I asked The Groovies to come do a guest post highlighting their FI journey. Their blog, Freedom is Groovy, is a consistent pit stop on my morning bus rides. I love the straight forward and honest writing style. Head over and check it out!
Here’s the story of Mrs. Groovy and me in a nutshell:
In 2006, we were living on Long Island in a one-bedroom condo and struggling financially. To get out of our monetary funk, we decided to relocate to Charlotte, North Carolina. This proved to be a very sagacious move. In less than 10 years, we managed to save enough money to be financially independent. We officially retired on October 14, 2016.
It’s a great comeback story. Two financial boobs get their act together and in 10 years give the proverbial middle finger to the soul-destroying cubicle life. And they do it all on middle-class incomes, to boot.
But while our story makes for a good read, I often wonder how relevant it is to the average guy or gal. In other words, did we do something anyone could do if he or she put his or her mind to it? Or did we just step into a heaping pile of buena suerte mierda?
To find out, let’s begin with the math behind financial independence (FI).
Financial Independence Math
According to the King of Early Retirement, Mr. Money Mustache, FI is achieved when you have accumulated 25 times your annual living expenses. Mr. Money Mustache also insists that you can achieve FI in 10 years by saving 65% of your take-home pay.
For our purposes here, I’m going to assume that Mr. Money Mustache’s target accumulation for FI is correct. After all, who am I to argue with the King? But will saving 65% of your take-home pay for 10 years deliver you to the gates of financial Valhalla? Let’s run the numbers and find out.
Years to Financial Independence at Various Savings Rates, Based on a $50K Take Home Pay and a 7% Annual Return
As the table above shows, if you’re taking home $50k and saving 5% of that, you’re spending $47,500 annually. This means you will need to save $1,187,500 in order to be FI. To get that size of a portfolio, in turn, you will need to save $208 for 50 years.
Ouch! Those are pretty daunting numbers.
But the beauty of Mr. Money Mustache’s FI math is this: as your savings rate goes up, your FI target amount goes down. At a 5% savings rate, you’re throwing $208 a month at an FI target amount of $1,187,500. That’s why a 5% savings rate takes 50 years to achieve FI. If you had a 65% savings rate, however, you’d be throwing $2,708 a month at an FI target amount of $437,500. And that’s why a 65% savings rate takes 10 years to achieve FI.
More Savings = Smaller FI Target Amount = Fewer Years to FI
So Mr. Money Mustache’s FI math works. And I can attest to this from my personal experience. From 2007 to 2016, Mrs. Groovy and I had an annual savings rate of 60-65%, and by the conclusion of 2016, we had managed to accumulate twenty-five times our annual living expenses.
(If you want to figure out what your current savings rate is, I’ve included the chart that Mrs. Groovy and I use to calculate our savings rate each year.)
Mr. and Mrs. Groovy’s 2016 Savings Percentage
It Can Be Done, But…
Okay, achieving financial independence in 10 years is doable. Mrs. Groovy and I are proof of that. But we had a lot things going for us. To show what I mean, let’s review the key ways the financial gods smiled upon us.
When Mrs. Groovy and I sold our one-bedroom condo in 2006, it was the height of the real estate boom. We made enough money from that sale to wipe out our credit card debt, pay off the balance of Mrs. Groovy’s student loan, and buy a house outright in North Carolina.
The main reason we were able to save 60-65% of our take-home pay for 10 years is because we had absolutely no debt. If we had a mortgage, there’s no way we could have achieved FI so quickly.
Since moving down to North Carolina, Mrs. Groovy and I have each averaged around $55K a year in income. Those are hardly killer salaries. But don’t forget, the median household income in the United States in 2015 was $56,516. Our household income has been nearly twice the national median during our drive for FI.
Living in a Low-Cost State
In North Carolina, our property taxes are a little more than $2,100 annually. Had we remained on Long Island and purchased a decent three-bedroom home in a decent neighborhood, our property taxes would easily be around $15K annually. That’s roughly a $13K difference.
In addition to higher property taxes, staying on Long Island would have meant higher utility, transportation, food, and entertainment costs. It also would have meant having a mortgage. We walked away with $250K from our condo sale, but decent three-bedroom homes in decent neighborhoods were selling close to $600K on Long Island in 2006.
Staying on Long Island would have added $40-45K to our annual living expenses. Yes, our household income would have been higher, but it still would have required a herculean effort to save 25% of our take-home pay. This savings rate, in turn, would have added at least 15 years to our FI journey.
Modest Wants and Tastes
Mrs. Groovy and I are very comfortable living under the radar. My wardrobe basically consists of 12 polo shirts and 4 pair of jeans. Mrs. Groovy owns maybe 6 pairs of shoes and has very little jewelry. Our car isa dinged-up 2004 Camry with 157K miles on it. The last thing we want to do is buy stuff that announces to the world that we have “arrived.” We really want no part of the bubble popularity that so many of our fellow Americans seem to crave.
In addition to living modestly, we are also easily amused. A great Saturday night for us is playing May I with family and friends or taking a ride to the Dairy Queen so we can indulge in some Blizzards. Our last vacation was a road trip along the Gulf Coast. The highlight of the trip was eating meat pies at a Chevron station in rural Louisiana. Yes, it’s pathetic. But we’re happy. And because our contentment doesn’t hinge on the finer things in life, it’s easy to live within our means.
If you remember anything from this guest post, please let it be this:
Modest Living + Simple Joys = A Less Onerous Path to Financial Independence
Kids are expensive. A dear friend of mine just spent $130K on his oldest child’s college education. And his son didn’t go to Harvard or Yale. His son went to the University of Wisconsin. And his son didn’t take five or six years to complete his studies. He got his degree in four years. Now, I would never advise anyone to forego kids. Kids are a tried and true way of bringing joy and meaning to one’s life. And not having them is my biggest regret. But make no mistake, having kids will add years to your quest for FI.
Mrs. Groovy and I are very proud of how we handled our finances since 2006. But we have no delusions of grandeur. If it weren’t for an epic real estate boom, and our incredible good fortune of selling at the height of it, there’s no way we’d be retired today. And there’s no way I’d be guest posting on the Apathy Ends blog.
Achieving financial independence in 10 years is a bridge too far for most people. Too many variables have to be properly aligned for that to happen. I do think, however, that once you’re completely debt free, achieving financial independence in 15 years is a reasonable goal. So my advice to Millennials is this: focus your energies on being completely debt free by the time you’re 40. If this means foregoing a big-name college, a succession of new cars, and a dream home in a dream neighborhood, so it be. By going small (i.e. living under the radar), you sacrifice nothing truly important, and you give yourself a great shot of accumulating your FI target amount.
Okay, groovy freedomists, that’s all I got. What say you? How many years will it take you to achieve FI?And what’s a realistic goal for the average guy and gal? I’d love to hear your thoughts. Peace.