A common assumption among the population, even among those aiming to retire early, is that you can’t build wealth and reach Financial Independence on a low income.
And the only stories you hear of lucky people who do manage it, are those with huge six-figure salaries and no kids.
Aussies with modest incomes simply haven’t got much hope in achieving much financially, let alone being able to retire at a young age. Is this actually true though?
In my view, no! It’s complete rubbish! And today, I’ll share my thoughts with you on why that is.
Wages and mindset
Unfortunately, we don’t yet have many case studies in Australia of folks reaching FI to draw on. So, at the risk of sounding like a self-congratulatory knob, I’ll use our story as one example.
Neither of us finished school. We both had relatively unskilled jobs. Mrs SMA was a travel agent and later moved to government admin. I worked for two years as a factory hand, and then eight years as a storeman/forklift driver.
Despite the lack of qualifications, our wages were quite healthy. On average, each of us earned $75,000 per year, before tax. That’s about the median full-time wage ($78,000), according to the Australian Bureau of Statistics.
To be honest, those incomes are very good for what are pretty non-technical jobs. So, this in itself suggests to me how good we have it in Australia. Certainly enough for two average people to become financially independent in ten years.
Yet how many people are earning these wages and feel like it’s not enough?
The funny thing is, if you ask people earning twice this much, they’d likely still tell you it’s not quite enough. It seems to be human nature to find ways to be dissatisfied. We always want more.
At both our workplaces, many were earning equal or more than us, but they had absolutely nothing to show for it. Wait, let me re-phrase. They had nothing meaningful to show for it.
Sure, maybe they had a brand new four-wheel drive in the car park. Or they’d just renovated their kitchen for the third time. Some even managed to avoid cooking altogether, and live on barista lattes, takeaway meals and junk-food snacks to the tune of a few hundred dollars per week.
But other than that, nothing. Two steps forward (income hits the bank) was routinely followed by at least two steps back (aaaand out it goes again).
The fundamental truth is that there’s no amount of money that can’t be spent. There’s no salary so high it can’t disappear into a deep sea of unnecessary purchases. That’s why falling into the mindset of thinking income is the barrier (or the solution) is so dangerous. For nearly everyone in Australia, that’s not the case.
Simplicity, stress and freedom
In our case, we managed to avoid the traps most of our peers were making, live moderately and get our lives back in under ten years. And the biggest factor in that was having a strong focus on saving and priorities.
No tricks, no great investment payoffs, no inheritance. But a willingness to question how we were living, and an effort to live more simply, in harmony with our desire for freedom and control over how we spend our time.
It later turned out that a simple life, in many ways, is better than a chaotic, rushed, stressful, high-spending life. And that’s fantastic news, because it means your happiness doesn’t suffer with a reduction in spending. If you do it right, it can actually increase!
Case Study 1: Moderate income earners
Okay, let’s look at some numbers. First, a base case scenario. We’ll take a couple both earning median full-time incomes (using the ABS figures) to run through a hypothetical time-frame to early retirement.
Household income before-tax: $156,000. ($78,000 each).
Household income after-tax: $121,500. ($60,750 each approx.).
Make no mistake, this is a HUGE amount of household income. And it’s here that a simple difference in perception leads people astray. Most households have grown accustomed to spending 100% of their available cash as their income has scaled up, so excess and waste has become normal.
Now, let’s suppose this couple is reasonably savvy with their cash and manages to burn through only half of their income. This is extremely doable and still lets them spend $60,000 per year!
With a 50% savings rate, starting from scratch, it will take them around 16 years to retire. That’s pretty damn good. So if they wise up in their mid 20s, they’ll be completely free by 40!
Of course, it’s possible to live a perfectly good life on much less than $60,000 per year. In fact, with our own level of spending at around $40,000 per year, this couple would be free in under ten years.
But let’s have this example be full of comfortable perks, like owning a nice home and overseas travel. I can already hear the moaners saying, “But my mortgage alone costs $60,000 per year, this just isn’t possible.” We’ll get to that later.
The main point of this article is whether Financial Independence is possible for low income earners. So let’s run some numbers on that now.
Case Study 2: Low income earners
Now we’ll assume our couple are not only low income earners, but getting paid the minimum legal adult wage in Australia.
Even in traditionally low paying jobs, many people are earning more than minimum wage, as they’re paid ‘Award’ or ‘Agreement’ rates. But let’s be ultra conservative here.
At the time of writing, the current legal minimum full-time wage is $740.80 per week. Or, $38,521.60 per year.
Household income before-tax: $77,043. ($38,521.60 each)
Household income after-tax: $69,335. ($34,667.59 each)
Can our couple achieve Financial Independence on such low incomes? What do you think?
Well, if they go splashing cash around like the middle-income couple above, they’ll save only around $9,000 per year. And actually, that’s a good example. In everyday life, people are often trying to keep up with those around them (appearance-wise anyway), burning through their entire salaries in the process.
And when folks try to live like others further up the income/wealth ladder (which many do!), their finances take a big hit. It’s ugly.
Anyway, while earning $69k and spending $60k, this couples savings rate is around 14%. While that sounds respectable, it means 44 years of mandatory full-time work.
They’ll become financially independent around traditional retirement age. In one sense, that’s a healthy outcome. But I also see a massive opportunity for freedom, and a more self-directed and enjoyable life gone begging.
