Achieving Financial Independence On A Modest Income

There are some people who think that achieving financial independence before 60 is only for people with high incomes. I strongly disagree. You can still achieve financial independence sooner on a modest income.

A modest income is defined as +/- 25% of the median household income in America, which is roughly $75,000. In other words, a modest household income today ranges between $63,750 – $93,750.

A large part of achieving financial independence is having a strong money mindset. If you believe you deserve to be rich, you will likely put yourself in a position to get richer.

If you believe you don’t deserve more wealth despite people dumber and less talented than you making way more money, then less is what you’ll likely get.

The other part of achieving financial independence is having congruency between your beliefs and your actions. The more you believe, the more you need to take action. Otherwise, you might look back on your life, full of regret.

Anybody who has played competitive sports knows having a healthy mindset is more than half the battle to winning. And maybe that’s the problem? Not enough people are put in competitive positions to test their mettle.

You Can Make Excuses Or You Can Take Action

The disgruntled will say how it’s not fair other people are able to escape the rat race early with their six-figure salaries. Instead of seeing the various wealth target figures by age in Buy This, Not That as a motivator, some will just throw their hands up in the air and just give up.

The reality is nothing good comes easy! You’re either going to complain about why life is not fair or you’re going to do something to better your situation. Always choose the latter.

In a world where depending on only yourself for retirement is the way to go, having a weak money mindset can be devastating for your financial future. When it comes to achieving financial independence, the percentages often matter more than the absolute numbers.

However, the larger numbers always seem to mesmerize some folks into not being able to focus on the percentages. To minimize envy, please think about saving rate percentages, investment return percentages, and risk-appropriate asset allocation percentages on your journey to financial independence.

Achieving Financial Independence On A Modest Income

Imagine being 22 years old and finally landing your first job in finance at a top investment bank. You thought you were going to be rich, but nope! The bank sends you an offer letter in the mail for $40,000 a year.

What the heck? $40,000 in Manhattan was like earning $16,500 in Austin, Texas. Here are the cost of living salary equivalents to $40,000 for other major cities in America:

$26,330 – Washington DC Area

$31,893 – San Francisco

$25,554 – Seattle

$24,255 – San Diego, CA

$24,349 – Los Angeles, CA

$20,394 – Chicago, IL

$19,100 – Miami, Florida

$18,766 – Philadelphia, PA

$16,600 – Phoenix, Arizona

$16,100 – Houston, TX

Working Long Days For Not A Lot Of Money

OK, $40,000 was an OK salary back in 1999/2000 when I first started working. But not so much when it cost $1,000 to rent a room in Manhattan, the most expensive city in America. Watered-down beers were still $6 at local dive bars.

A regular day for me would start at 5:30 am and end at 7:30 pm. I’d then have to work another 5-8 hours on the weekend. When you add up all the hours a week, a $40,000 a year salary equated to earning only about $9/hour, or $4/hour above minimum wage at the time.

After only two weeks on the job, I realized I couldn’t last working such long hours for decades. Therefore, I logically decided to save as much money as possible to give my future self options.

I knew achieving financial independence wasn’t going to be easy. But I had to try in order to give myself opportunities when I was older.

One of the biggest mistakes I see young people make is not properly forecasting their misery. They think they will have the same enthusiasm for their job as when they first start in their 20s. This is seldom ever the case!

The question I asked myself was, what are the things I’m willing to sacrifice today to have a better life in the future? At the time, my answer was almost everything.

The more you want something, the more you are willing to sacrifice. If you don’t sacrifice by working longer hours, starting a side hustle for extra income, and continuing your education, you’re probably happy just the way things are. And that’s great!

For me, I had won the lottery getting a good job from a non-target school. Therefore, I tried my hardest not to screw things up.

$40,000 Salary Budget Breakdown

Below is my detailed budget breakdown when I was earning $40,000 a year living in Manhattan. Take a look and I’ll explain more below on my path to achieving financial independence on a modest income.

Achieving financial independence on $40,000 a year living in Manhattan

Saving For Retirement Starting At An Early Age

Back in 2000, the maximum you could contribute to your 401(k) was $10,500 a year. After several months of working, I got educated about the importance of retirement savings so I elected to deduct 30% from each paycheck to go to my 401(k). Once the maximum was hit, the contribution stopped.

