How To Live Frugally and Achieve Financial Independence

What's up you guys? It's Graham here. So this is a really interesting topic: how to live frugally and achieve financial independence. This is something that at its core is really, really simple. It's not at all complicated. In fact, I could sum up everything you need to know about financial independence and give you the entire blueprint in this one single video, and that would be all you would ever need to know. And in fact, I intend to do that.

But it's also not that simple at the same time. See, if these concepts are so basic and easy to understand, then why is it that financial independence becomes like this elusive goal for 99.9% of the population? Why does financial independence need to be this pipe dream of, "Oh, I'll retire when I'm 65 after I've worked 40 straight years, and then I'll finally be able to enjoy the golden years I have spent so hard working towards?" Because I don't believe it has to be like that.

So I'll share my journey about achieving financial independence by the age of 28 and some really simple steps that you can do as well and follow along with. When it comes to me, I believe my financial independence journey started at the age of 18 because this was the first "aha" moment I had with really a definitive goal in mind. Now, at that time, I worked a very brief job doing data entry from 8 a.m. to 5 p.m. Monday through Friday, and working that job felt like an absolute prison. I felt completely trapped.

I saw the dead blaze looks of everyone working in their cubicle, waiting for the day to end just so that they could go home, watch TV, and then do the same monotonous, repetitive tasks the next day. And then they do that for 40 years. Maybe they retire, then they enjoy the last remaining years of their life, and then they die. They say that as people, we're more motivated by avoiding pain than we are by seeking pleasure. To me, there was nothing more painful than the idea of doing that.

I knew at that exact moment that I would do anything possible that I needed to do to avoid ever going back into a job that I absolutely hated. So I ended up switching careers and beginning work as a real estate agent. But because I instinctually wanted to avoid that job so badly, I saved everything that I made. I knew this: the more I saved, the more options I would have in the future. I would just think to myself, "If I could just save up enough and then invest this money, at the very least, I would have something to fall back on should something ever happen."

This is where we come to the first step of financial independence, and that is saving. In order to achieve financial independence, you must save your money and live below your means. How long it's going to take you to achieve financial independence relies entirely on these two things: how much money do you spend, and how much money do you save. This is what Mr. Money Mustache, a financial independence blogger, calls the "shockingly simple truth behind early retirement."

Based on right now your own income and expenses, you could just do the calculation really within a few minutes to see how long it's going to take you to achieve financial independence. For example, if you spend 100% of your income, well then you're never going to retire because you never have anything left over. However, if you start saving 25% of your income, you'll be able to retire in about 32 years and maintain your current standard of living today. If you start saving 50% of your income, you should be able to retire in about 17 years. And if you start saving 70% of your income, well, you should be able to retire in about eight and a half years. You get the idea.

Now, before I even found out about early retirement or financial independence, I was naturally a saver and just a very frugal person. It was just instilled in me at a really young age that you don't waste money, you don't buy things you don't need, and I prefer just having the mobility of having all of this money saved up in case of an emergency than buying all of these fancy things that I would never actually use.

So I did my best to save every single dollar I could. Starting at a young age, doing that for over three and a half years straight, saving as much money as I could, led me to buy my first rental property at the age of 21 years old. It was also around that same time that I just randomly discovered a community on Reddit called FIRE, which stands for "financially independent, retire early." This was an entire community of people just like me who loved talking about their savings rates, who loved talking about their investments, who loved talking about living frugally, all for the unified goal of being able to retire early.

When I found this community, I finally felt understood. I finally was no longer the single crazy person who loved saving money for the goal of investing it and growing the whole nest egg. I finally found a whole community of other crazy people who like to do this as much as I do. I swear people thought I was absolutely crazy for being involved in the whole retire early community.

I'll never forget when I was 23 years old; somebody asked me what my plan was, and I told them that I wanted to work as a real estate agent and then be able to retire by the age of 30. I literally had people laugh at the idea. They would joke and say, "Oh, ha ha ha, you know, you got a lot to learn about life — maybe try more like 50 if you're lucky!" Meanwhile, these were people spending a hundred percent of their income, living in huge houses, buying the newest cars, getting the newest gadgets. Here I was, saving almost everything that I made, living on like $5 Subway footlong sandwiches, not going to buy drinks at bars because I felt that was too expensive, and I was buying rental properties instead.

This is saying out there that I found to be so true: the rich stay rich because they live like they're poor, and the poor stay poor because they live like they're rich. This is basically what I ended up doing. That just brings me to my second point of financial independence, and that is cutting back expenses. Now, for the sake of financial independence and retiring early, you must do what you can to save more money. You must do what you can to live below your means.

