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Hi there Revolutionaries! Tis Friday, which means time for another reader case!
We’ve been getting questions over e-mail about whether this whole financial independence thing is do-able for people without 6-figure salaries. There’s always skepticism, eye-rolling, and the insistence that you can’t become FI without a massive salary. Well, skeptics, today’s reader case is for you.
Our intrepid reader is only 24 years old, is paying off student, and doesn’t have a 6-figure salary. Let’s find out if FI is in her cards, shall we?
“Hi FIRECracker and Wanderer!
Hope both of you are doing well and enjoying your travels. I’m about to hit my 18th country (Indonesia) in a couple months, myself. Cheers to traveling and wandering!
A little about myself: I’m a 24 year old, single woman, born in Canada, raised in New England and now a recent transplant in Richmond, Virginia.
After 2 years of living and working in Vietnam as a manager of an international school, I came back to North America for a more viable career and aiming to become FI. Currently, I work as a Data Analyst, but hope to move into Organizational Change Consulting.
I’ve noticed many of your reader cases are people that, even with enormous debt, are rather established. But what about people starting at the very beginning of the starting line: in career, in wealth, in knowing what steps to take.
I feel like I have a grasp on the situation thanks to the fountain of knowledge you provide here, but I’m still lost as to next steps.
Here I am, in all my glory:
Gross Income: $40,000/year (post-taxes)
Monthly spending: $2,000
• Rent: $795
• Internet: $57
• Student Loans: $400
• Gym: $40
• Food: $200
• Phone: $40
• Fuel/Gas: $140
• Book Writing Group: $40 (I’m writing a novel!)
• Fun Money: $288 a.k.a $72/wk (includes educational workshops, eating out, going to museums, random things you need to buy, like bday cards)
Additional Monthly Spending
• Money to Savings Account: $1,200 ($300/wk)
Debt (I have 9 years left to pay this off)
• Student Loan #1: $25,701 @ 5% interest. Minimum payment required is $284. I pay $300
• Student Loan#2: $1,190 @5% interest. Minimum payment required is $40. I pay $100.
Assets
• $5,000 TD Savings Account
• 2003 Toyota Camry worth $3000 (Definitely need to car to get around)
As you can see, I’m starting at the very, very beginning of any financial future. My questions are: is it possible to save, pay off debt, and invest at the same time? How much of an emergency fund is necessary before I can ignore it and funnel money elsewhere? Can I even dream of how many years it’ll take to be FI or is that too far in the future? I know you’ll probably say pay down all the debt first, but that’ll take a couple years, in which I’ll be missing out on some crucial years in investing. The earlier, the better, right?
Thanks so much if you get a chance to read this!
Cheers,
~At The Starting Line”
Good news, ATSL! You’re only 24 years old. That means you have TONS of time to grow your portfolio, and get a few promotions along the way to super-charge your savings!
And not only that, because of your low expenses, you don’t need a 6-figure salary to get to early retirement.
Don’t believe me? Well, as we always say on this blog, let’s #MathShitUp!
Summary:
Net Salary (after tax): $40,000/year
Expenses: $2000/month or $24,000/year
Debt: $25,701 + $1190 = $26,891
Assets: $5000
First of all, to answer your question traditional advice would be to keep 6 months of living expenses as cash in case of a job loss. For you that would be $12k, or an additional $7k, and since your monthly savings is ($40000 – $24,000) / 12 = $1333.33, that should only take you 5 months or so, so not a big deal.