By taking money off the top first, it was easier to adjust to a $28,000 gross salary. It also felt good that I didn’t have to pay a 28% marginal federal tax rate on the $10,500 either.

With $10,500 a year in pre-tax savings and another ~$2,200 a year left in after-tax savings, I was saving a blended ~31% of my gross income.

The retirement savings mistake I made back then was not also contributing $2,000 a year to an Roth IRA. I’ll always regret not contributing to a Roth IRA as well. However, I did end up using all my after-tax cash flow to invest in stocks, one of which did very well.

Run The Numbers

Was I going to achieve financial independence while making only $40,000 a year? It was hard to see. At the time, $40,000 really did not feel like a lot of money. But I had hope my income would grow as I gained more experience.

I did the math and knew that if I kept on saving at least $12,000 a year for the next 10 years, by the time I turned 32, I should have at least $177,000 with a 7% compound rate of return.

If I could boost my annual savings to $20,000 a year by living frugally and earning more income, in 10 years at a 8% rate of return, I could actually accumulate $313,000.

In another 10 years, with increased savings to $40,000 a year and 8% annual returns, the $177,000 would turn into $1,007,000. If I had accumulated $313,000 the first 10 years, it would turn into $1,301,563 ten years later! Ah, to become a millionaire by 42 would be great. So that’s what I shot for.

Only in retrospect did I realize the minimum investment portfolio balance to start feeling financially independent was about $300,000. Once you hit the $300,000 amount, your annual returns could provide enough to pay for basic living expenses.

The more pro forma calculations you can run, the more motivated you will become to achieve more wealth. You will find various ways to earn more, save more, and invest better.

Today, I just use free technology to track all my accounts in one place. The more you can stay on top of your money, the better you can optimize it.

Housing Costs ($920/month)

While many of my fellow financial analysts decided to rent a one bedroom for $2,100+/month (with the help of their parents) or split a two bedroom for $1,300/month each in a nice part of Manhattan, I decided to split a studio with my high school buddy down in the dead zone.

Our studio was at 45 Wall Street, a 10 minute walk to 1 New York Plaza where I had to get in by 5:30 am every morning. The traders and sales-traders would arrive by 6:30am. Therefore, I had to prepare as much printed research material about what went on overnight by the time they got in. Oh, how I remember the stress fixing photocopy machines!

By living close by to work, I not only was able to save time, but transportation money as well. I sometimes fantasized by taking a nap back home during my lunch break but that never happened.

Even during the depths of winter, our utility cost never got much higher than $40. When you’re living in a small space, it’s so much cheaper to heat. Besides, we were hardly ever home.

We didn’t have time to watch cable TV. There was no such thing as WiFi or streaming services back then as well. All I did was come home to a mattress on the ground and pass out. Drastically minimizing housing costs, makes saving for retirement much easier.

Getting your housing costs down is one of the most important steps to helping you achieve financial independence. If you can keep your housing expenses to 10 percent or less of your gross income, financial independence is an inevitability.

Housing expense guideline for achieving financial independence

Food & Drinks ($300/month)

A great way to incentivize worker bees is to offer free cafeteria access once you work past a certain hour. Because I didn’t have a lot of leftover cash flow, I would always stay until 7:30 pm and gorge myself with whatever was on the menu that day at 85 Broad Street.

After filling myself up, I’d “steal” some fruits and mini cereal boxes to feed myself free breakfast the next day. There was always random free food in the office I could eat. It was part of the culture that if an employee closed a deal or got a big trade to buy lunch for their team or the floor.

Despite the ubiquitous free food that got me fat, I still had a ~$300/month food and beverage bill because I’d occasionally go out with colleagues. When you go out with friends and colleagues, it’s customary to buy at least a round of drinks. I didn’t want to be seen as a cheapskate, even though I had a thin financial cushion.

Back then, stepping outside your apartment in Manhattan would cost you at least $50.

Related: The One Ingredient Necessary For Achieving Financial Independence

Vacation & Entertainment ($600/year)

Given I was working so much, I didn’t take any vacations my first year because there was so much to do and learn. If I got an entire weekend off, that counted as my vacation. Only after the second year did I fly back to Hawaii to see family.

