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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.
• $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!
~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!
Net Salary (after tax): $40,000/year
Expenses: $2000/month or $24,000/year
Debt: $25,701 + $1190 = $26,891
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:
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);
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?
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:
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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