With expenses of $2000/month, you would need $24,000/year to live on which means a portfolio size of $600,000. That means, with your current expenses, at a current savings rate of 40%, you can retire in:
| Year | Balance | Savings | Portfolio Growth | Total |
|---|---|---|---|---|
| 2018 | $5,000 | $16,000 | $300 | $21,300 |
| 2019 | $21,300 | $16,000 | $1,278 | $38,578 |
| 2020 | $38,578 | $16,000 | $2,314 | $56,892 |
| 2021 | $56,892 | $16,000 | $3,413 | $76,306 |
| 2022 | $76,306 | $16,000 | $4,578 | $96,884 |
| 2023 | $96,884 | $16,000 | $5,813 | $118,697 |
| 2024 | $118,697 | $16,000 | $7,121 | $141,819 |
| 2025 | $141,819 | $16,000 | $8,509 | $166,328 |
| 2026 | $166,328 | $16,000 | $9,979 | $192,308 |
| 2027 | $192,308 | $16,000 | $11,538 | $219,846 |
| 2028 | $219,846 | $16,000 | $13,190 | $249,037 |
| 2029 | $249,037 | $16,000 | $14,942 | $279,980 |
| 2030 | $279,980 | $16,000 | $16,798 | $312,778 |
| 2031 | $312,778 | $16,000 | $18,766 | $347,545 |
| 2032 | $347,545 | $16,000 | $20,852 | $384,398 |
| 2033 | $384,398 | $16,000 | $23,063 | $423,462 |
| 2034 | $423,462 | $16,000 | $25,407 | $464,869 |
| 2035 | $464,869 | $16,000 | $27,892 | $508,762 |
| 2036 | $508,762 | $16,000 | $30,525 | $555,287 |
| 2037 | $555,287 | $16,000 | $33,317 | $604,605 |
20 years, at the age of 45! Not bad. But I think we can do better.
Okay, what if you were to aggressively pay down your debt for the next 2 years by redirecting the money you’re dumping into your savings account? After that point, your expenses would drop from $2000/month to $1600/month. This would drop your required retirement portfolio size from $600,000 to $480,000. Woohoo! This means your savings rate would also increase from 40% to 52%. So paying of your student debt has the double-win affect of turbo-charging your speed in the FI marathon AND moving the finish line closer.
What does this do to your TTR? (Time To Retirement);
| Year | Balance | Savings | Portfolio Growth | Total |
|---|---|---|---|---|
| 2018 | $5,000 | $20,800 | $300 | $26,100 |
| 2019 | $26,100 | $20,800 | $1,566 | $48,466 |
| 2020 | $48,466 | $20,800 | $2,907 | $72,173 |
| 2021 | $72,173 | $20,800 | $4,330 | $97,304 |
| 2022 | $97,304 | $20,800 | $5,838 | $123,942 |
| 2023 | $123,942 | $20,800 | $7,436 | $152,179 |
| 2024 | $152,179 | $20,800 | $9,130 | $182,109 |
| 2025 | $182,109 | $20,800 | $10,926 | $213,836 |
| 2026 | $213,836 | $20,800 | $12,830 | $247,466 |
| 2027 | $247,466 | $20,800 | $14,848 | $283,114 |
| 2028 | $283,114 | $20,800 | $16,986 | $320,901 |
| 2029 | $320,901 | $20,800 | $19,254 | $360,955 |
| 2030 | $360,955 | $20,800 | $21,657 | $403,413 |
| 2031 | $403,413 | $20,800 | $24,204 | $448,417 |
| 2032 | $448,417 | $20,800 | $26,905 | $496,122 |
15 years, bitches! Add the 2 years you spent paying off your debt, that’s 17 years. So you’d be able to retire at 41.
But, these calculations assume you never get a single promotion, or raise, other than salary adjustments for inflation.
Since you’re only 24 years old and starting out in your career, you will likely be able to increase your salary to $60,000/year after tax after a couple of promotions and raises. Or if you’re feeling ambitious, you could start some side hustles to earn $10,000 to $20,000/year. This is not insurmountable. Since you’re in a writing group and aspire to write a novel, you could start building up a portfolio of freelance writing projects, and start making money that way. This might take a few years, but once you get the ball rolling, $10,000- $20,000 side hustle income should be doable. Check out Financial Panther site for inspiration—he’s currently making $32,000/year in side income and he breaks it all down in his side hustle reports. He uses Airbnb to make income from his house, but if you’re renting, you can do the same thing. In fact, we just stayed with an Airbnb host recently who’s renting a 2-bedroom apartment and Airbnb hosting out the extra bedroom.
Another great resource for side hustles is Popup Business School, started by none other than our fabulous Chautauqua organizers, Alan and Katie. If you can attend a session (they’re FREE!), you’ll learn about how to start a side hustle with very little startup capital. .
If you manage to increase your salary to $60,000/year with a promotion or side hustles/freelance writing, you’ll be able to supercharge your savings rate to 68%!
