3 min read
I think anyone who discovers the concept of financial independence before age 30 is uniquely blessed and cursed.
Blessed, in the sense that you’re aware of the importance of saving money as early as possible. We have all read about the scenario of two friends who start investing five years apart. By her late sixties, the one who starts investing at age 20 finds herself with hundreds of thousands, if not millions, more than her friend who delayed investing until 25.
Cursed, in the sense that you’re keenly aware that compound interest doesn’t actually help you much early on. For the first few years of any financial journey, it’s just you and your savings. Grinding it out.
This slow start doesn’t mesh well with the impatient nature of most of us 20-somethings.
I often question, does discovering the idea of F.I. at an early age make us young people more likely to hate our day job? Does it cause us to see jobs purely as a barrier to financial freedom, as opposed to an opportunity to learn and acquire skills?
I think your age matters when you discover F.I.
Contrast the situation of a 22-year-old with a 37-year-old who discovers F.I. for the first time. If this 37-year-old has been contributing regularly to a retirement plan over the years, they may have a few hundred thousand in savings.
They actually have enough money for compound interest to work its magic. Combine this with a dash of frugality, and with three to six more years of diligent saving, they may be able to call it quits on full-time work.
For a 22-year-old who discovers F.I., three to six years of diligent saving might not even be enough to accumulate their first $100,000.
The Launching Point
I think discovering F.I. at an early age is more of a blessing than a curse, but not for the reason you might think.
See, I think the real blessing is being able to go from a net worth of $0 to $150k before age 30, not being able to go from $0 to $1.5 million by 40.
In previous posts, I have referred to the concept of saving up $100k – $200k before quitting your day job as a “launching point strategy.” You don’t have enough money to be financially independent, but you do have enough to launch towards a new lifestyle and walk away from a job you hate.
Venture Capitalist Paul Graham refers to this phenomenon in startups as Ramen Profitable:
“Ramen profitable means a startup makes just enough to pay the founders’ living expenses. This is a different form of profitability than startups have traditionally aimed for. Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time.”
The idea is simple: As long as a startup company earns enough to cover their living expenses, they don’t have to seek out investors to give them a salary so they can keep working on their business.
Saving up a few hundred thousand is the equivalent of becoming ramen profitable. If you can cover your living expenses through a combination passive income from investments and active income from work you enjoy, you don’t have to seek out a full-time job that you hate for a salary.
The ramen profitability approach forces you to view life as a marathon. You build up an initial financial foundation quickly, possibly doing work you don’t enjoy, so you can exit the rat race as fast as possible and earn income doing something you do enjoy over the course of several decades.
The more time I spend thinking about money and life, the more I warm up to the idea of taking a multi-decade slow approach to accumulating wealth so I can spend more time enjoying life along the way.
Using this calculator, it’s fun to plug in different numbers to see exactly how little I need to save before quitting my day job.
For example, if I spend $30k per year in retirement, and earn $25k per year doing something I enjoy for the next 50 years, I could walk away from my day job with only $150k in the bank and never run out of money over the course of these 50 years (assuming 7% ann. investment returns, 3% ann. inflation rate):
Sure, this assumes I have to earn active income each year in retirement, but the number of people who achieve financial independence only to create their own business, blog, or product and earn $25k or more each year is quite high.
If I can quit my day job a decade sooner and cover my expenses doing something I love, that’s ten years of my life I can get back from Corporate America.
Little Expenses = Large Living
No matter how you slice it, minimizing your expenses is the ticket to achieving your financial goals as fast as possible. If you can happily live on $30k per year instead of $50k, you can become ramen profitable years sooner and your savings will cover your annual expenses for much longer.
For young people in particular, who have no kids or a mortgage, $100k – $200k can cover basic living expenses for several years. This can buy you the time to create that blog, business, or product that will help you cover your living expenses in the future.
To me, the allure of ramen profitability is strong. What are your thoughts? Drop a comment below 🙂
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free, has no trading or maintenance fees, and even allows him to set up automated target-allocated investments.
His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.
His favorite micro-investing app is Acorns, a free financial app that takes just 5 minutes to set up and allows you to invest your spare change in a diversified portfolio.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.