Thinking about retiring early? Achieving financial freedom can feel like a moving goal post. How do you know when you can retire without having to worry about running out of money?
My personal goal was to create steady passive income streams to cover my monthly expenses in addition to having a 6-9 month emergency savings fund.
Four Percent Rule
As a rule of thumb, I use the 4 percent rule to determine when I could retire. The rule helped me determine how much I could withdraw from my bank account each year following early retirement.
The 4 percent rule is based on a study by financial advisor William Bengen. Under the rule, I would have steady income stream from having an account balance that keeps income flowing through retirement.
Financial experts consider the 4 percent withdrawal rate safe given the withdrawals would consist primarily of interest and dividends.
Overall, the 4 percent rule helps to calculate a portfolio's withdrawal rate. For instance, say I want to withdraw $40,000 per year from your retirement portfolio. $40,000 / 4% =$1 million.
The 4 percent rule isn’t a hard and fast rule.
According to the rule, I would need $1 million dollars in my retirement portfolio. It is a general estimate of the amount that I can withdraw from my portfolio. The rule does not factor for other sources of retirement income, like Social Security.
Life expectancy plays an important role in determining if this rate will be sustainable. Individuals who live longer need their portfolios to last longer. Also, medical costs and other expenses can increase with age.
My financial history is far from perfect.
There are many things I wish I did differently with my money in my 20’s and early 30’s. I made a lot of financial mistakes from not investing early to overspending on things I didn’t need.
Even as a business major in college, one would think I’d be better with my personal finances. I figured, all I had to do was make more than I spend. If only it were as easy as it sounds.
Enough was enough.
It wasn’t until I realized how much I craved freedom from a cubicle that I started waking up to my beliefs and habits around money. And when I really couldn’t stand my job, I knew I needed to have an exit strategy.
Sometimes I stuck to this plan. Other times, I would just quit the next day without a Plan B. Not my best moment.
I ended up going back to the employer for my job back.
Since I was so frustrated with the 9-5 rat race, I wanted to achieve financial freedom earlier than the average retirement age. I knew I had more to contribute to society than what I was doing at my cubicle all day.
So I started my journey towards Financial Independence Retire Early (FIRE).
I wanted to be able to travel whenever I wanted, take a nap in the middle of the day, and have more time to do yoga. Most importantly, I wanted to be able to help others through sharing my financial lessons learned on a full-time basis without worrying about the bills.
I learned a lot of financial strategies the hard way.
Through trial and error, I’m living proof that financial freedom is within reach regardless of past financial mistakes. That’s why I’m sharing my top personal finance strategies to save you the time.
My #1 Strategy
Create multiple income streams. There are many ways to have a side hustle these days. You don’t even have to start a business to do so. This includes freelance writing to renting out your car. I did both!
During my weekends, I taught yoga and wellness workshops at the local hospital. I also worked the front desk of a yoga studio at one point too!
Get creative with the different ways to generate passive income. Here are 8 ways I created multiple income streams while still working in Corporate.
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The fun part was the journey, not the destination.
I got to experiment with different types of side hustles. I eventually got a feel of what I enjoyed doing and let go of the activities that were not as enjoyable.
It just took the tiniest of tiniest baby steps to start seeing improvements in my net worth. If you are trying to achieve financial independence and early retirement, knowing your net worth matters. Here’s why…
According to financial advisory firm Personal Capital, the median US household net worth is not sufficient for most investors to realize a comfortable retirement.
Net worth peaks at retirement age for those 65 years and up. House and property values may account for the majority of the net worth calculation.
For younger age brackets, net worth is impacted by holding significant debt such as a mortgage and student loans. In addition, the younger generations typically have lower salaries and less assets. But over time, these investments may result in higher net worth households.
Net worth = Assets - Liabilities
Let’s make sure we’re on the same page. Your net worth is every significant thing you own (assets) minus what you owe (your debts and other liabilities).
Assets includes cash, investments such as IRAs, 401k accounts, bonds, and stocks. This also includes your home and other valuables such as your car.
Liabilities include what you may owe on your assets and other debts, such as a mortgage, car and student loans. If you have any credit card debt, that number also falls under liabilities.
Simply put, net worth illustrates the amount in cash you would have left over after selling all of your assets to pay your liabilities. This figure provides a measure of your overall financial health and stability. Your net worth can either be negative or positive.
Track your net worth
As mentioned throughout this site, having multiple investments and income streams is important to achieve financial freedom. But keeping track can be a major pain. I can barely remember my passwords to my social media accounts let alone all the other online accounts I have.
Through Personal Capital, you can also securely link all your financial accounts to get a complete picture of your net worth. Over time, you’ll see if your net worth is trending positively. Then, take steps to make adjustments in your spending and savings habits.
About 1 million people use the Personal Capital app to track and manage their net worth. Ready to face the numbers?
Early retirement calculator
Can I retire yet? I asked this question many many times throughout my life in corporate. In order to know if I was even close to financial independence, I played around with different early retirement calculators.
Of all the different calculators out there, Personal Capital offers one of the most in-depth retirement planning calculators. And it’s free to use!
Know exactly where you stand relative to your retirement goals.