See, I'm the type where I like living in Los Angeles, I like driving a Lotus Exige, I like being able to travel anywhere I want. But the thing is, these things don't need to be expensive. These are a few ways that I have found to cut back on expenses without cutting back on experiences. Now, the first and biggest expense we all have is housing, and it's estimated that as Americans we spend between 30 and 50 percent of our incomes on housing. To me, this is just way too high. I believe there's a better option there.

I know a way where you can live entirely for free and cut down your housing expenses to absolutely zero, and this is what I'm doing as well. It's called house hacking. This is where you buy a multi-family home, let's say a duplex, triplex, or four-plex, you live in one of the units, and you rent out the other units. You can also do this by buying a single-family home with a guest house on it or buying a single-family home that maybe has a detached basement or something that you can rent out separately to bring down your cost of living.

Typically, when you do this right, renting out the other units is going to cover your entire ownership cost of owning that building. And there you go: all of a sudden you've found a free place to live entirely for free. Now, to actually do this, it requires that you save up about ten to twenty percent as a down payment on the cost of the building. But when you do that, you can leverage that money for pretty much the rest of your life for free housing.

Now, if you don't have the down payment to buy something right now, no worries. You can also do what's called rent hacking. This is where you rent a house and then you rent out a few of the other rooms to cover your cost of the house, or you could just go and live with roommates. This way you just end up splitting the cost for all of the common areas that you barely end up using anyway, and the only real cost is a smaller amount for the room that you use.

Now, besides housing, another large expense that we tend to have is our car. Now, I'll be the first to admit that depending on the industry you're working in, sometimes image can matter, and it can't help to drive a nicer car. But this doesn't need to be expensive. For instance, when I was 19 years old, I went and bought a used 2006 Lotus Elise for $30,000. That car probably gave me the same enjoyment as I would have gotten from a $500,000 Ferrari. I ended up driving that car for two years and ended up selling it for $30,000, the same price I bought it for. I lost absolutely zero money for the car, and if anything, that car ended up making me way more money than I spent on it from meeting new clients, going to car meets as a real estate agent.

But really, my entire point is this: you don't have to spend a fortune to get a car. If you're a car guy like me, you want to drive something cool and fancy and rare or maybe exotic, I totally understand that. But that also doesn't need to be expensive because you could do what I like to call car hacking. This is where you buy an exotic car or really any car at the bottom of its depreciation curve, drive it for a few years, and with that, usually if you buy the car correctly, you'll be able to sell it for about the price you paid for it. Or if you're not a car guy, pretty much any five to eight-year-old Honda or Toyota keeps its value; they rarely depreciate, and this is something you could pretty much drive to the ground for just a fraction of the price of just about any other car.

Now, besides cars, let's then focus on entertainment, and when it comes to financial independence, there's really a fine balance that comes with this. Now, I'm in the type of mindset where you should go out and enjoy yourself. You don't need to be huddled up inside all day just for the sake of saving money, but it's important to know that you spend your money on things that matter the most to you. For example, as a young 20-something, I saw my friends easily blowing like a hundred bucks on a Friday or Saturday night just for going out, between Ubers and buying drinks and buying food and then an Uber back. Easily a hundred bucks!

Like, it just completely boggled the mind for me how anyone could go to a bar, order five drinks at like $13 each, when they could just go to the grocery store, buy the entire bottle themselves for like $18, pre-game beforehand, and then go to the bar and order water. It's the same thing! Basically, what I'm saying though is that I found a way where I can go out and have the same experience as all of my friends are having without missing out, except I found a way to do it for 10% of the price.

Also, when it comes to buying food, those $15 to $20 lunches every day at work start to add up really, really quickly. So instead, I just made the decision to go and make food at home and bring it into work, and I got my cost of lunches down to about $5. And then again, I would just save the rest. And come on, let's be real here; I'm a guy in my 20s! I don't just sit around doing nothing all day. If all my friends are going out to dinner one night, I don't just say no to that. Of course, I always say yes!

I think it's important to live life, but when it comes to me, I honestly don't care about food. It sounds weird, but I get the same enjoyment eating like a petit filet at Mastro Steakhouse as I do scrambling eggs and cheese at home. So if I end up going out to dinner with a whole bunch of friends, I just usually end up eating an appetizer instead of ordering an entrée so I can get the same experience as everyone else, except the appetizer is 1/3 of the cost of an entrée.

And again, as usual, I just save the rest. The same could also be said about travel. Some people absolutely love to travel, and I have family up in Canada that I like to see twice a year. At $700 per round trip ticket, that adds up and that gets pretty expensive. But I found it does not need to be this way; you can learn the art of credit card churning, which is basically you could sign up for credit cards to get the reward points and then redeem those for free travel. And all of a sudden, all of your travel is free!

