Crush Debt and Retire Before 40

Editor’s Note: This is pretty much the summation of what I write and why I want to be efficient with all of my resources. If this article interests you feel free to keep up with SimpleEconomist through email, twitter or facebook. Also, this post is meant to be shared so send it to anyone you think might find it interesting.

What is the point? Why be free?
I started my financial journey with this simple question: What do I want to get out of life and how can I use money as a tool to get there? I had to start with this. I had to know why I was so interested in money and why people spend so much of their time thinking about it and trying to earn a little bit of it. I realized that my time is really what is truly important to me. I want to be able to spend time doing things I love, hanging out with my family, and making and building things that are significant. I want to be able to help people without a life full of nagging obligations and needless stress. And I have now learned that money, and surprisingly little, can be the tool to do just that.

Boracay Island, Philippines

Crush Debt
Debt is a tool. You need a good credit score. Only take on good debt. Debt allows you to have stuff now instead of later. Words of wisdom. What are your thoughts on debt? Do you enjoy it? How did you learn about debt?

I don’t like debt. To be honest, I simply don’t enjoy the feeling of owing someone money. But more importantly, debt is an obstacle on the path of where I want to be. Think for a moment, what would your life be like if you had absolutely no payments of any kind? How would that make you feel? For me, payments limit my freedom by increasing my obligations and decreasing my flexibility. Secondly, the idea of being debt free gives me Financial Peace. I understand the math. I’ve taken all the graduate finance and economics classes. I understand margin and opportunity cost. But I keep coming to the same conclusion: No Payments = Freedom. Having money is nice. Not having financial obligations is nice. My goal is to have both.

I think debt has been very well marketed. Debt has moved from being normal to being expected. People think it is strange when they hear my views on debt. I think the trouble with debt is that it allows you to inflate your lifestyle before you have money. I don’t think having more makes you that much happier. After you use debt you get stuff faster, it just turns up the intensity on the hedonic treadmill.

The last reason I hate debt is how I’ve seen it negatively affect people. After facilitating financial seminars for years and doing financial counseling, I’ve seen the stress and relationship issues debt causes. Debt, and especially credit cards, mortgages, cars and student loans are the bane of middle class financial problems. I feel like the average American pays more in interest than they have saved or invested! I have friends with finance degrees carrying a balance on credit cards. I know people who work at banks who are in debt up to their eyeballs. But mostly, I see people forcibly attached to jobs they hate due to the inflated lifestyle and payments that are made so easy in the form of debt!

How to Crush Debt
Use the debt snowball. I think most people are surprised to learn that when it comes to getting out of debt: habits, motivation and behavior are much more important than math. For those who are unfamiliar, the debt snowball is a simple concept of attacking your debt in a way that keeps you motivated by focusing on small wins. As big Dave puts it:

The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. First accumulate $1,000 cash as an emergency fund. Then begin intensely getting rid of all debt (except the house) using my debt snowball plan. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.  -Dave Ramsey

Every time you pay off a small debt, use the money that was going to pay it off to attack the next debt. With every debt you pay off you have additional money to pay off the next (hence the snowball effect). In our experience facilitating several classes of FPU we were astonished at how well this plan actually works.

This system is all predicated on the idea that you must first decide to get out of debt! After you have made that decision, the process is not that complicated. If you need more specifics or details check out the book My Total Money Makeover.

Retire Before 40
It is funny the reactions I get when I tell people I fully intend on retiring before I turn 40. Why would you want to? Are you serious? How? What do you consider ‘retired‘?

First, I had to figure out why I wanted to retire early. Have you ever thought about what you would do if you never had to work for money again? Would you lay on the beach? Fish every day? Build Houses? Travel the world? Teach? Do Missions? Spend more time with your family? What would you do?

For me, it boiled down to this: I don’t want to outsource my kids or family. I desire the freedom to travel, do mission work or help other people without inhibitory financial considerations. I want to be able to teach my kids to ride a bike and grow their own food. I want smart teachers to supplement their education but I want to have the time to teach them important things myself. I would rather have a non-rushed bike ride to school with my kid than a fancy SUV to drop them off on my way to work. I’d prefer the free time and flexibility of inexpensively travel with my children than a rushed one week trip during Christmas break in between the five paid vacation days a year. Since I already have so much stuff, early retirement gives me access to free time.

Some people would rather work 80 hours a week until they are 90 so they can have a few more square feet of storage space and a deeper shade of leather in their BMW. For me, contentment doesn’t come from new toys and yearly lifestyle inflation. I’ve decided that I’m willing to trade that for time and freedom. I do enjoy the things I have; but once I realized I don’t always need more to be happy, it makes the pursuit of more stuff less attractive. Time to pursue my passions will make me happier than almost any thing I can buy.

How to Retire Early
The simple answer is: spend a lot less than you earn. I think the whole save 10% or 15% is pretty weak. That is designed for cubicle dwellers who want to be slaving away until they are 75. To start, let’s reset the metric to 50%. High savings rates actually do two things. Not only do they force you to pile up massive amounts of cash, but they also incentivize you to become more efficient with your spending enabling you to Attack Financial Freedom from Both Ends. To retire early, saving must to be a priority. You must also understand and discuss the ‘why’ or the motivation will fade.

