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Live on One Income to Reach Financial Independence

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This post is brought to by Pauline of InvestmentZen.com

Financial independence is defined as that moment where your investments generate enough dividends, or passive income, for you not to have to work anymore. That point, to many investors, is attained when you can live on 4% of the value of your nest egg. Calculations have shown that by doing so, based on historical market returns, you should never run out of money in retirement. Thus, it is a two part equation: how much you save every month, and how much you need to live on each month. Both are obviously connected.

If you save 10% of your income every month, that means that every 10 months, you will have saved a month worth of living expenses. If you put that in a savings account, with today’s rates, that won’t get you far. It will take 10 years to save a year worth of expenses.

On the other hand, if you live on one income, and save the other, assuming you both make the same, your saving rate would be 50%. Every month, you’ll save enough to live for a month. After a year, you will have enough to survive a year without an income. Keep going and living on one income, investing your money at 5% annually, and financial independence is just 17 years away.

Yes, that means a couple in their early 30s can retire before they turn 50. But how exactly can you make it work on one income?

First, you need to stay focus for the next 17 years, and that’s not easy. So clearly define what life will be like once you become financially independent.

  • Will you travel together?
  • Will you volunteer for your favorite charity?
  • Will you enjoy your hobbies and spend more time with the grandkids?

If you can’t see it, you won’t want it enough to stay focused and disciplined for almost two decades. So think about all the cool things you’ll do, instead of having to take a second shift at 65.

Next, beware of lifestyle inflation. Instead of buying a bigger house, or getting a brand new car, focus on paying off your student loans, other high interest debt, and getting started on investing.

Finally, throw all your savings at your investments. You are living together now, so probably saving on rent combined. Invest that money. You are not going on so many dates. Invest that money. You don’t need to woo the other person with lavish gifts. Invest that money.

Having a partner to go through all that makes things much easier. You are your own little social unit now, so you can decide how you want to live your life. For example, you can invite your friends over for a potluck dinner instead of paying hundreds to go out. You can set a small budget for Christmas and bake cookies for the family as a thoughtful touch. Or barter baby sitting nights with your neighbors. I personally think you have an advantage against a single person to reach financial independence early. Your housing costs are reduced, it is cheaper to cook for two, you carpool almost everywhere… seen this way, the individual expenses are really limited. So it is that much more money you can invest.

Start by taking advantage of both company matches, filling up your 401ks and IRAs, and then other tax free accounts such as your SHAs or 529s if you have kids. The added tax credit and company match means you can actually make it work by saving less than 50% of your income, but if you are able to do 50% anyway, you will shave a few more months off your freedom date. Starting early as a couple makes it much easier to keep living on less once you have kids, and to build comfortable cash reserves in case of an emergency.

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