There is more than one path to financial independence

There are many roads to Rome, and this couldn’t be more true when it comes to pursuing financial independence.

Whenever a story hits the mainstream of someone retiring early, there tends to be an outpouring of comments and objections of how it can’t be done.

“I could never save that much”

“I could never live that frugally”

“Lucky for them they had such a high income”

These comments are people’s justifications for why they can’t achieve something based on their interpretation of the story. But, these stories/articles tend to only highlight people who are living in caravans, cost cutting expenses to the bone, or earning six figures a year. The extremes.

No wonder people have objections. If I didn’t know any better I would be turned off too.

I don’t want to live like that. It is not for me.

Luckily for me I looked into the concept of financial independence at a much deeper level, and instead of dismissing the idea, I realised there are multiple ways to get the same result.

The good news is if you can’t save significant amounts to achieve financial independence, then maybe you can invest in real estate or increase your income.

Or if you have a really hard time increasing your income, you could look at reducing your expenses.

Maybe you could do a little bit of everything.

There are many different levers you can pull depending on your preferences.

We will now explore the most common paths to financial independence. In each of the examples, unless mentioned otherwise, we will assume that income increases at the rate of inflation, effectively meaning a static savings rate that keeps up with inflation.

There are flaws to this method, but we will use the 4% rule of thumb to determine our financial independence number.


Path one: Decreasing expenses

The most travelled path for FI seekers. This strategy is arguably the easiest and hardest path to financial independence for most people.

Easy because lowering expenses is low hanging fruit for most people. It is fairly easy to find areas of cost cutting. Most people find it easier to reduce expenses by $5,000 than it is to increase income by $7,000. Note, income is more than expenses due to tax. Another benefit of cutting expenses and the reason why a dollar saved is more than a dollar earned. For a 33% tax earner, cutting expenses by $10,000 is the equivalent of a $13,300 increase in income.

Hard because most of us are not natural savers. The average savings rate in New Zealand isn’t even positive. Too many people think reducing expenses is too much deprivation. If you are to use this strategy, then it requires a mindset where one does not derive happiness from spending on unnecessary things, but more so from the simpler things in life. Conscious spending.

Let’s use an example. Suppose Sally is on an after tax income of $60,000 per year and doesn’t have a cent to her name. She finds it hard to find ways to increase her income, so she decides on the decreasing expenses path to financial independence. She gets in a new roommate to help share the rent and housing costs, she changes electricity, phone, and internet providers, ditches Sky TV, and cuts back on eating out. After these changes she manages to reduce her annual spending from $60,000 to $40,000.

Sally puts the $20,000 savings in to low cost index funds returning 5% per year after costs.

By saving 33% of her income Sally will reach financial independence in approximately 30 years. If Sally could manage another $5,000 reduction in expenses to $35,000 per annum then she would cut another 6 years off her time to financial independence. You can calculate your own numbers here (calculator #19).

It is a long road, but much shorter than the alternative of not saving at all, or only saving 5%.

Because this strategy alone still tends to mean a long road to financial independence, you must be happy with your level of expenses. Too high and you will never reach financial independence. Too low and 24 plus years is a long time to be unhappy. Find that level of expenses where you are both happy and making good progress.

For me, I was able to downsize house saving $10,000 a year, as well as a few other simple changes such as changing electricity, phone, internet and insurance providers. No real deprivation at all. However, if I were to cut our food spending down further, I probably wouldn’t be happy. So we have left that as a high expense. The key is to pick expenses that have little to no effect on your happiness and cut them as much as possible, while keeping expenses that make you happy.

Path two: Increasing income

I get it. Reducing expenses is not for everyone. Some people just can’t commit to the idea of cutting costs and that’s OK. Each to their own. Luckily there are other options that allow us to achieve financial independence. One of which is increasing income.

To take this path your focus will be on finding ways to increase your income. This could be from increasing your day job income, or finding secondary work. Or as the cool kids are saying these days a side hustle. This may include things such as charging lime scooters, driving for Uber, tutoring students, or teaching music lessons. There are literally hundreds of ways to earn extra income if you are willing to put in the time.

It may even involve starting your own business.

Personally, for my time, I feel like I can squeeze more juice out of my day job than I could from any side hustle. So, I would rather focus on ways to increase my current income, as opposed to looking for new income streams. But that is just me.

Things that have helped me earn pay rises in my day job include, but are not limited to:

  • Finding out what my boss wants from me and then doing more.

  • Finding out work my boss hates doing and taking it off his hands

  • Showing up consistently. It’s surprising how just doing this will place you ahead of your colleagues. Who would have thought? All you need to do is show up consistently. The reality is most of your colleagues will not, so by default this places you ahead.

  • Be available and personable.

  • Always learning. More knowledge and skills demands more pay.

  • Know your worth in the employment market. From this you can negotiate better pay and conditions.

These are some of the keys to helping me increase my pay over the last 10 years at a rate much higher than inflation.

Each extra dollar provides an opportunity to save and invest, not increase your spending!

Just be weary you are not spending so much time working that is negatively effecting your productivity and your personal life.

Example: Tom is a real go getter at his job. He starts off on a salary of $40,000, but provides far more value to his company than that. After two years his work is recognised and he earns a promotion to $60,000. From that point on he continues to receive frequent pay rises and promotions, whilst keeping his spending more or less in line with inflation.

Because Tom spends more than Sally, he needs more money to reach financial independence. But by increasing his income he can help reduce the difference.

In fact, even if Tom only received the one promotion and income only increases with inflation from that point, then he too will be at a 33% savings rate and will reach financial independence at the same time as Sally.

