”Financial Independence is for the rich and privileged.”

Now that’s an old chestnut that we are tossing into the fire. While a large income can grease the wheels, that scenario isn't the card everyone's dealt. Luckily for us, it's far from necessary. If you don’t believe us, just ask Dave here. He actually made the news for retiring at 28 after 10 years of working in warehouses .

If Dave could do it, you can too. In fact, most listeners are regular folks on middle-of-the range income. Yet, they are finding ways to tweak and stretch their income to meet financial goals.

In this episode, we explore:

• hypothetical examples to illustrate that even small, regular investments can make Financial Independence (FI) inevitable
• how to figure out your retirement income and expenses, calculate your savings rate, and identify three levers to hit your FIRE number
• and, lastly, the typical challenges of saving on a lower income, and the practical ways to overcome them

Remember, though: we can’t know everyone’s unique situation. And, ultimately, we're only speaking from many years of chasing and learning about FI. Your finances, personal situation, needs and goals look different than ours. So, take our insights as a source of guide and inspiration, not professional advice.

How long does it take to build a million dollar portfolio?

For anyone who’s on a lower income, building a million-dollar portfolio for Financial Independence (FI) might sound like a pipe dream. But let's play with a simple compound interest calculator and see how achievable this goal actually is.

Of course, all of the figures below are hypothetical. They assume – all things being equal – a 7% annual return based on historical performance . However, actual returns in the future may vary, and it’s important to approach these scenarios with that in mind.

For those of us starting from scratch, here's a look at what consistent investing could do:

• Investing $500 a month could grow to a million dollars in about 37 years .
• Doubling that to $1,000 a month cuts down the time to 28 years .
• Up the ante to $2,000 a month , and you're looking at reaching that goal in 20 years .

As you can see, increasing your monthly investment significantly accelerates your journey to $1 million. But what if you are in the position to invest even more aggressively?

• With $3,500 a month , the timeline shrinks to just 14 years .
• And at $5,000 a month , you could be looking at a million-dollar portfolio in just 11 years .

Now, remember that these figures don't even account for the superannuation contributions, which also get invested on your behalf. It’s easy to overlook, because you don’t see it. But, actually, your super is working for you right now, every day, without having to think much about it. And it can potentially speed up your million-dollar portfolio even more.

Put another way, here’s how much income you’d have theoretically…

Thinking about what it takes to build a million-dollar portfolio is just the beginning. It only gives you a good idea of what compounding can potentially achieve over long periods. Another important consideration is figuring out how much income you want in your retirement.

Before we go further, here’s a quick look at the methods we are demonstrating in the next sections:

• Income-based 20x rule (retirement income for at least 20 years )
• Expenses-based 20x rule (retirement expenses for at least 20 years )

For starters, you could work out your calculations using the income-based 20x rule . Essentially, the rule suggests your income should sustain your retirement for at least 20 years. For instance, let’s take the million-dollar portfolio we explored earlier. In this scenario, we’re assuming that amount already factored in dividends and capital gain.

So, if we break it down, dividing that million by 20 gives you about $50,000 annually. If the 2023 ASFA study is any indication, this sum puts you at a level where you can retire comfortably. Just remember, though: that’s for singles only. For couples, they’re going to be needing more than $70,000 to match that level of comfort.

Of course, what ‘comfortable’ means is purely subjective. That said, any suggested numbers should be treated as sort of a baseline only. You still have to take into account housing (if you’re renting), lifestyle, and effects of inflation by the time you retire.

This brings us to the second point. There are folks who want to make the transition into retirement smoother and less stressful. These are individuals who are probably used to a higher income bracket. And, understandably, they might want to maintain a similar lifestyle in their golden years.

Let’s say you’re accustomed to a $100,000 annual income. You’d need $2 million in assets to continue earning $100,000 annually.

In that sense, there's truly no upper limit (or lower limit) to what you might consider saving for your retirement. It all depends on how much income you want to live on.

In the end, your FI number should reflect your personal situation, goals and unique factors that general advice may not consider.

Alternatively, calculate expenses you need to retire…

While the income-based rule is a popular starting point, it’s missing important context that determines Financial Independence. Sure, wealth is great, and so is high income. But it's really your expenses that decide if your wealth and income can keep you going.

This is where the expenses-based 20x rule comes into play. In short, it involves basing your FI number on estimated expenses instead of income.

For example, if you're pulling in $100,000 annually, that doesn't automatically mean you're spending that entire amount. You might find that your actual living expenses – what you need to be content and secure – are closer to $70,000.

This is the base figure you should consider when calculating your FI number. It starts from a position of real needs rather than just replicating your current income. It’s less arbitrary, and it doesn’t stretch your investing timeline far longer than it needs to be.