What does that do to your TTR?
| Year | Balance | Savings | Portfolio Growth | Total |
|---|---|---|---|---|
| 2018 | $5,000 | $40,800 | $300 | $46,100 |
| 2019 | $46,100 | $40,800 | $2,766 | $89,666 |
| 2020 | $89,666 | $40,800 | $5,379 | $135,845 |
| 2021 | $135,845 | $40,800 | $8,150 | $184,796 |
| 2022 | $184,796 | $40,800 | $11,087 | $236,684 |
| 2023 | $236,684 | $40,800 | $14,201 | $291,685 |
| 2024 | $291,685 | $40,800 | $17,501 | $349,986 |
| 2025 | $349,986 | $40,800 | $20,999 | $411,785 |
| 2026 | $411,785 | $40,800 | $24,707 | $477,293 |
| 2027 | $477,293 | $40,800 | $28,637 | $546,730 |
10 years! Add the 2 years you’d have to pay off you’re debt, and that’s only 12 years!
So by paying off your debt, increasing your salary via promotions or side hustles by $20,000/year, you’d be able to retire at 36! That’s a whole 29 years before the normal retirement age of 65!
But wait. What if you don’t want to fully retire? What if you end up loving your side gig so much (especially if you’re writing), you continue doing it in retirement? Even with a fluctuating side-gig income in retirement, if you end up making only $10,000/year, that’s $10,000 * 25 = $250,000 LESS that you’d have to save. Which means, if you stopped working, earned a $10K/year side income from writing, you’d only need $230,000 to support your $1600/month expenses (after debt repayment).
Which brings your TTR down to:
| Year | Balance | Savings | Portfolio Growth | Total |
|---|---|---|---|---|
| 2018 | $5,000 | $40,800 | $300 | $46,100 |
| 2019 | $46,100 | $40,800 | $2,766 | $89,666 |
| 2020 | $89,666 | $40,800 | $5,379 | $135,845 |
| 2021 | $135,845 | $40,800 | $8,150 | $184,796 |
| 2022 | $184,796 | $40,800 | $11,087 | $236,684 |
5 years + 2 years to pay off debt = 7 years! If you manage to build up your writing career in 7 years (it took us around 5 so it’s doable), earn $10K/year after retirement, you could retire in 7 years!
Who says you have to have a 6-figure salary to retire? If you’re just staring out, making 40K/year after taxes, have low expenses, you could easily retire in 12 years at 36 (pretty close to our ages when we retired), just by doing the following:
- Pay off your student debt! At 5% interest, it doesn’t make sense to invest while carrying this debt. (Plus with your savings rate, you could murder that debt in less than 2 years!)
- Get a promotion or work on a couple of side hustles to increase your salary by $20,000/year (since you love writing, freelance writing is one route you can take, once you develop your writing portfolio)
So there you have it. Inspiration for those just starting out who aren’t making 6-figure salaries. Keep your expenses low, murder your debt, get a side hustle, and you could STILL retire in your 30s in just 12 years!
What do you guys think? Should ATSL pay off her debt? Care to share some strategies for side hustles?
PROTIP: If you’re a writer like ATSL, and want to know what happens behind the scenes after you get a Penguin book deal, we share writing tips and top secret book news in our VIP Book Mailing list.
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I love these posts. After two months of blogging, I got my first email asking for financial advice. I was like, forget me, go over to Millenial Revolutionand ask them to math shit up for you!
Sweet! Having someone ask you for financial advice is a major milestone! Congrats, DocG! 🙂
Nice case study FIRECracker! Too many people believe it takes a large salary to retire early, but this is blatantly false. A large salary just makes it easier to save.
My own numbers started out very similar — tons of debt and a sub-6 figure salary. In fact, I’d say for 90% of my “working” career I made less than 6 figures.
Now, I’m worth more than $3million. It’s totally doable!
That’s why you rock, Mr. Tako! You’re proof that just because someone started with a low or average salary, doesn’t mean it’ll go up over time. Also the magic of compounding. When you’re young, time is on your side!
Good choice, FIRECracker, to focus on this case study! It also ties in nicely with that two-part post from MMM years ago about how many jobs out there pay $50k.
Your post also implies something I think is very important: The need to make good choices. ATSL needs to decide how much she values full-stop early retirement vs. work-a-little-bit early retirement vs. lifestyle inflation vs. etc…
Perhaps one element missing from her expense list is explicitly saving up to repair and/or replace the ol’ Camry (she says a car is mandatory, and thus needs to be planned for). At some point it will give up the ghost. While she may choose to use her emerg fund at the time, she will then have to top it up again. I don’t think ATSL needs a large budget line item here, but something in the range of $100-150/mo would allow for a “new” $3-4k car and several repairs every few years. Even at that level of luxury she’s still financially miles and miles ahead of most car owners!