During my weekends off, I’d go watch a movie in the theatre, go out for dinner, catch an occasional cheap ticket play, or go to some free event in Central Park. There are lots of relatively inexpensive or free things to do in a big city.

My firm did have the occasional analyst appreciation outing where they’d take us to watch the Yankees or take us to some restaurant close by. But there was never anything fancy or special.

Yes, sacrificing vacation time was not great. However, I believed I could one day have all the vacation time in the world if I worked hard until 40.

A Simple Life Was Just Fine

Even though my budget looks pretty boring and maybe even a little sad, I was simply too busy at work to spend money on anything else. To pay up for a nicer apartment felt stupid because I was hardly there.

To go clubbing or get bottle service at a fancy lounge with my fellow analysts would only limit my options in the future. I went clubbing maybe once a month or two, not every weekend.

Yes, I wanted to go to the Hamptons during the summer and go on European vacations like my colleagues. But I wanted to reach at least a 50% saving rate before I partook in such festivities. At a 50% saving rate, every year I saved meant one year of freedom covered!

I had my whole life ahead of me to enjoy. There was no rush. Besides, college was kind of like a four-year vacation with all the partying and studying abroad. So I didn’t mind grinding hard while I still had the energy. Further, many of my analyst classmates had family money.

My main focus in my 20s was achieving financial independence at a young age. I treated my investments as expenses so I could take care of my future self. Work was too miserable, which ironically propelled me to focus on my finances more than my peers.

$40,000 Was Just OK For Manhattan

If you want to adjust the $40,000 into today’s dollars, you can increase the salary and all other city salary equivalents by about 50%.

But $60,000 a year in Manhattan today (= ~$30,000 in Austin, Texas) is still relatively modest as well. After all, the median household income for the entire country is about $75,000 today.

See median income chart below by the St. Louis Fed. Elevated inflation is also requiring more people to make more just to run in place.

Historical real median household income United States through 2021

I knew the rough times wouldn’t last forever because there was upward mobility. I just needed to survive in the industry for 10 years. If so, I would make more in finance than in most occupations.

So long as I could stay frugal while I made more, financial independence was an inevitability. There really is no sacrifice saving and investing in your 20s when the ultimate reward is 1,000X.

According to eFinancialCareers, my old firm now pays $110,000 base salaries for first-year analysts when I only made $40,000 ($60,000 inflation adjusted). The young guns have it good nowadays!

first year analyst salaries at various investment banks

Advice For Modest Income Earners Wanting FIRE

If you want to achieve financial independence and have a modest income, here is my advice.

1) Live in a crap box. 

Be honest. If you have an entire room to yourself, you are living large. In US colleges, most students have dorm mates. In China, each college dorm room has bunk beds for 4 to 8 people. If you are a family of three living in a two bedroom apartment or larger with more than one bathroom, life is pretty comfortable.

There is no reason why you shouldn’t continue living like a college student until you can save at least 30% of your income. Housing continues to be the greatest expense most people face.

The more humble the place you live in, the more motivated you are to go outside and network and make more money.

Even after I got a raise and promotion at a new firm in San Francisco two years later, I decided to share a two-bedroom apartment with two other people. My rent in San Francisco was only $800, or $120 less a month than my rent in Manhattan. By keeping my living expenses low, I was able to boost my saving rate by another 10%+.

See: Lean FIRE

2) Work so much you don’t have time to spend money.

Your 20s are for learning, your 30s and older are for earning. There is so much to soak in that if you’re working 40 hours a week or less before the age of 40, you’re leaving a lot on the table. People everywhere around the world are outworking you because they are hungry to improve their quality of life.

Don’t believe me? Go to any major city in a developing country and witness their work hours for yourself. Taiwan is already a developed country, and only in 2016 did they put into law to limit work days from six days a week (48 hours) to five days a week.

Yes, you will likely have to suffer more than the average worker in order to make more money. But you know that because you are rational. Decide to either suffer earlier or later.

3) Don’t confuse yourself with someone else.

This is a common phenomenon I don’t get. If you only work 40 hours a week, how can you compare your salary to someone working 60 hours a week? You can’t. If you are 30 years old, how can you compare your net worth to someone who is 45 years old? Of course not.

If you work at a nonprofit, why are you comparing your income to someone working in the private sector? Nope. If you dropped out of college, it’s not rational to compare yourself to someone with a graduate degree.

