I was broke and deeply in debt, but I plan to achieve financial independence in my early 40s

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Imagine you’re 21, ready to graduate without a first job, and you get a call that a friend has had an accident – and you realize that this, combined with student loans, has just bring you $40,000 in high-interest debt?

Here’s my story: I took out student loans with almost 7% interest rates all through undergrad, but then decided at 20 that I’d “help out” a friend by co-signing a line open credit (which does not need a motorbike?) at around 18% interest. Well, the call about the accident and finding out he would be disabled (lucky to be alive) was my wake up call, and that’s one of the main reasons why I became interested in personal finance and early retirement.

The initial jolt just before graduation made me realize I had to clean up my mess – and fast. I set out to move, land my first salaried job (with a starting salary that was less than my debt), and learn about personal finance. I consumed every available resource: blogs of people getting out of debt and cutting lifestyle spending, and books and radio shows focused on personal finance.

From all of this, I gathered a variety of viewpoints and found the ideas that resonated with me the most. Personal finance isn’t a one-size-fits-all situation, it’s really about gathering information that makes the most sense for you and your own goals. Fast forward to today, and I’m a CFP and vice president of products in the retirement industry, where my work focuses on expanding access to quality savings opportunities for Americans. I am personally focused on achieving financial independence by reducing living costs, eliminating debt, and achieving financial independence in my early 40s.

What is FIRE?

The FIRE movement covers two main concepts: financial independence (FI) and early retirement (RE). The movement’s most important concept is financial independence – whether or not you choose to truly retire becomes less important. Typically, people aim to save 50% to 70% (or more) of their income. This may sound extreme, but it doesn’t have to happen all at once.

If you are able to increase your income over time and can reduce your expenses or keep them stable, you can increase your savings rate without drastic measures. The concept of avoiding lifestyle inflation isn’t new, but the math can really work in your favor. Think of it this way: the fewer fixed expenses you have, the less you need to save to cover those expenses — and the more you can save out of your total income. Not only are the total savings needed lower, but you’ll get there faster. If you only save 10% of your income, that means you are living at 90% and need to save for a longer period to cover these expenses (nine years to collect one year of expenses, without taking into account compound interest and inflation). Alternatively, if you save 50% of your income, you live on 50% and save a year of expenses each year. By increasing savings rates, you are actively taking advantage both levers.

Lily: Think it’s hard to save half of your income? Saving 10% is even worse

Levels of financial independence

One approach when planning to achieve FI is to break it down into milestones or levels. Below are my personal definitions to help me think about FI with a more achievable baseline and more ambitious levels from there. For reference, I use the controversial 4% withdrawal rule, which is questionable for long-term success – but it makes the math easier in the early planning stages. I am aiming for 25 times the annual budgeted amounts for the levels below and I will check further before declaring myself an FI. I’m also comfortable with this as a reference because I don’t really intend to ever work again, but of course it’s different for everyone:

Level 1 (Baseline): just scraping (groceries—not eating out, housing and utilities, insurance—including non-employer-based medical insurance, clothing, and transit budget); no recreational expenses allowed, but if I never worked again I would be “OK”

· Level 2: Covering today’s actual monthly expenses, less exclusive of “pleasure” (hobby expenses, vacations, other luxuries/improvements) and gifts.

· Level 3: Full coverage of today’s actual monthly expenses, including vacations, hobbies, and current donation levels.

Level 4: Level 3 plus major future purchases desired (eg car replacements, home improvements), lifestyle upgrades if desired, and give like crazy.

I have estimated a three year path from now to my Level 1 baseline. Over the next three years, my goal is to pay off my mortgage in full, save enough money to support 18 months of Level 1 spending and achieve retirement savings of 25 times budgeted Level 1 spending. I have no intention of retiring early at this level, but it will give me comfort to know that income and savings after this level are purely additive lifestyle and gifts. I can choose to take time off (an adult gap year, as I like to call it), reduce my work hours and responsibilities, or maybe start a new hobby or career.

What I learned

I’ve tried many versions of strict budgeting, loosening the purse strings while living in New York, and everything in between. Here are some concepts that helped me find the path to financial independence.

· Holistic Lifestyle Considerations: As you might guess, FIRE goes well with minimalism and reduced consumerism. That’s not to say you’ll never buy something else or release another latte, but it’s being aware of how you really enjoy spending time on the happiness you expect from your purchases. . Plus, think about how social media can inspire comparison and adoption of a lifestyle that’s just window dressing.

· Celebrate key moments: Having a minimalist mindset is a helpful way to avoid spending traps like freebies. I’ve never been a fan of default gifts to celebrate holidays or events. People can feel as much (or more) joy from giving and receiving expressions of gratitude and love via cards or written notes, sharing experiences, and offering to cook together. Consider having discussions with family about not giving physical gifts during the holidays by offering a group activity as a different way to spend the time; and for those with extra funds who want to give, consider funding college savings plans or other accounts for the next generation of your family.

· Plan your retirement: Make the most of your company-sponsored retirement plans, saving directly from your salary is the best way to get out of your own way. Use HSAs for longer-term savings (i.e., pay for medical needs today out of pocket and consider HSAs for tax-advantaged growth). Maximize your 401(k), especially with employer correspondence. Finally, research whether pre-tax or Roth contributions are right for you. Did you know you can stagger your Roth conversions over your early FIRE years to help fund your pre-59½ expenses? Learn about these methods…but don’t let the research stop you from saving early and often.

· Stay flexible in your approach: I’ve tried several ways to budget, track expenses, and figure out what goals I’m pursuing. I find it’s best to pick one main goal to work toward to stay focused, and it’s helpful to pick up small wins along the way. Find tools and apps that help you on your journey and let go of those that distract you. Realize that what you think is important today might not match what is important five years from now, and be prepared to change.

While racking up so much debt was one of the hardest things that ever happened to me, it also ended up being one of the best, as it pushed me to continue my quest for financial independence. Although the FIRE movement is not for everyone, I believe there are aspects that everyone can take and implement in their daily lives. Achieving financial independence is a goal that can be achieved for most with some lifestyle changes and a commitment to making and sticking to a plan.

Amy Ouellette is Vice President at Vestwell, a 401(k) digital custodian.

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