ATSL – You rock! Keep up the good work 🙂
Great point, Chris! With a car, you never know when you’re going to need some money set aside for maintenance. Added some cushion to her monthly car costs and having an emergency fund will help in this case.
I’ve got a similar situation but with a little twist, Public Service Loan Forgiveness. I have 2 student loans, a $30k private loan @ 4.37% and a group of Federal loans totaling $40k at 5%. No other debt and about $15 in savings. I make about 60k after taxes and have about 30K in expenses (Bay Area). I could aggressive pay down my private loan or fully fund my 457b ($18.5k) and 401k ($18.5k) in order to reduce my AGI and thus my decrease my federal loan payment which increases the amount of loan forgiveness I’ll receive in about 8.5 years.
Any thoughts? Could we do a full case study?
I would love to learn more about this as well! Similar situation
Sure. E-mail us your full details (including expense breakdown) and we’ll do a case study (follow the form here:https://www.millennial-revolution.com/can-analyze-personal-situation/)
out of curiosity, what public service job do you have where you can make 60k after taxes? i’m in the bay as well, work in a non-profit in the tech sector and am barely near 50k after taxes. and are yall hiring? 🙂
Thanks for doing these reader cases, I really enjoy them!
One thing I would like to comment on is your assumption that her expenses stay static for the next 10+ years. The odds that ATSL’s rent will remain at $795/month seems slim in my opinion. The reality is that many people just starting out in the work force are going to live with roommates to keep living costs affordable but likely don’t want to make this sacrifice in the future.
I’m 27 myself, pay $875/month rent in a high COL city and I live with 3 roommates. I’m frugal now because I want to save as much as possible as quickly as possible. Frankly, I don’t want to be living with roommates forever, so my housing costs will likely double at some point in the future. Yes – this is a personal choice but I think it’s an opinion that is shared by many young people.
Moral of my rant is that I think the time to retirement calculation has the potential to be somewhat unrealistic because the average person’s expenses will increase as a person moves beyond their 20’s (e.g. renting a nicer apartment or buying a home, having children, choosing to help your children pay for school, etc). Yes, I’ve ignored that income typically increases over time.
Life is all about choices. I suppose everyone considering FIRE with a modest salary needs to ask themselves if they’re okay with their current quality of life and if they can sustain the frugal lifestyle to reach early retirement.
Thoughts?
Inflation is usually ignored in these calculations because it should affect earnings and spending in very similar ways. Also the 4% “rule” is adjusted for inflation. The stock market returns an average of 7% in real terms when accounting for inflation. It is simpler and relatively safe to ignore inflation when doing rough calculations. When he/she gets closer to retirement date, then more accurate calculations are needed.
You took the words right out of my mouth, Brendan 🙂 Good eagle-eye on picking out why I didn’t add 2% inflation to her salary to counteract the 2% increase in her costs.
Awesome post and useful case study!
I’m almost in the same situation as ATSL, but my student loan interest is 2.9% so I’m not sure if I should repay it or keep investing… did you recommend to pay it off because 5% is a threshold and under that we’re better off investing?
I have the same net salary, but here in the UK it is considered a fairly high one and I’m not sure how much more I will be able to grow it. By the way, next time you’re in London I’d love to invite you for a beer!
Cheers,
Claire
Right now, it makes sense to pay down debt at 2.9%, as its like a guaranteed investment. With Markets and stocks at all time highs, this is what I am doing.
It most all cases, it makes sense to pay down debt at any rate, especially if that debt (think mortgage) will reset at a higher rate, and is compounded.
cheers
I’m paying down my 6% student loan but not my 4% one. I’m willing to accept a certain amount of risk with ‘assuming’ an 8%ish ROI on investments (conservative given the historical track record), knowing full well that my returns in a given year could be negative. I think 2.9% is pretty low and I’d invest, but how you feel about debt and your comfort level in holding it is probably even more important to your decision than debating the math.
