Can You Be Financial Independent Before 40?

By Ellesse

When I first pose this “financial independent” question to my advisor 7 years ago, he gave me a rather cynical look. I guess he must be thinking “Gee, this girl is out of her mind. With the salary she’s drawing, there’s no way she can be financially independent by 40!”

It was inevitable. At that time, I was just a lowly paid analyst. Given the conventional way financial advisors derive their calculations, it was technically impossible for me to achieve something like that within such a short time. In fact after that first meeting, he went back and did some analysis for me. And the final conclusion?

The earliest age I could “officially” retire was 55. And that was provided I had at least $1.5 million worth of cash & investments – with a 1% withdrawal rate – by then. That stash of money would help pay off a pseudo $500,000 mortgage and generate $1,200 a month for my post retirement expenses. $1,200 isn’t a lot but for a 55 year old retiree who spent her most productive years slogging on a 9to5, with grown up kids, a paid up mortgage and few hobbies, that would help.

But to accumulate $1.5 million, I would have to stay dutifully employed for at least 3 more decades for the compounding to work.

Yes, 30 years!

I don’t deny it. I was disappointed when he said that. Though I liked what I was doing in the corporate world then, I found it depressing that I would have to wait so long before I could have the time of the world to do what I truly valued.

And that is what being “financial independent” means to me. It isn’t about having loads of money in the bank while I get around in a posh car or live in a large mansion. It isn’t even about traveling around the world on a lavish fashion. But rather, a modest down-to-earth approach towards living life. When I can have the freedom of time & resources for things, people and activities that really matters to me. While my daily needs and wants are being taken care of. And certainly, I’m not expecting to do all this only in my 50s. I want to do it in my best years.

My Ongoing Journey Towards Financial Independence

It was with this goal in mind – an awakening I got after reading Rich Dad Poor Dad – that I started actively researching on ways to “get out of the rat race”. As I explored and experimented with different ideas, I made several lifestyle choices along the way. And one of the most significant decision was taking the plunge to become a full time online entrepreneur.

Looking back, it has almost been 3 years since I’ve decided to quit my job. While I’m not exactly living in a lap of luxury, my online endeavours and dividends from stock investments is supporting my lifestyle now. Which is relatively simple and low cost since I’m single, debt free, living with my parents and pretty frugal to begin with. The fact that I’m now working from home helps a lot too. Daily commuting & apparel expenses can really add up, you know :)

I’m fortunate too that my income is kind of residual in nature. I don’t trade time for money and much of my effort these days is spent on monitoring my investments (5%), my websites (5%), family (50%) and volunteering for a cause I strongly believe in (40%). I love it that I’m no longer accountable to anyone for my time. And that – in my opinion – is where I think the “real” freedom is.

But having freedom for freedom’s sake is meaningless unless you’ve got the resources to support what you want to do. And of course your day to day needs. For example, what’s the point of having 8 hours of free time a day when you can’t even afford a proper meal? Or leisure activities that you’ve always wanted to pick up? Such as salsa lessons?

I admit this is one area I got real lucky. I’ve always been a very thrifty person and my┬álifestyle is kind of minimalistic in nature. Most of my hobbies are either inexpensive or entirely free. I’m that kind of person who’ll rather wait months for a new release at the public library than buying it immediately from the bookstore. And even when I travel, I usually do that on a shoestring. I know, I know. Thriftiness stems from scarcity but I admit this is one “virtue” that put me in a good stead. I don’t have to live miserably just to be financially independent. Scrimping and saving seems to be in my blood. Ha ha.

But much as I’ll like to think I’ve achieved financial freedom, I know I’m still a distance away. After all, there are way too many possibilities which may disrupt this equilibrium. What if I decide to move out? The rent or mortgage payments will add on my monthly expenses, isn’t it? What if a nice guy comes along and I decide to get married and have 2 kids?

Even though my emergency fund can tackle any unexpected one-time expenses, these possible recurring lifestyle related costs can have longer term repercussions. Being the ever prudent girl, the challenge for me right now is to really diversify and beef up my income sources so that I’m “ready” for such changes as they unfold. But one thing’s for sure though. I don’t think I’ll be waiting till 50 to make that happen.

No, don’t get me wrong. I’m not implying that retiring at a later age is inappropriate. Nor am I encouraging you to quit your job and do the same thing like I did. My decision was purely personal. And while it may not be the most foolproof plan around, I know it’s something I call my own. So far the journey has been very fulfilling! What about you? Any goal to achieve financial independence this year?

What You Can Consider In Your Own Financial Independant Plan

While everyone’s circumstance is different, there are things to consider and perhaps even adopt, if they’re relevant to you. Some of these may require a major paradigm shift, but the actual execution can be picked up over time.