The simple math. For sake of illustration and simple calculations let’s use expected returns of 10%*. So, if your family needed 100k to live off of every year, it would take approximately $1Mil invested to produce 100k a year. But, say you live an efficient luxurious lifestyle on 25k a year. In the simplest of terms you would only need about 250k invested to yield that income for the rest of your life. For a family making 100k combined, living off 25k would leave 75k a year to invest. Seriously, four years of work would give you plenty of money to be financially independent ($75k x 4 = 300k). Even for income earners making 40k a year, living at 20k a year would leave you financially free in less than ten years! Is the math that hard? How do you invest your money if you want to retire early? Well, the most popular investment vehicles for early retirees are paid for real estate, mutual funds (dividend funds) and efficient annuities. For investment specifics (inflation, compound interest, investments) and frequently given excuses check out Mr. Money Mustache.

The added benefit of early retirement allows you to live an off-peak lifestyle. When you have time and flexibility it actually saves you lots of money. You not longer have to compete with all the other working people on the few hours they have off. The other strange thing that comes up over and over again is that intelligent, motivated individuals often end up earning some money even after they retire. When people have the time and freedom to pursue their passions the byproduct is often small amounts of income. Which, combined with an efficient lifestyle, make the process even more attractive.

Crush Debt, Retire Early, Love Life
I don’t like debt. I like the freedom and time money buys me. And I’m looking forward to spending the majority of my life pursuing my passions and spending time with my family and friends instead of in a cubicle. Our lives are too short to be wasting away at a job you don’t love. Figure out what you want to do with your life. Learn to spend your money efficiently and join me on the journey to retirement before you are 40.

*More detailed or conservative modeling at the Shockingly Simple Math of early retirement. Also, for all the haters that can’t get past the 10%, complain to your friends about unrealistic expectations and keep working while investing 5% of your income and lament on how hard life is.


16 thoughts on “Crush Debt and Retire Before 40

  1. Beautifully written. I use the term “pretired” for the exact reason you mentioned: people don’t get it when you use the word “retired.”
    But other than that, this could appear word-for-word on my own site and fit right in.

    • I kinda like the ‘pretired’ term too. It has a nice ring to it. I’ve enjoyed seeing other people write about this exact topic. There are still tons of people that could benefit from a little more efficiency in their life!

  2. Love the article, really well written! I’m currently in the process of debt crushing (student loans) and I plan on using the Avalanche method. I know the snowball method that you had linked to can give psychological victories, I think the psychological victory for me will be paying less in total interest. I’m also going to be going for an ‘early retirement’ or ‘financial independence’ but I’m targeting more for around the age of 45-50.

    • It is cool that you have already gotten the processed started. Most people wait until after they are 40 to even think about any of these things. I think any way you chose to attack debt is a good thing. Just simply being aware and starting the process it better than most!

  3. Nice article. I have already crushed my credit card debt, but now I have to move on to the other debt. Though I am working on crushing all of my debt, I don’t really have a desire to “retire” early. I want to build my wealth, so that when I am ready to retire, which right now is around the average time, I can just do what I want, when I want. I am sure this plan will change, but right now, that is what I am up to.

    • We are in a similar position. We were pounding all the little debt but we have slowed down a little bit with the house. It has taken a little longer than expected but we are planning to have it all paid off before we turn 30! Also, Debt Roundup has some pretty awesome resources. We appreciate you putting all those together.

  4. It looks like we are very similar in philosophies. I have started saying that I refuse to have to work past the age of 40, although I would like to be able to retire at 35 if I so choose.

  5. I’m looking forward to reading through some of the stuff you have written. I enjoy it when I hear other people who are killing it so they don’t have to work their entire life. I think most people never even consider their plans until they are well past 40!

    • I was working a job I hated and realized that I could not sit there for the next 40 years just mindlessly wasting my life. I knew there had to be a better way.

  6. I love it, fantastic post. I particularly liked the hedonic treadmill nod, not too many people even know about the concept!

    I’ve gotta agree with you on the retire by 40 thing. Most people I tell about my desires here just think I’m off my rocker. They don’t understand how I could do it or even why sometimes. It’s a lofty goal but an especially important one.

    • I too think it is a lofty goal but I agree it’s worth it. I think most people love the idea of being FI but haven’t ever thought about what they would do with their life if they became FI. Thinking about that keeps me motivated to stay focused on the goal. Looking forward to reading through some of your post on your site too.

  7. We’re definitely on a similar path. It’s funny – recently a friend of Mr. PoP’s commented that we still live like we’re in college, and our response was, “Yeah! Don’t you remember how much fun we had in college just hanging out? We do that all the time!” It’s really not the most expensive things that bring joy to our lives.

  8. That is a great point. One of the things I loved most about college was all the free time. We didn’t have a lot of money but we were able to build some awesome relationships. It’s funny because I’ll probably always be a college student in some capacity (I work for a university and we can take free classes!). Keeps me young!

  9. I amnot in your position , am 47 and should beable to retire when 55 with 80 % pension, but the little things I can do will surely make it easier when the time comes, its great to see younger people doing so well when all you normally hearin the news is about gen y slackers who will never retire, keep up the good work you are not only helping people retire young but also to help people just do better in life even if they have to workmuch longer

  10. I feel the same way, all that stuff doesn’t really bring me happiness. I want to have real freedom to pursue what I want. One day it would be a passion for sports, the next day I would volunteer, and the next day I would work on a side business. This is what I really want, to be able to just live without being forced to do anything against my will. Because of debt, people are forced to go to a job they hate. I don’t want to hate anymore all I want is to be free.

  11. Steven, great write-up! My wife and I are shooting to retire by the time we turn 50, which will be our 25th wedding anniversary gift to ourselves.