Personally, I hate debt, but if the interest rate is 2.9%, it’s low enough that you could continue paying the min and invest in a diversified portfolio over the long term. Anything above 4% and I’d pay it off like my hair’s on fire. The threshold depends on how much risk you can stomach. Check with your loan provider to make sure it’s a fixed loan and doesn’t reset.
I’d love to have grab a beer with you the next time we’re in London!
thanks for answering! and yes for a London meet-up!
My spouse and I have never even made six figures a year combined and we are FI (in our mid 30s). It is doable with good spending habits and a bit of luck with good investments (we bought a house at the right time and were able to take advantage of the real estate boom), opportunities (we have a place we can rent for cheap but the trade off was higher living expenses from living in a secluded area and completely having to uproot our lives to get there), etc. Considering we didn’t even know anything about investing or FI until I found this blog a year and a half ago, I think it would still be possible without the luck we had if we would have known all this stuff 12 years ago. Good luck to you, ATSL! You can do it!
Good spending habits and a bit of luck definitely helps 🙂 Thanks for sharing your story, Liz!
I love this one as well!!! Ahhh, reader case Friday’s I love – thank you Friday 😉
Thinking back – we did a similar living low cost, paying off our student loans very early and fast so we started off on a very similar path, all to…. Buy a house… Whoops…
Don’t own a house anymore but thinking through the financial implications at the time – darn… But – no sense in beating oneself up over the financial past, and her future is looking great!
Biggest thing I’d suggest to focus on is avoiding lifestyle inflation – so finding inexpensive (or way better still – free) hobbies she enjoys now is also key.
Also – I totally love that in 7 years she’d be FI if she’s planning on only semi-retiring – sounds so crazy!!!
“no sense in beating oneself up over the financial past”
So true! The best piece of advice I ever got is “Doesn’t matter how we got here, what do we do now?”
Avoiding lifestyle inflation as she gets raises and promotions over time is the key. Easier said than done, but I know she can do it!
With expenses of $2000/month, you would need $24,000/year to live on which means a portfolio size of $600,000.
Ok, but in 10 years, that 2000 will need to increase to about 3000, and what if you get married, and he doesn’t want to live in a garden shed… $795.00 is a room in a house with a hot plate…. in Nova Scotia… ( I hear its very nice place to live)
Definitely pay off the debt first, that’s a guaranteed investment saving. Invest in career, try to link up with a company thats pays for your education, I have taken lots of courses, and certifications for free thru my company.
cheers
If her costs increase over time, chances are her salary will too. The calculations are made on the very conservative estimate that she NEVER gets a single promotion or raise in a decade–very unlikely. If she gets married and her spouse brings in money, that should make the numbers look even better 🙂 The good news is now that she knows how to do the calculations, she can redo them with the updated numbers as time goes on.
That makes sense to me, thanks.
Thanks for the shout out Kristy! The value of picking up a side hustle is really big when you’re early on in your career and probably have more time, few responsibilities other than taking care of yourself, and a lower salary. If you’re making 50k or 60k a year, then add yourself 10k of side income, you’ve just given yourself a 16% to 20% raise. And since that’s money you literally didn’t even expect, you can use all of it for whatever financial goals you have. Having trouble maxing out your 401k? Boom, add 10k a year of extra income and I bet you’ll be able to do it. And literally anyone can make 10k extra on the side in today’s world.
You’re welcome, FP! Thanks for sharing all your side hustle numbers to inspire other peeps! I like using your reports as an example because it’s concrete and the side gigs you do are very practical and anyone can do them.
Great case study, and great work ATSL. Paying off those loans early also gives you freedom to pursue a different career and takes a huge burden off your mind. Had a similar debt load, and slaying it quickly was one of my best decisions.
Keep plugging away – it gets better the longer you go, and you’re already in a good place.
Well said and kudos on paying off your debt!
Quick question Firecracker, maybe I overlooked it, but what is annual return for the market (that we are using for her case study)?
6%
Appreciate it!
Totally doable! I hate debt so would kill that first.
I used to make 4.75/hr (many moons ago) when I started, I have three kids and I reached FI. If you put your mind to it and follow the basic rules, it is all possible.
Love it, Caroline! You didn’t start with a 6-figure salary, you are the mom of 3, and you STILL reached FI. Thanks for the inspiration!
Rising duties and https://cvwritingservicesuk.com/uk-careersbooster-review of first-year students