Rather than working a 9-to-5 for the rest of our adult lives, many of us would rather retire early.
How difficult is this?
Let's look at the fundamental formula for Early Retirement and Financial Independence.
Most of us have Active Income. This is your 9-to-5 job. It's where you trade your time for money in order to pay for your expenses. It's what we're trying to escape.
Passive Income is money earned while you sleep (most commonly our investments). When you generate enough Passive Income to cover your expenses, you can stop working. This is called Financial Independence.
When you reach this point you have two choices:
Active Income is money earned for performing a service (i.e. wages and salaries).
Passive Income is money earned without spending your time to earn it.
Financial Independence is when you have more Passive Income than expenses, and you no longer need to work.
There are many ways to generate Passive Income, but for now we'll focus on stock investing, specifically Index Funds.
An Index Fund is a collection of a lot (hundreds or thousands) of company stocks. Investing in an Index Fund allows you to spread your risk over a lot of different companies.
You can conservatively assume that an Index Fund will grow 7% a year over the long term, but often it can be higher than this.
While you're working, you will grow your investments in Index Funds. You won't touch this money while it grows.
When you retire, you can conservatively withdraw 4% a year* without it ever running out. You can skim off the top of your investment growth for the rest of your life without it ever running out.
Let's estimate it with some napkin math.
How much money would you like to spend per month when you stop working? (This includes everything from rent, food, clothes, activities, etc.)
This is the amount of money you need in order to pay yourself $ per month for the rest of your life!
How much can you save per month to invest?
How much do you currently have saved?
How long it will take you to reach $0 if you save $ per month. (Don't do this, invest instead.)
How long it will take you to reach $0 if you instead invest your savings in basic Index Funds (with ~7% return). We'll show you how.
Take your time to play with the numbers.
I know we've glossed over the details, but don't worry. There will be plenty of time to cover them in later lessons.
To explore this concept visually, check out our very popular Investment Calculator.
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