one by one.
I hope you love this idea as much as I do because I think it’s pretty awesome.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.