(1) Set Up An Emergency Fund

“Cliche!” you might say. But this really works. In case you’re unaware, an emergency fund is an amount you can readily access to tide over unexpected events in your life. This should be separated from your spending account and used for only covering emergencies. You know, things like getting laid off, paying for an unplanned hospital bill etc.

I can’t stress enough the importance of an emergency fund. Before I first decided to quit my job back then, I had at least 10 months worth of daily expenses all stashed away. It gave me a lot of reassurance as I worked on launching my websites and also, learning more about stock investments on the side. I had to dip into it a couple of times over the initial months but since then, the shortfall has been replenished. So, how much should this amount be?

Well, it depends. Popular personal finance expert Dave Ramsey recommends that if you’re debt ridden, keep a buffer of about $1,000 and use the rest for the debts. Once they’re cleared, build up your emergency fund to about 3-6 months worth of required expenses. I think that’s a good way to get started. But for me, 10 months is still a figure I’m more comfortable with so I’ll probably stick to it.

(2) Keep Yourself Covered Medically

Since the demise of my sister, my attitude towards insurance – particularly health insurance – changed drastically. I witness for myself how chronic illnesses can literally cripple a family’s finances overnight. I also learned how one can easily mitigate that risk with a relatively low cost health insurance plan. Believe me, if you’re living in a country which doesn’t have some sort of universal health care, this can be a life saver.

Consult a few insurance agents if you must to obtain several quotations for your comparison. You can even get insurance quotes online. A general rule of thumb? Get a plan that suit your needs and not necessary something that is cheaper. For example, I switched into a comprehensive private health plan when I knew I was no longer covered under my ex-company’s employee insurance scheme. It cost twice as much as the most common option. But at least I know I can sleep better at night.

(3) Reduce Your Debts

Do you know how debts can delay your journey towards financial independence? It basically eats into the amount of disposable income you have for investing in cash flow generating assets such as stocks, real estate or in my case, a portfolio of stock investments and web properties. These assets are responsible for creating the residual income required to fund your lifestyle. And since debt payments and interest usually represent a significant portion of one’s monthly expenses, by tackling it head on, you’re applying the 80-20 pareto rule.

A rather effective method for debt reduction is Dave Ramsey’s debt snowball approach. While traditional methods of debt elimination recommends tackling the highest interest rate debts first, the debt snowball suggests you attack the lowest balance debts first. In this way, you gradually build up a psychological victory of eliminating debts in a quick consecutive manner.

I can see why this method works so well. It encourages the human mind by letting in a few quick wins and by the time one gets into the bigger balances, the whole debt elimination process would have been reinforced. Sure, that doesn’t mean it’s easier. But it somehow becomes so much more habitual.

(4) Lower Your Cost Of Living Without Feeling Miserable

In Your Money Or Your Life, financial independence is defined as “having an income sufficient for your basic needs and comforts from sources other than paid employment”. By simply lowering your essential costs of living, you stand a better chance of reaching financial independence earlier. Think about it. Which is easier? Earning a residual income to cover a monthly expense of $2,000 or $5,000? And trust me, you’ll be surprised how little you actually need.

For example, my expenses was cut by 30% after I quit my job. I don’t need to commute to an office anymore since I’m working from home. I can’t remember the last time I bought a new set of “office wear”. You know, those formal power suits? And I’m eating out less too thanks to my mum who cooks at home.

But do you know where the bulk of my savings was? Entertainment. Previously, I would chill out over drinks with my colleagues after work. I still do nowadays with my friends. But it’s so much less frequent. I guess when you’re bogged down with deadlines and tight schedules, you’ll need more booze to soothe the nerves. Ha!

So how do you get started on this? First, write down all your monthly expenses on a piece of paper. Run through each one of them and as you do so, ask yourself these questions

  • Can this be cut back?
  • If yes, will doing so make your life miserable?
  • If not, how should you go about it? And how should you track it?

Remember, every dollar saved is a step closer to being financial independent!

(5) Increase Your Residual Income Sources

While being frugal and cutting back on your expenditure helps, it’s just one side of the equation. Some say it’s just a small part of it. You must have sources that will generate income for funding your needs and wants. And it’s pretty crucial that this income is “residual” in nature. Here’s why.

Residual income refers to recurring revenue you receive long after the initial work is done. It’s very much different from earned income in that you aren’t getting paid for your time, like you would in a job. And when your residual income exceeds your monthly expenses, you’re literally freed to do whatever you want! Because you don’t need a job to pay for your expenses anymore! Examples of such income include :

  • Rental from real estate
  • Dividends payouts from your stock portfolio
  • Advertising revenue, affiliate commissions, product sales from your websites
  • Recurring commissions from network marketing or insurance related products
  • Royalties from copyrighted works such as the books you authored, music you composed, inventions you created etc.

