How do people become financially independent and retire early?
Well it's funny that you ask! You're in the right place asking the right questions. There are many ways to be considered financially independent with the ability to retire early. The overarching definition is when your investments pay all of your expenses. Ok, that was simple right?! Actually, it can be difficult to measure at what point and time you have reached FI(financial Independence). There are many different levels of FI and FIRE, starting with Lean-FIRE, where a person has the most basic expenses covered, all the way to FAT-FIRE, which is more money coming in than you know what to do with. I'm a fairly conservative person when it comes to risk and I always love having a little cash cushion to keep me secure, in case of unexpected occurrences.
So, we have the basic definition of FIRE out of the way. Let's take a brief look at ways that people use to achieve this freedom. Primarily, in the FIRE world many people love low cost index funds such as, Vanguard's total stock market index fund VTSMX. This Fund features low fees that will keep more money in your portfolio to be reinvested and compounded so your money grows exponentially. This is the magic of compounded interest, you earn interest on the principal amount invested, then that interest earns on itself. Here is a link with a more in depth explanation. The value of your portfolio will grow exponentially like a hockey stick making you very rich over the long term, say 20-40 years.
Many people have reached FIRE through businesses! This path is one of my favorites, as it is more on the offensive side of income. Hopefully, the business you have can be made somewhat passive or passive, giving you time to live your retired life. A way to make this path work would be to create a business and find people that are better than you at what you're doing. Slowly, you'll be making yourself become obsolete as an employee, because there is someone that can do it better than you. You do this for every role until you're no longer needed to work for your company, making you an owner rather than a highly paid employee. It's easier to say than do.
One of my favorite ways to reach FIRE would be with the use of real estate. This is a large part of my plan to reach FIRE myself, since I am not there yet. The beauty of real estate, if you buy correctly, is that you own a cash producing asset, all the while your debt is being paid down and you have the ability to write off taxes. After some time you'll own equity in said property and be earning income. Sounds great right?! This is just one example of real estate, but there are many different ways to earn income through this industry from selling house, to developing land, or wholesaling.
All of these things can be brought back to our basic principles of Earn More, Spend Less, Invest the Difference.
“It is what a person will do with the saved money that will make a big difference in his or her finances” ― H. J. Chammas
There are other ways to reach FIRE, through inheritance, the lottery, etc. Those all depend on luck and some of us aren't that lucky. So we'll focus on the investments that require time and energy more, rather than just dumb luck. So to reiterate what those ideas are:
1. Low Cost Index Funds
2. Owning a Business
3. Real Estate
This world of FIRE and FI is so complicated, with so many avenues to try to reach our goal, so many terms and things to understand. Like we've said before, you're already ahead of most people in the world. Just by thinking about this and reaching this point, you are getting ahead. So take pleasure in that and remember to enjoy the ride. Please comment with ideas about what you want to hear next, or how I can make this better for you.