Of course, it’s worth mentioning that, regardless of which 20x rule you lean on, you may still have to pay tax on your investment income. So, depending on your income sources and when you plan to retire, there may be tax liabilities that your FI number should take into account. For that matter, you can always check this Australian Taxation Office resource for the latest information. Or, if in doubt, speak to a tax professional or financial adviser for guidance.

Three levers you can pull to reach your FIRE number

After crunching the numbers, the next step is exploring the three levers we can pull to make Financial Independence a reality.

Now, we’re not going with the usual “get a higher paying job” advice. We understand that's not always within reach for everyone. In reality, many folks with lower income might already be maxing out the opportunity to earn more. There’s many reasons for that, but it’s usually because of industry limits or economic factors. These are things that are simply out of your control, unless you change careers or location.

Instead, let’s take a look at the other options below:

First lever: reduce retirement expenses

Often, we overestimate how much we'll need to live comfortably in retirement. The truth is, many of us will spend less because we're no longer saving for retirement. And, we'll have more time and opportunities to manage expenses, like cooking at home more often. If you go this route, you could significantly shorten your timeline to Financial Independence and potentially pay less taxes too.

Second lever: boost savings rate

Here's where a small tweak can lead to big changes. By increasing how much of our income we save, we can significantly shorten our path to FI.

Let’s say your annual income is fixed at $100k and your target is an income of $50k post-retirement (before potential taxes). If you manage to invest 20% per year (or $1,666.67 every end of month), you’re looking at a 22-year journey based on a 7% average annual return.

But bump that savings rate up to 30% (or $2,500 every end of the month), and suddenly, you're down to about 18 years. That's four extra years to enjoy life on your terms.

Third lever: extend the timeline

We know – nobody on the FI path wants to hear about waiting longer, but hear us out. Like many things in life, sometimes, we get more if we simply give ourselves a little bit more time. It’s tempting to rush towards retirement, but a few more years means more savings from your job. And, if you are investing them, it only means more time for compounding to grow that money.

Again, this is not professional advice. But, all things considered, saving more for retirement may sound like the more attractive, flexible plan.

Sure, some folks are pretty set with their current spending. That’s totally fine. And, if that’s you, all you might want is a retirement pot that keeps that going.

When you retire, though, your plans are most likely going to change. You might think you know what to do in your retirement. But, you’d never be able to predict the person you will be by then.

That change is inevitable, especially across something like 20 years. Chances are you might actually discover a hobby or take a part-time gig later on. Others might wake up one day and decide they want to move to another country. All it takes is one random moment to realise you don’t want the same routine for the next 18 years.

So, for those on a lower income, there's also something to be said for not rushing to retire. Adding just a couple of extra years to our work life could boost your savings a lot. A bigger allowance means you can truly fulfil the very essence of FIRE. And really, you can't do things on your own terms if your budget’s too tight.

There’s no hard and fast rule for savings rate—only what you can tolerate

That said, you might ask: “How much should we save, then?”. And the answer is: save as much as you can tolerate.

No, it’s not the most satisfying answer, but that’s just how personal and nuanced this topic is. Budgeting tips like the 50/30/20 method may be great for beginners, but they won’t suit everyone. A realistic budget that works is always the one that makes the most sense to you.

Let’s break this down further.

Typically, Australians might save around 3 to 5% of their income after tax , and many of us can definitely push beyond that. However, the real challenge begins when trying to go past the 20% mark.

Now, hitting that percentage often seems like a benchmark many aspire to. Yet, from what we've seen, it's usually more doable for those without extra responsibilities.

If you’re raising kids, for example, a 20% savings rate is going to require some serious budget gymnastics. It’s tough, but not impossible. Even so, we’d caution that there are things you simply should not compromise for some arbitrary number. And that includes your child’s wellbeing or quality time with them.

On the other hand, savings rates can be such a slippery slope for singles and the extremely frugal folks. For instance, Hayden would carry 10 kilo bags of rice on his back just to save a few dollars on transportation. Great for the wallet and a free workout. But, it’s not something everyone can or should do.

So, while it’s great to push your savings as high as you can go, remember to budget with reason. The best place to start is by accepting that some expenses are simply priceless. Happiness, health and quality time with your loved ones – these are worth far more than any amount of wealth. No-one in their final moments has ever wished they’d saved 5% more every month. It’s always “I wish I had tried surfing” or “I wish I went to Disney World with my kids”…

The keywords are ‘deliberate’ and ‘mindful’

The next step is to pinpoint what’s not worth the extra dollars. So, this time, we are focusing on mindful and deliberate spending wherever possible. To be clear, those two keywords are not the same as deprivation. TL;DR: it’s planned spending on things that bring real and long-term value to our lives.