Now, I’ll be lying to you if I said such income doesn’t require any effort. In fact, the initial work can be very laborious. During a dinner yesterday for example, a friend revealed how she was renting out her property for a net positive cash flow of $600 a month. Not too bad considering she’s still holding a full time job. But do you know how long she took to earn that income? Almost a year sourcing for a suitable property, renovating, furnishing it and getting all the paperwork done!

Come on, all that work for just $600 a month? Doesn’t sound like a good deal, isn’t it? But if you consider how much work she’s putting to maintain it, it’s probably not that bad after all. Yes, there IS effort required to maintain such revenue streams but depending on the type of investment you’re looking at, it can be pretty low.

In my friend’s case, the house’s in a pretty good condition so there were few tenant complaints about it. She also engaged someone to help her with the management so it was pretty much hassle free. Lucky girl.

Or is it? From my own experience, it definitely takes more than just luck to being financial independent.

** Photo by Only Sequel


11 Responses to “Can You Be Financial Independent Before 40?”

  1. Wayne at 4:14 pm


    Very good informative article. I would agree 100%, in that you have to make a plan, review, adjust as needed, been contnue to move forward in your goals. Many people that I have helped/mentored think of starting something months or years down the road, but you have got to take action now.

    If one will only develop the plan, stick to the plan, and have the faith, belief in themsleves and in God, and develop the perseverence not to give up and quit, the sky is the limit what people with real passion and motivation can do.

    I too opened up my personal development website in June 2009, and I figure it will take me at least 18 months before I am earning monthly consistent income from my informational website, but I am planting today’s seeds for tomorrow’s harvest!



  2. Ellesse at 2:22 am

    @Wayne Absolutely. I can’t justify enough the importance of faith. It’s so easy to give up on your goals when the going seemed so difficult. Especially when people around you are asking you to just drop whatever you’re doing and stick with the crowd. At the end of the day, if your desire’s so burning and your vision is so vivid, keeping the faith together, what seems impossible WILL definitely become possible.

    All the best in your own journey and do keep me posted on your progress! :)

  3. Rajiv at 9:55 pm

    This was really awesome!

  4. Ellesse at 2:26 am

    @Rajiv Thanks for your kind words!

  5. Darren at 4:43 am

    Hi Ellesse,

    I like how you discussed how financial independence doesn’t have to be postponed until our 60s. We can achieve financial independence much sooner if we set a goal and follow a sound plan to reach it. Minimizing our expenses and eliminating non-essential expenditures is key. Reducing our cost of living is the equivalent of a pay raise.

    Thanks for sharing.

  6. Ellesse at 2:53 am

    @Darren Lowering expenses is an important part. Assuming a 3% rate of return, you’ll need $33 worth of capital to generate $1. So literally, saving $1 goes a long way. But that said, it’s also important to look at the income side of things. Work on the knowledge necessary to generate residual income. For example, learning on how to invest in dividend stocks etc.

  7. Jimmy at 2:53 pm

    Thanks Ellesse for your article.

    I particularly like some of the practical tips you provided for reducing on expenses. They are all sensible and personal methods you have tried. I have implemented something like this too recently. I no longer eat out for lunch at work. I bring left overs from dinner and have that as my lunch. My mother-in-law cooks tons for dinner. Its such a waste to throw food away. Lunch out can be expensive affairs too. A food court meal in Singapore can easily cost up to 10 dollars ($5 for a meal, $2 for a soft drink, $2 for fruits).
    BTW, I have also used some of the resources you have directed me to. They are most helpful and free. Wonderful. Thanks.

  8. Ellesse at 8:04 am

    @Jimmy Wow, you’re definitely a step before me! When I was still in the corporate world, I didn’t embrace the brown bag it approach. And you’re absolutely right how much one can save by doing so! $10 a day equals to $200-$250 a month. If you add up the savings over a year and put those into a dividend stock yielding 5% p.a, that can mean some extra residual income! It may seem small to many right now but compounding wise, it can be a huge avalanche effect in the longer term.

    And I’m glad you found the free resources useful. :) Glad to help another fellow countryman out.

  9. Eki at 8:18 pm

    Your article is truely awesome! I can’t even imagine how you were able to incorporate those ideas to help your fellow country men. It a very good resource that deserve lots of commendation, big up to you.

  10. aria at 1:24 am

    You get lucky to have found ‘the real freedom’ in your life. Financial freedom or Financial Independence is a dream of many people. Rely on as an employee’s wages will not be able to achieve financial freedom, therefore other measures are needed to make additional income. Out of comfort zone (as every month get a paycheck) to then set up your own business is the right step. Thank you for giving enlightenment, planning and action that you provide is very helpful.

  11. Ellesse at 6:33 am

    @Eki Thks!

    @Aria Nah… I’m still FAR from being financially free! Even though my expenses are covered but well, that’s mainly because I’ve got a low cost of living. With the uncertainty of the stock market, I would need a big capital base before anything is considered stable at all. Also, need to work on generating a better return!


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