This is a guest post by Eric. He has a finance degree from the University of Colorado and an MBA from the University of Denver. He is a financial analyst at a large, public company. He blogs about personal finance at Narrow Bridge.
I am a pretty young guy. At 25, I am only a few years into my career. I have begun moving toward finding my dream job, and I earn enough to live comfortably as a single 25 year old. I am doing all of the “right things,” of course. I am putting about 12% of my gross income into a combination of a 401(k), Roth IRA, and investment accounts. However, I have begun to realize that saving 12% of my pay will not get me to my real goal, being able to retire at 40.
When I say retire at 40, I don’t mean quit working. I think of retirement as the freedom of being able to quit working. I hope by that age I have either a dream job that I love or a company of my own. Rather than simply quit, I want to be able to quit whenever I like without any worry of finding a job for the rest of my life. I want to work, but only if I feel like it. I want the mental freedom of retirement without the boredom that some people find when the leave their jobs.
I decided to do a little number crunching to find out what I need to “retire” the way I want. I picked the arbitrary number of $200,000 per year as a comfortable living point. At $200,000 per year, I can do any traveling I want and afford a home that I will be happy with. So the question is, how do I put away the $4,000,000 I need to live on the interest alone at $200,000 per year (I estimated about 5% interest per year to be conservative). How do I put away $266,667 per year for the next 15 years when I don’t even make $100,000 per year?
My story is not about conquering thousands of dollars in credit card debt (I’ve never had thousands in credit card debt). It is not about overcoming all odds. I have managed to pay all but $12,000 of a $90,000 MBA while in school, but I believe anyone can do that if they work hard. My story is the part that is not yet written.
Like many of you, I am often perplexed by the idea of saving enough to retire early. I don’t even know how I could afford a house as nice as the one I lived in growing up, let alone retire at 40. So now, I am trying to figure out how to make more money and save more money.
I have several ideas for what to do. Some of them are from great books and blogs. Some of them are my own.
To start, I need to get a promotion or a raise. I had a raise of more than 10% when I switched jobs in November. I have to keep going on that track to reach my goal. When I find my next job, I plan to find one at the next level up on the pay scale. Even in a bad economy, there is no reason a smart, hard worker cannot find a good job. I know many people who have done well during this recession, and it is entirely possible for each of us to find success regardless of economic conditions.
I have also found that simply living a frugal lifestyle will not be enough. While living a thrifty lifestyle is a goal, budgeting to get rich is like exercising to lose weight. It makes a difference, but it will not get you there alone.
As I build up my wealth by saving my extra income, rather than adjusting my lifestyle, I plan to find a way to start my own business. As the famous quote goes, “why should we work hard for someone else to take all of the profits?” In almost every success story I have read, the successful person got there by starting their own company and working at it until he or she became a success. While that is a highly simplified version, I am working out a plan to start my own small business and grow it into a large business. I am taking bit of many strategies, including the “muse” proposed by Tim Ferris, to make it big. Ultimately, I hope to be the employer with a lot of workers doing everything they can to make me profits.
Because it has not happened yet, this story is not written in permanent ink. It is just an outline for my plan to retire at 40, using my own definition. Everyone needs their own goals, and an action plan, to live a successful life. After all, what is the point of being an expert in personal finance if we don’t take the steps needed to turn our ideas into actions?