Let’s dig deeper into these two concepts.

On one hand, mindful spending is where you really consider the emotional and practical value of a purchase. It's asking ourselves if this purchase will truly improve our lives or meet a real need.

On the other, deliberate spending is more about the strategy behind our expenditures. This is where you make more conscious decisions about where your money goes. It’s spending within context while keeping the bigger financial picture in mind.

At a glance, these concepts may sound confusing to put together in practice. So, let’s picture a scenario in which you’re booking a seat on a flight.

If you’re jetting off to a country you've never visited, a window seat is never a bad idea. Why not? It’s your first glimpse into a new place! You are soaking in the experience. And it’s these moments that make spending a little extra feel completely justified. On your way back, you can always get the cheapest aisle seat and potentially cut your travel costs.

On the flip side, if your travel is the usual run – say, from Sydney to Perth – the thrill isn't really there anymore. Paying extra each time just doesn't make sense. The best approach is to get the cheapest seat and redirect the savings into your goals. Make your money work harder for you instead of spending on the same old views.

And it's not just about the small stuff. Big decisions count too. If you’re driving a well-maintained 2012 Toyota Corolla, do you really need a second car? Weighing up the ongoing costs (insurance, maintenance, fuel), it could make more sense to skip it. That’s a lot of money saved – money that can grow, and potentially give you extra hundred dollars a week in retirement.

The mindfulness part comes in when you have to take kids and dogs into account. Or when you live in a rural area where the extra ground clearance could save your life. Even then, you wouldn’t really need the 2024 model of a full size SUV. Instead, you’d want to look for something that’s enough for your situation at a reasonable cost.

Practical ways to save money for middle- and low-income earners

In the previous sections, we’ve laid the groundwork for achieving FI on lower income. This time, we’re putting those lessons into a more practical perspective. Without getting into the weeds, there are three things you can do now to make some big savings.

1. Housing

Housing costs often eat up more of our budget than anything else. So, how can we tackle this without feeling like we're just treading water?

If you’re looking to own, it's tempting to stretch for that dream home, but often, a more modest place will do just fine. When you look at your options, just remember: ‘Enough’ is not the same as ‘too small’ (or ‘too old’).

So, consider older properties, or maybe something a bit smaller. Maybe it's not in the trendiest neighbourhood. Or perhaps it's five minutes further out from the city centre. At first, these options sound like a compromise. But, inevitably, you’ll quickly find out the minor details don’t matter much in the long run.

If you're renting, properties without the latest upgrades can lower rent dramatically. Skipping that en suite? That alone can shave a decent chunk off your monthly expenses.

2. Transportation

Cars drain cash faster than they burn fuel. If you’re single, ask yourself: do you really need a new SUV to drive around a city? Could a reliable older model work? What about a bike for those shorter trips? And if you’re in a two-car household, could you manage with one? Every dollar not locked in your garage is money you could be saving or investing.

Think about it this way: if a less flashy ride means you can boost your investment contributions, isn’t that a trade worth making? Especially when that trade could turn into extra years of freedom down the line…

3. Recurring expenses

Lastly, recurring expenses are your subscriptions, memberships, or daily conveniences. You barely notice them because they’re small and automated, and that’s the problem. The subscription business model is tricking you into thinking it almost costs you nothing. But, in fact, research by ING suggests that each Australian could be losing up to $1,261 every year to services they no longer use.

Obviously, not all subscriptions are bad. Some services you actually need for work or managing your finances. But, even if you were to keep half of those unused subscriptions and memberships, that’s still $600 extra going towards FI. If you want to bag the easy wins , start here and cancel as many as possible.

Summary and final thoughts

To round it up, we’ve made it clear that Financial Independence isn’t just a dream for the privileged. In fact, FI is genuinely achievable for folks on lower or middle incomes. If a former warehouse worker like Dave could do it, you can too.

Basically, you have two paths to FI. Either cut expenses where it’s reasonable or extend your timeframe a bit. Or maybe even both.

If you are in the position to earn more, that’s just a bonus. In the words of Morgan Housel: “building wealth has little to do with your income or investment returns, and lots to do with your savings rate”. A single earning $160k and saving $2k every month doesn’t know better than a parent earning $70k but managing to save $1k a month. It’s worth keeping that in mind.

Lastly, we’ve shared some of our personal strategies and ideas, not all of which will suit everyone. But, at the very least, we hope to spark some excitement about what’s possible for you. If you have any questions, drop us an email at hello at the Aussie FIRE podcast . Alternatively, you can DM us at @pearlerhq or Strong Money Australia .

Thanks for joining us, and we’ll catch you on the next one!

Happy investing,

Dave and Hayden