Early Retirement Freedom Chart

Do you dream of one day leaving the rat race? Who doesn’t? For me the idea of “retirement” does not evoke visions of fishing and golfing, rather the ability to do whatever it is that I truly want to do. Personally, that looks a lot like writing, coaching youth sports, and perhaps working with a non-profit for a cause I strongly believe in. Unfortunately, much talent is wasted doing the 30-year corporate shuffle to pay for “stuff.” What if you could begin to eliminate some of this “stuff” and find new ways to diversify your income to cover basic expenses?

kailuumStep 1: Tracking Expenses

One of the best ways to begin any new plan is to figure out a baseline. Dieters often begin a new fitness plan with the dreaded measurements of weight, BMI and bodyfat percentages. Think of this portion of your plan for an early “retirement” as your financial fitness evaluation. The very first thing you should do is figure out what you’ve been doing. Stop reading this and estimate in your head how much your monthly expenses are (debt payments, utilities, food, gas, etc.). Keep that initial estimate in mind as you move forward with this exercise.

At the beginning of the next calendar month start recording all expenditures, from the $2.00 cup of coffee to the $1,000 mortgage payment. If it is early in the month you may begin this step retroactively, assuming you can account for expenditures up to this point. For now, don’t be overly concerned with the method of recording these figures, just record them. Some people like to set up elaborate Excel spreadsheets; others prefer a ledger pad and pencil. During this first month resist the urge to reduce your spending. Try to spend and save as you have been doing to get an accurate representation of your starting point.

Step 2: Tracking and Diversifying Income

This step will take much less time, unless you are already in the enviable position of receiving daily income from multiple income streams. Most of you are probably like me. My first month of tracking income had exactly three records. Two paychecks and about $0.16 in interest from a savings account. Some of you may have even less. That’s fine – as they say in the book that inspired this entire exercise, Your Money or Your Life, “No shame, no blame.”

If you really want to step off the corporate treadmill one day, you simply have to increase your passive income either by investing current earnings in high-yield accounts, or by developing multiple income streams from part-time or freelance work, or some combination of the two. As long as you rely on your current full-time paycheck to pay for your expenses you are trapped in the rat race.

Step 3: Creating a Freedom Chart

At the end of the first month you should now have a detailed cash flow statement listing all of your expenditures and your household income. You may need to sit down for this step. For most people this is the point where they realize they are spending more than they earn. This overage accounts for what I refer to as “lifestyle debt.” It is the two hundred dollars you charged at the grocery store to float until you got paid, or the insurance bill you paid with your credit card because there wasn’t enough in checking. Lifestyle debt is a killer when it comes to early retirement plans. It ties up your income from future investment, and the interest accrued cheapens your future earnings.

Step 4: Project the Intersection

At some point in the future, as your passive income increases and daily living expenses decrease, your monthly expenses will equal your passive income. It is at this point that you are technically free from the rat race. If you received a pink slip from your job tomorrow you could survive indefinitely assuming your expenses did not increase significantly due to health coverage, etc. From this point of intersection forward you are continuing to work, save and invest to improve the quality of life in your early retirement. The more you have invested in high-yield accounts the higher your passive income will be, allowing you a few more expenses each month. You may decide to continue working at your full time job to generate some capital to put into your own business, adding even more to your passive income stream. Whatever you decide, the choice is now yours. At this point of intersection you are officially free from the rat race.

photo by davidandnasha


  1. This is excellent advice! Passive income is something I yearn to create for myself–hopefully through writing. I’m just turning 30, but I’ve already got visions of retirement dancing in my head…

  2. FrugalDad – I just found your site last night and love it! I especially like your post about goals to increasing passive income. I recently started my own blog last week specifically on this topic. I wrote a post yesterday about my current family budget (http://www.passivefamilyincome.com/2008/05/14/creating-a-family-budget/) which I hope to analyze from month to month to become financially lean and work towards financial freedom. I look forward to reading more of your posts.

  3. FD – We had the moment you describe in Step 3 a few years ago when we realized our lifestyle was inflated beyond our earnings. We cut expenses drastically and now we are debt-free except for the mortgage. It is nice to think that my income goes toward building wealth instead of paying interest every month.

    I hope more people will follow the steps you have laid out here to get themselves out of debt and on the road to financial freedom. It isn’t complicated, it just takes discipline.

    I am now working to develop alternate streams of income as you suggest.

  4. Excellent advice. This was a great mood booster! Give me a reminder fo what I want to focus on.

  5. I realized early on that I wanted to retire early.
    I didn’t go into it with a specific plan. Just invest as much as I could afford and avoid debt as much as possible. Not to say I haven’t made mistakes along the way. Might have done better with a plan like this. I am going to retire early this November.

    If I could give one piece of advice it would be think long term, and maintain an even emotional keel.

    Don’t get too excited when the market has a big runup. There is often a correction to follow. Don’t panic when there is a downturn. In my experience, the recoveries often outweigh the downturn.

  6. Last year, a friend of ours was able to borrow a copy of the board game Cashflow, a Rich Dad Poor Dad product. We spent a couple hours playing it while your article summed it up in 5 minutes.

    That’s not to discredit the whole exercise of playing “Cashflow.” I learned a lot from it.

    The first step is to get income to exceed expenses. It really is best to approach it from both sides – reduce expenses AND increase income. That positive cashflow is the basis upon which we build the passive income. If you have money left over at the end of each month, it’s going straight to the places where money works for you.

  7. Great post, this is exactly what I needed to stay focus on my goal to retire early in my life, run away from the rat race and enjoy the life I WANT.

    Thanks a bunch!

  8. You are starting to sound like Robert Kyosaki (sp?)…

    At the end of the day, it’s really about what is the best use of your time. My salaried job provides a far better “hourly” rate than any other gig I could spend my time doing.

    • @Doug: “You are starting to sound like Robert Kyosaki.”

      Not sure how to take that – I’m not a big fan of Kyosaki’s ideas on real estate, etc, but I did like Rich Dad, Poor Dad in the context of creating an income for yourself. You are correct, the best way to get ahead financially is to maximize your earnings for time spent. However, over time, you may discover that passive income streams (interest, PT income, real estate, etc.) can be just as lucrative. Thanks for your comments.

  9. FD- It is meant be good but dangerous for some who don’t fully understand the implications of such advice (self employment). I have read “Rich Dad, Poor Dad” and aside from RK’s misrepresentation of tax laws & misleading info about real estate his ideas about passive income are good. Your ideas about snowflaking are good also. The vast majority of folks out there would be wise to keep their day jobs. So I guess your post about planning the future is wise, however working for yourself is vastly more risky for the majority of folks who may be reading. Maybe this is just my experience in banking and lending…Keep up the great blog.

  10. Frugal Dad: I am 1000% on board with you. As we get closer to our intersection point, the more fun it is to try and get there! Thanks for the mention.

  11. I am always thrilled when I see someone talk about Your Money or Your Life. That book is a good 10 years old now and people STILL talk about it!

    • @Darla: Your Money or Your Life will never grow old! It is one of my top three favorite personal finance books ever read. So sad that one of the authors, Joe Dominguez, died relatively young and didn’t get a shot at sharing a follow up book.

  12. Create a Freedom Chart to Map Early Retirement..!! Sounds great. Thanks for sharing it.