If you are a new Financial Samurai reader, you can’t compare yourself to those who have been reading FS since 2009. It’s not possible since long-time readers have been able to benefit tremendously from the bull market and reading so much about money.

The same thing goes for comparing yourself with someone who has been reading personal finance books for a decade when you’ve never read a personal finance book in your life. The voracious personal finance book reader is likely much wealthier.

If you must compare, then compare yourself to people with similar backgrounds. Just know that comparison tends to lead to misery. If you want to aspire, eliminate the jealousy and learn from others who are doing things differently.

4) Max out all pre-tax retirement accounts.

You will adjust to your lower gross income because you will find a way to make things work. We get in trouble when we decide our lifestyle expenses first, and then figure out how much we can save after.

If you max out your 401(k), then you’ll always know that you’re building at least that much for your retirement. You will mostly likely be a 401(k) millionaire by the time you reach 60.

Please also keep maxing out your Roth IRA or traditional IRA if possible. Then work to contribute another 20% to your taxable accounts as your income grows. In 10 years, I promise you will be happy you did.

5) Ask yourself what’s wrong with making more?

Unless you are a terrible employee with low self-esteem and a severe disability, your earnings trajectory should be up and to the right along with inflation. With more experience and a stronger network, your income growth should continue.

If you can’t make more from your job, find another job. Don’t be stuck doing something that’s not rewarding. If you can’t make more by finding another job, freelance after work. The freelance industry is booming now. If you can’t make more money freelancing after work, start your own online business.

If you can’t start your own online business, be a rideshare driver. Don’t be too proud to get your hands dirty. If you can’t be a rideshare driver, be a Tasker. If you get shut out at the thousands of online gig jobs you can do, start coaching or tutoring.

We all have something we are good at. Maybe you can provide private sports or music lessons. Or perhaps you can do some freelance writing or editing. We’ve all taken music, sports, and English before.

Personally, I used to coach private tennis lessons. I still occasionally do private 1X1 personal finance consulting if there’s a good fit. I also make money from my severance negotiate ebook as well as potentially royalties from a traditionally published book.

Don’t think the only way to make money is through your day job. That is so pre-2000 thinking. Today, there is literally an endless amount of ways to make money thanks to the internet.

Keep Fighting For Financial Independence

Achieving financial freedom is tougher with a lower salary no doubt. But the good thing about having a modest income is that you have more upside! This is where having an abundance mindset really helps.

If you can control lifestyle inflation while continuing to save and invest, you’ll do just fine. It’s those who keep spending at the pace of their income increase that tend to get in trouble.

Instead of complaining about higher income folks achieving financial independence sooner than you, expend your energy trying to improve your own situation. Don’t let your fixed mindset keep your income static forever. For things to change, you have to change!

Remember to focus on the percentages. Improving your percentages is what will help you achieve financial independence the most.

The amount of income opportunities out there are endless. Take advantage!

Achieve Financial Independence Through Real Estate

Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.

Take a look at my favorite real estate crowdfunding platform, Fundrise. Fundrise manages over $3 billion in assets invested in the Sunbelt. I strongly believe in the long-term demographic trend of Americans moving to lower-cost areas of the country due to technology and work from home.

Investing in a fund that focuses on Sunbelt single-family and multi-family homes takes advantage of this long-term trend. Valuations are cheaper, net rental yields are higher, and there is more upside compared to more expensive coastal cities.

I’ve personally invested $810,000 in heartland real estate since 2016. I plan to keep on building my sticky and defensive real estate portfolio for decades to come. During times of volatility in the stock market, real estate tends to significantly outperform. Check all all that Fundrise has to offer here.

Achieving financial independence takes discipline. Sign up for Personal Capital, the web’s #1 free wealth management tool to get a clear overview of your investments. Not only will you see how your net worth is allocated, you can also get a better handle on your retirement cash flow needs and more.

The more you can stay on top of your finances, the better you can optimize your wealth. I used to use an Excel spreadsheet to track every line item each month, but now, Personal Capital will automatically track my wealth for me.

Personal Capital Asset Allocation
Log onto dashboard and click Investing -> Holdings to get an overview of all accounts

For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. If you would like an unfair competitive advantage in building wealth, pick up a hard copy of my instant WSJ bestseller, Buy This, Not That.

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