ChampagneWhen I was in my twenties, I had this vision that I would be very rich.  Rich, rich, rich!!  I thought I needed to have all the money in the world if I was ever going to be done working.

I mean, how else can you retire if you aren’t rich and sipping champagne on a yacht near your own private island in the Caribbean somewhere??!!

Now, although that vision coming to fruition would be great, it took me until the past handful of years to realize that I don’t need to be lighting cigars with hundred-dollar bills to be able to quit working.  I started to understand something very important…

You don’t need to be rich to become financially independent.

Here’s one more important point…

The only thing you need is enough money to cover all your expenses every month for the rest of your life.

That’s it.  That’s the whole shebang.  That’s the way to gain your financial independence.

Now, that might sound easy enough – if you put your mind to it, you can save enough money to cover all those expenses.  The problem is that savings might not always cut it because, unless you have a ton of it, you need to store that money somewhere to keep up with inflation.  If you put it in the stock market, you’ll probably have some average gains that will outpace inflation, but you’ll need to ride out the waves.  Regardless of where you keep it, you’ll need to hope it never runs out before you die or it’s back to work.

And that’s where passive income comes in.  Passive income is money that comes in to you without you needing to work hard to attain it.  Some examples are rental income (my favorite), dividend stocks, owning (but not managing) a business, or royalties from something (books, inventions, etc.).

If you can find one or more streams of passive income, you can help set yourself up without the need to drain your savings.

Right now, my wife and I have a decent amount of money between our 401(k) plans (over $500,000), our Roth IRAs (worth a little over $35,000), savings of over $40,000, and a taxable account with mostly dividend stocks in it.  So we’re not poor by any means, but we’re definitely not rich either.  Even with us continually growing these accounts over the next 9 to 10 years, we’re still hoping to not be dependent entirely on them.

We currently have one rental property and we’re shopping for another throughout the winter and spring.  Our existing rental house provides us with over $700 of rent each month.  After paying the property management company their 10%, making the mortgage payment, and all the other fun expenses, we probably make about $100 a month on the property… and usually not that much!

Jim, are you telling me you’re going to try to live off $100 a month when you retire?

Ah, so glad you asked.  If you remember my story, I plan to retire no later than 2025 (before the age of 50).  Our current rental house should be paid off by 2024.  In the meantime, rent should continue to gradually increase every year.  So hopefully when I retire from my career, the passive income we make on that house should be about $750 each month (and should continue to grow every year as well).  Keep in mind that inflation will erode some of this.

And the plan is to get a 15-year loan on the next rental house that we’re in search of currently.  I would hope to pay that off early if possible, but regardless, we’ll have it paid off (by the tenants) in no more than five years after I retire.  Without knowing what kind of rent we’ll be getting on it, we’ll just assume it’s around the same.  That would mean $1,500 a month coming in each month on rental income between the two houses.

Now, we’re no Mr. Money Mustache and probably won’t be able to live off $18,000 a year (I think they actually live off around $25,000 a year), but we do tend to live a relatively modest lifestyle.  Nevertheless, that’s $1,500 less I’ll need to pull from my Roth IRA every month after my Roth IRA Conversion Ladder.  And that’s a HUGE help in making your money last.

So, if you look at a path to becoming financially independent and the route to retire, you need to get rid of your debt and build up a sizable nest egg.  And the lower you can keep your expenses, the less money you’ll need in the long run… if you love to live the extravagant lifestyle, then you’ll need a larger nest egg.  And if you really want to help secure your financial independence, you should find the right passive income stream for you to help prevent erosion of your hard-earned nest egg.

Hope this inspires you to find your way to financial independence!

Thanks for reading!

— Jim

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You Don’t Need to be Rich to be Financially Independent!!

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