Nearly everyone I know wants to become financially independent, to retire early. But most folks have no idea how to do so. The method I describe in this article is simple to understand, although it might be tough to implement. I call it the “Money Boss method”.
With the Money Boss method, you manage your personal accounts as if you were managing a business. Doing so allows you to maximize profit and pursue Financial Independence – or any other any other money goal you choose.
For more on this concept, check out the Get Rich Slowly course, which teaches you how to become the CFO of your own life.
Financial Independence occurs when you’ve saved enough to support your current spending habits for the rest of your life without the need to earn more money. You might choose to work for other reasons – such as passion or purpose – but you no longer need a job to fund your lifestyle.
To achieve Financial Independence – or achieve other money goals – heed the basic rule of personal finance: To build wealth, you must spend less than you earn. Forget the standard advice to save 10% or 20% of your income. To be a money boss, practice extreme saving. Your goal should be to save half of everything you earn. (And more is better.)
Sound impossible? It’s not. Most of the advice here at Get Rich Slowly 3.0 is built around helping you save half. To do so, you’ll need to conduct a three-pronged attack.
First, minimize spending. Because a handful of expenses consume most of your budget, pursue these first (and with greatest vigor).
- Choose a home in an area with a low cost of living. Reject the advice to “buy as much home as you can afford”. Buy as little as you need. Take out a small mortgage at a low interest rate. Repay it as quickly as possible. Don't be afraid to rent. Spend no more than 25% of your income on housing – less is better.
- Reduce your use of motor vehicles. Walk, bike, or take the bus. If you must have a car, buy a fuel-efficient used model and drive it until it’s dead.
- Be frugal with food. Eat out less, be a savvy shopper, and eliminate food waste.
With the Money Boss method, these won’t seem like sacrifices. They’ll be trade-offs made to pursue a more important purpose. Plus, with mindful spending you’ll still have the freedom to spend on the things that matter most to you.
Next, maximize your income. It's great to cut expenses and develop thrifty habits, but there's only so much fat you can trim from your budget. In theory, there's no limit to how much you can earn.
- Your job is your most important asset. Treat it as such. Negotiate your salary, learn new skills, connect with colleagues, and actively manage your career.
- Become better educated. Studies confirm that greater education tends to bring greater pay.
- Sell your stuff. It’ll improve both your mental and financial health.
- Start a side gig. Make money from your hobby. Take a second job.
Depending on your preferences and priorities, your path to Financial Independence might emphasize frugality. Popular blogs like Mr. Money Mustache and Early Retirement Extreme tend to promote the power of thrift. Other people prefer a road to wealth that emphasizes income. For them, sites like I Will Teach You to Be Rich can prove valuable.
Me? I think it's best to do both. You'll have the best results if you reduce spending and increase earnings. Your goal should be to create a wide gap between the two.
Aim to save half your income.
Finally, funnel your profit into smart investments. (“Profit” is the same as “savings” — we prefer to talk about profit with the Money Boss method.) Take advantage of employer- and government-sponsored retirement plans first. Then route profit to regular investment accounts. Don't get fancy. Invest in low-cost, diversified mutual funds. Ideally, choose a total-market index fund, such as Vanguard’s VTSMX. Ignore the news. Ignore market fluctuations. Ignore everybody. Keep investing during good times and bad.
If you can follow the three steps, you will become rich — and sooner than you think.
With your profit, you’ll create a wealth snowball. Track its growth. Conduct an annual review. How much did you spend during the previous year? What are your investments worth? Have you achieved Financial Independence yet? To determine whether you can retire, use the following assumptions:
- You'll spend as much in the future as you do now. (In reality, studies show that most people spend less, but go with this.)
- If you withdraw about 4% from your savings each year, your portfolio will continue to maintain its value against inflation. During market downturns, you might need to withdraw as little as 3%. During flush times, you might allow yourself 5%. But around 4% is generally safe.
Based on these assumptions, there's a quick way to check whether your goal is within reach. Multiply your current annual expenses by 25. If the result is less than your savings, you've achieved Financial Independence. If the product is greater than your savings, you still have work to do. (If you're conservative and/or have low risk tolerance, multiply your annual expenses by 30. If you’re aggressive and/or willing to take on greater risk, multiply by 20.)
If you save half of what you earn, you should achieve Financial Independence in about fifteen years. If you save 70%, it’ll take nine years. But if you only save 20%, you’ll need to work for thirty years before you can retire – and at 10%, you’ll need to work for forty-five years.
As I mentioned at the beginning, these principles also apply to pursuing other goals. Maybe you don't want to retire early. Maybe you want to save to buy a home. Or to send your kids to college. Or maybe you want to quit your job and start your own business.
The Money Boss method applies to these situations too.
If you can save half your income, you can build the life you've always wanted.
There's more to it, of course — but not much more. The math and mechanics of Financial Independence are simple. They're easy to understand. The hard part comes in mastering the mindset. It's the psychology and emotions that hold people back.
My goal at Get Rich Slowly is to help you develop that mindset. If you've read this article and think, “Man, saving half my income is impossible!” then Get Rich Slowly is the place for you. In the weeks and months ahead (and in the GRS archives), you'll find tons of info about how to cut costs, increase income, and pursue your financial goals.
Stick around. Let's build some wealth!
Note: I've created a one-page PDF that describes the Money Boss method. Feel free to download, print, and share!
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.