How to Achieve Financial Freedom in 5 Years
People who are wondering how to achieve financial freedom in five years face a pickle. On the one hand, financial freedom is a fantastic goal to pursue.
On the other hand, trying to accomplish it in five years is extremely difficult. But I’m not trying to dissuade you.
Generally, achieving financial freedom is hard. It takes patience, persistence, grit and determination. But trying to do it in such a short time span is like climbing a steep mountain.
For some people, it may not even be possible. Now, I sincerely believe that financial freedom is possible for everyone. But it might take longer than five years.
However, if you think you have what it takes to achieve financial freedom in five years, I say go for it! After all, you really have nothing to lose by practicing excellent financial habits regardless. So here’s how to do it.
Achieving Financial Freedom in 5 Years
Step 1: Calculate Your Expenses per Year
The first thing you need to do in order to achieve financial freedom in five years is to determine how much money you spend per year. In order to do this, first calculate your average monthly expenses.
To do this properly, you must include all of your monthly expense. These will include things like:
- Rent or mortgage payment
- Auto payment
- Insurance payments
- Food and household goods
- Entertainment and miscellaneous expenditures.
Did you know that the average American household spends $5,102 every month? So in our example, let’s say you find that your total monthly expenses add up to $5,000 per month, to make it a nice round number. Then you can calculate your average annual expenses as follows:
Average Annual Expenses = $5,000 x 12 months = $60,000 / year
So in our example, every year, you are spending about $60,000. Now, if your annual income is substantially higher than $60,000, you will be in relatively good shape to start putting away money to help you achieve financial independence in 5 years.
Step 2: Calculate How Much You Need to Save
When determining how to achieve financial freedom in five years, you first calculated your expenses per year. To be financially free, you’re going to need to be able to cover these expenses each year without worry.
In general, you will need to do this through passive income. That way, you will be earning enough money to cover your expenses without having to worry about your day job or any other activities.
In our example, you must have enough money saved to generate at least $60,000 in passive income per year by the end of five years. So how much money will you need to do that?
Let’s assume in this example that if you invest your savings, you can earn 10% on your money every year. That means your portfolio will be slightly more risky than the S&P 500, which tends to return about 8% per year on average. To generate $60,000 per year with a 10% rate of return on your savings, calculate as follows by dividing your total savings needed by 10%:
Total Savings Needed = $60,000 / 10% = $600,000
In order to achieve financial freedom in five years, you are going to need to save $600,000 in the next five years. Of course, that’s a lot of money! How will you be able to get there? That’s precisely what we’ll find out next.
3. Calculate Your Annual Savings Rate
The next step in determining how to achieve financial freedom in five years is to calculate how much you need to save per year. A wonderful tool to help you do this is our investment calculator.
Using this tool, you can play with the numbers until they make sense for your particular situation. But let’s continue with our current example and assume you need to save $600,000 in the next five years.
To do so, let’s assume a starting amount of $0 (you have no savings) and a rate of return of 10% with five years to grow. You’ll see that if you contribute $98,279 per year to your savings, you will save $600,003 in five years. This gives you a cool $3 to spare!
Now, if you earn a salary of $98,279 per year and put literally all of it into your savings, you could achieve financial freedom in five years. Unfortunately, you also have $60,000 per year of expenses you’re dealing with in our example.
A Summary of How to Achieve Financial Freedom in 5 Years in This Example
In order to have enough money to pay all of your expenses and save for financial freedom, you must have the following:
Net Income Needed = Annual Expenses + Savings Needed = $60,000 + 98,279 = $158,279 per year in net income
Therefore in our example, it works as follows:
- You earn $158,279 per year in net income
- You spend $60,000 per year on your expenses
- You save $98,279 per year towards your financial freedom
- You earn 10% on your savings per year.
In five years, you will have a total of $600,000 (and $3!). As long as you keep earning 10% on this money per year and your expenses remain the same, at $60,000 per year, you will be earning enough money to sustain yourself in perpetuity through passive income alone.
Congratulations, you will have achieved financial freedom in five years! Of course, now you have to apply this to your own real income, expenses, savings rate and investment rate of return. Then you can calculate if it’s possible to achieve financial freedom in five years – or how much longer it will take you.
Some Difficulties in Achieving Financial Freedom in 5 Years
In the example laid out above, getting to financial freedom was pretty smooth sailing. Unfortunately, your actual situation may make it a bit harder to get there. Let’s look at some common difficulties.
1. You Have Debt
When you think about it, money you owe as debt isn’t really your money. It’s money that belongs to someone else that you haven’t given to them yet.
If your money belongs to someone else, that’s a form of financial un-freedom. So in order to achieve financial freedom in five years, you absolutely need to get rid of your debt.
Depending on how much debt you currently have, this may not be so bad. For example, a few hundred dollars’ worth of credit card debt is not a large problem.
On the other hand, if you have a mortgage, car payments, student loans and thousands in credit card debt, achieving financial freedom in five years is going to be difficult, if not impossible. And it will likely involve selling your home – hopefully for a profit – as well as your car.
Unfortunately, your sociology master’s degree isn’t worth much on the resale market, so you will likely need to pay down your student loans as fast as you can. Plus, refinancing high-interest credit card debt with lower interest personal loans can also be a good option.
2. You Have No Savings
If you have no savings, achieving financial freedom in five years can be difficult – but it may not be impossible. In fact, in the example laid out above, there was an assumption of no savings, and we showed how it was still possible.
Fortunately or unfortunately, when it comes to being financially free in five years, your savings rate is going to be the main determining factor. That’s because over five years, your invested money doesn’t have a whole lot of time to compound.
Debt becomes a problem again, because if you have to pay down debt, that’s less money that you have for your savings. And that’s going to make your time to reach financial freedom that much longer.
There are different methods you can use to pay down your debt including the snowball method. In order to shave off all of your debt, you may need to spend some time living an austere lifestyle.
3. You Have Lots of Expenses
Like debt, your expenses work against you. The more money you are paying each month for your living expenses, the less money you will have to save for financial freedom.
One potential solution to this problem is to earn more money. This is possible in a variety of ways, including getting a better job, asking for a raise or picking up a side hustle.
However, it may be much easier to trim your expenses than to make more money. If this is the case for you, start with your largest expenses and see if there are ways you can slim them down.
For example, if you own a home or rent an apartment, you may want to consider downsizing significantly. This can save you a tremendous amount in living costs per month.
Other things you can do include cutting the cable cord, cooking instead of going to restaurants or ordering in, giving up that fancy gym membership, and walking to work so that you can sell your car.
Achieving Financial Freedom in 5 Years: Difficult but Worth It
Now that you know how to achieve financial freedom in five years, you may determine that it’s too difficult and not worth it. Indeed, it will involve a ton of present sacrifice.
However, it will also involve an incredible amount of future gain. And that may outweigh the present sacrifice for you. Only you can determine whether you really want it badly enough and whether you have what it takes to get there.
If you’re still feeling a little fuzzy on what financial freedom actually means and how it differs from financial independence, I encourage you to check out the article I linked by my colleague Amber Deter.
And for lots more information on how to achieve financial freedom in five years, sign up for our free e-letter. You will get powerful articles delivered to your inbox each weekday.
Achieving financial freedom in five years is a daunting task. But close your eyes and picture what your life could be like in five years if you didn’t have to worry about money.
Now take a deep breath and decide whether you’re ready to achieve financial freedom in five years.
It’s also time to ask yourself a very important question: do you know the difference between financial freedom and financial independence?
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.