When it comes to me, I haven't paid for a plane ticket or hotel in probably like three or maybe even four years. Right now, I have easily over half a million points, and I can fly first-class on multiple round trips anywhere I'd like to go and stay in any hotels I want to stay at — all for free. And clothing can be another really big one! I think a lot of people are shocked when they figure out just how little I spend on clothing. Most of the stuff I buy is from H&M. All the jackets I buy are usually from Zara, and they all cost, for the most part, under $100.

Most of the clothing I have, I've owned for years, and I bought them on sales or clearances or Black Fridays. This is a shirt, I kid you not, I've had this shirt—this same shirt—for about 10 years, and I bought it at a Ralph Lauren Outlet 10 years ago. I just keep it in good condition, I guess. Not even kidding! Fun fact! But for real though, in most of my videos, no one knows whether or not I'm wearing a $50 shirt or a $2.50 shirt from H&M. Plus, styles just go in and out every other year or so, and I don't want to be stuck spending like $500 on a thing that is going to make me look ridiculous two years from now.

It's just really important not to get caught up in the cycle of buying new things just because you can and really focus on spending your money in the areas where it really matters the most to you. See, I don't care about buying drinks; I don't care about spending a hundred dollars on a steak; I don't care about buying expensive luxury designer clothing. I care about having the freedom to be able to pursue whatever I want in the moment without money getting in the way. To me, that is true enjoyment.

But with that said, that then brings me to the third step of achieving financial independence, and that is staying out of high-interest debt. This is really pretty much the kryptonite to financial independence. Most people don't realize just how much high-interest credit card debt, high-interest medical bills, or student loans really tie up your income and set you back years or even decades. Throughout my entire life, I made sure to stay out of any debt that isn't a low-interest fixed-rate mortgage. That's it!

I also make sure to never carry a credit card balance. I also make sure to never finance anything I cannot afford. Of course, I still leverage my money if that debt just ends up making me even more money, like with real estate. But I also believe that if you're paying more than a 5% interest rate, then it's probably in your best interest, pun intended, just to pay that off early.

Now, besides cutting back and saving, which is really the foundation of financial independence, it's then important to go on to the fourth step, and that is investing. Now, this is another very, very simple one, and the concepts are as easy as this: number one, take advantage of all of your tax-advantaged accounts such as a Roth IRA, 401k, or HSA. This saves you money on taxes, and there's absolutely no reason why you shouldn't be taking advantage of these.

Now the second thing is to invest consistently and invest long-term. Take a percentage of your paycheck that automatically goes into your investments without even thinking about it. No matter what, ideally this should probably be 20% of your paycheck—preferably more—but my recommendation is a minimum of 20% if you can. Now the third thing is time the market. Just invest consistently no matter what the prices are. The fourth thing is that you should be investing in a well-diversified low-fee index fund. Vanguard and Fidelity both have amazing options when it comes to this.

Then the fifth thing you have to do is just let the markets do their thing and stay consistent. Now, for the majority of people out there watching this, that’s it! That's all you need to do. Some people might want to throw real estate into the mix, but for all of those that just want to take a very lazy approach and not be involved in any of that, for probably 90% of people out there, this is probably just all you need to do.

And here's how you find out when you're financially independent: this is when your portfolio value becomes 25 times what you spend annually. So this means if you spend $50,000 a year, you are considered financially independent when you have $1 million,250,000 invested. Or if you spend $80,000 per year, you will need $2 million invested. Or if you spend $200,000 a year, you'll need $5 million invested. This is based on what's called the Trinity study, which suggests that you can withdraw 4% of your portfolio every single year for life without running out of money.

That is the very simple math behind early retirement! It's just a simple function of how much money you spend, how much money you invest, and then just waiting until you hit that number where your portfolio is 25 times your annual expenses. And that is exactly how I was able to achieve financial independence at the age of 28 years old. And yes, you know, I'll be the first to admit that doing this by the age of 28 years old is by no means normal, and I had several things working dramatically in my favor that helped contribute to that.

For instance, I was working as a real estate agent in a very high cost of living area, where the average home was worth about two to two and a half million dollars, and that translated into very substantial commissions. I also invested from the bottom of one of the longest bull markets—actually, the longest bull market we have seen in our entire history. So I'm not going to be naive and think that those two things didn't have a huge factor in where I am today, because they absolutely did.

But one of the things I did have control of throughout the entire process was that I never increased my spending. I continued to keep my personal expenses as though I am making a minimum-wage job. I can make a hundred thousand dollars a month; I won't spend a single penny of that. Instead, I will take all of it, I will save it, and I will invest 100%. Now, going after early retirement and financial independence is going to be different for everybody. No one needs to be as extreme as I am in some of these places.

It really just comes down to recognizing what's the most important to you, spending money on that, and then cutting out the things that really don't add as much value to your life. And basically, the entire blueprint of this entire video and the entire financial independence retire early community is just this: save your money by cutting down on your expenses just so that you can invest, and you can retire when your investment portfolio reaches 25 times your annual expenses.

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