Path three: Decreasing expenses and increasing income

Maybe you are not comfortable or interested in reducing your expenses or increasing your income by such large amounts. Maybe doing both is an option for you then. This is the path I have taken.

I haven’t cut my expenses to the bone and it has taken a long time to significantly increase my income.

This is the strategy to me that comes most naturally, and feels like the least sacrifice. In fact, it doesn’t even feel like a sacrifice at all.

Based on the previous examples, instead of a $20,000 reduction in annual expenses or a $20,000 after tax increase in income, you would instead need just $10,000 of each.

By the way, these are just examples. The $10,000 changes do not need to happen in one year. It could be at a much slower rate. As long as we are improving our position each year is the important thing right?

Path four: Real estate

Real estate as an investment class, can have a significant impact on wealth building, even more so for lower income earners who can’t get very far utilising paths one to three.

By leveraging off the banks money, someone has the potential to get ahead more quickly than they could on their own.

Bear in mind I am talking about real estate as an investment here. Not your own house. Your own house is a terrible investment.

Example: Tyra has an after tax income of $40,000 and annual expenses of $25,000. After 8 years of saving she finally has enough for a $120,000 deposit on a $600,000 rental property.

The property was a great purchase where the rental income is enough to cover ALL home ownership expenses. This is key, especially on a low income. To find a property that is either neutral or positive cashflow. Remember to calculate all costs of ownership too. If you can find this, then your risk of investment diminishes greatly and you will be in a better position to fight off negative equity in case house prices decrease.

In this example we will say that the house price increases in value at 2% per annum in line with inflation. In 30 years the house will be worth approximately $1.1 million. Effectively turning her $120,000 into a return of $500,000.

If Tyra had instead invested that $120,000 in index funds returning 5% then she would have a return of $217,000 after 30 years.

Less than half of the returns of the real estate investment, yet the percentage returns of the house were less than half that of the index funds. That is the power of leverage.

A major caveat with this example is that leverage also works in the negative direction. In fact I have written about my current concerns here. Due to leverage a 2% drop in house price in this example would equate to a 10% loss in value, not 2%.

The key is to buy smart, look for positive cashflow, and buy long term. Don’t rely on short term capital gains. Although it is likely over the long term, it is by no means guaranteed over shorter periods.

Path five: Lifestyle redesign

This is a path that I am slowly warming to.

At the beginning of my working career I just wanted work for income. I needed money to pay for my then lavish lifestyle of beersies and eating out! As I grew older, my need for a higher income grew as I started wanting more expensive things. Specifically houses, cars and travel.

In other words, I needed to work in order to live my life. That meant I was always tied to my job and was always worried about my financial and job security due to high financial obligations.

Now that I have simplified my life and finances though, the need for high income work dissipates.

By minimising your expenses to an optimal level of efficiency, a wide range of options open up that allow you to work at jobs you want to. Not jobs you have to. This means you can work at jobs you are passionate about and you would almost do for free.

This path doesn’t lead to financial independence in a short amount of time like the other paths. But what it does to is allow you to live like you are already financially independent now without having to wait 10 – 30 years like the other paths.

I am reminded of the Mexican fisherman fable as to the importance of living your best life now, instead of waiting.

I started my financial coaching business just under a year ago. I am currently contemplating quitting my full time job in the next couple of years so that I can focus on that full time. The decision would delay my time to financial independence by about 8 years, but it would mean an extra 5 years in time living my life in a more desirable way.

Path six: mini retirements

Similar to path five, this path is about trying to live your best life now.

It could include anywhere from one or more career breaks during your working career. If your savings rate is high enough you may even be able to take a year off work after every 2 - 3 years of work.

Years of work at different savings rates.png

For example, someone with a savings rate of 40% can afford to take a year off work every 1.5 years at their current spending levels.

This strategy is for those that just cannot stay in a job for too long before it drives them bonkers because there are a hundred other things they would rather be doing. The constant traveller is a common example of someone who would benefit from these mini career breaks. They need to satisfy their itch.

Just bear in mind that each time you come back from these career breaks you may find it difficult to find a job in the field you want or at the pay rate you desire. This strategy very rarely results in career progression.

You will also need to ensure that you are taking care of your full retirement funding when you hit your 60’s. If you keep spending all your savings every few years on career breaks, your future self may be left short as they need to fund up to 30 years of no work.

However, one or two sabbaticals during your working career may be just what you need to keep going.

Final Thoughts

The key to paths one to three is creating a large gap between spending and income, and maintaining that gap. If your income increases, not falling in to the trap of increasing your expenses.

Path four is leveraging other people’s money and paths five and six is designing your life where you don’t need so much money or you find a job that you love and would do for free.

The path to financial independence is not a race. You need to find the path that comes most naturally to you. One that feels easier and like the smallest sacrifice.

I made the mistake early in my discovery of financial independence of cutting expenses too far. I got too excited by the concept of financial freedom I didn’t fully understand the impact on my mental state and relationships. By limiting my spending more than I was comfortable, I was in a mental mess.

Not until I increased my spending back to a point where I was happy did I know I was on the right path. Don’t be afraid to try the different paths and see what works for you. We may not even stay on the same path. As we age our feelings and wants change. We may jump from path to path. That is fine. In fact, it is better than remaining on a path that doesn’t work for you anymore.

Contrary to what is often portrayed though, you don’t have to eat ramen noodles every day, re use your teabags, or live in a caravan. If it is more your style, you could increase your income, invest in real estate, or redesign your lifestyle.

Even easier is a combination of all paths. Where you don’t have to fully commit to any one option. So before dismissing financial independence after reading about yet another couple scrimping and saving, at least consider the different ways you can achieve it. I am glad I did.

It isn’t just about reducing expenses as many would have you believe.


The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here