So, what if our low income couple really upped their game? What if they, you know, actually started giving a shit about where each of their dollars is going?
Case Study 3: Low income earners – Optimised!
Let’s not beat around the bush. There’s absolutely no way our low income couple needs to spend $60,000 per year. Instead, I propose they can live a comfortable and contented life for much less, say $45,000.
How? By reading many of the ideas from this blog and other great sites. It first starts with a change in philosophy. Then, separating our spending from happiness. And generally, by learning to consistently make better financial decisions, until it’s effortless.
So, how do things look now with their spending optimised?
Well, their savings rate jumps to 36%. Because of this, they’ll now reach Financial Independence in 24 years. This magical effort of ‘giving a shit’ has brought their retirement forward by twenty years. TWENTY YEARS!
Despite their ‘low incomes’, they could now be wealthy enough to retire as early as their mid 40s. What is twenty extra years of freedom worth? For every sane person, it should be worth much more than a few holidays/extra bedrooms/car upgrades/etc.
Remember, this couple are earning minimum wage. The median full-time wage in Australia (which more closely resembles what Aussie adults are actually earning) is DOUBLE THIS AMOUNT.
So this is a fantastic outcome, and shows how fortunate we really are in modern-day Australia. We don’t suffer the same level of income inequality that other places do. In fact, we have the highest minimum wages in the world, adjusted for inflation and currency. See here, and below.
And these figures are before the most recent 3% increase, which is more than double the rate of inflation. Some people struggle to accept points like this. Either they’re stubborn pessimists, or they’ve been conditioned by too many poor-bugger-me/life-is-so-expensive stories peddled by the media.
In the above examples, I’ve also assumed no bonuses, no penalty rates, and no overtime. All of which are possible, or even likely, in a wealth-building plan.
Couples v Singles
At this point, it’s quite easy to point out an issue with these case studies. These are dual-income households. Is it easier for a couple, than a single to retire early? In most cases, yes.
But I haven’t chosen couples to paint a rosier picture. They just tend to be more common than singles, and they have an even larger amount of spending they can reign in!
It’s true that many costs are automatically shared, including big ones like housing. But that doesn’t for one second mean singles can’t retire early. They may just have to be a little more creative.
Singles can still share costs like housing. It’s called living with friends, or in a share house, or renting a room out in a place you own. And that’s a perfectly fine way to live. In fact, you could argue it’s a healthier and happier way to live, due to the social nature of sharing and having company.
Of course, some people prefer their privacy and complete independence over everything else. But that’s a choice to make. Just like you’d prefer to have your life back sooner, so you can choose how you spend your time.
Which preference is more important to you right now? Sometimes these trade-offs are worth it, because the truth is, we can’t have everything.
And don’t forget, singles may be able to up their frugality game more than a couple, as they don’t have to compromise on certain expenses to keep household peace. Or, they can choose to work extra hours without worrying about it affecting the relationship.
Saving as a single
So, our ‘optimised’ couple’s spending is $45k. For simplicity, let’s assume $22.5k is for housing and $22.5k is for everything else. How can our single improve on this?
For a start, he likely won’t need the same size housing as the couple. He’ll have less stuff and so is more suited to a smaller property. This should bring housing costs down at least a couple of thousand dollars per year (now $20k). At this point, he’s still living by himself.
As for his other expenses, again it might not be doable to halve these costs, but he can comfortably get these to $15k per year. So, our independent single ends up with annual spending of $35k per year – pretty luxurious in my book.
Assuming he’s a middle-income earner, he’ll have a savings rate of 42% and be financially independent in 20 years. But what if he got creative, decided to share housing, and either did some overtime or optimised his spending further?
I did these things myself in the early days when I was 18-19… earn pretty low income, work extra hours and share housing with mates, often managing a savings rate of 40-50%.
In this case, his after-tax income would likely rise to at least $65k (from $60k). And his spending would fall to $30k or likely even less (from $35k). Now he’ll reach FI in 15 years, at the latest.
But what if he’s earning minimum wage? Assuming he can manage the same as above (optimised spending and some overtime), he’ll be earning (say) $45k after-tax and spending $30k.
This gives him a savings rate of 34% and a 25 year journey to early retirement. So, even starting at age 20 after spending all his income for a few years, he can still retire in his mid 40s. Amazingly, all this is possible without sleeping in a cardboard box and eating from the bin behind the local McDonald’s.
What if you want to spend more? Simple – it takes longer. That’s the trade-off.
Children and FI
Is all this harder with kids? Of course. But I don’t believe it’s as hard as many assume.
For example, a friend of mine in Perth (an early reader of this blog in fact), retired at 32 with a wife and two young children. You can read his story here.
Probably the most famous example, Mr Money Mustache, retired at 30 with his (then) wife, and managed to live cushy middle-class lives, raising their son and doing all sorts of enjoyable things while maintaining low spending. In fact, he wrote an article about this very topic – the cost of children – which I highly recommend you read here.
Not long ago, I was watching a Facebook conversation unfold about the cost of child-raising, after a scaremongering article surfaced in the media. You know, one of those stories telling you it costs $1 million per child or something equally ridiculous.
By far, the most common answer on how much children cost from experienced parents in that group was: “It depends.”
After reading some more views on this topic, and applying some common sense, this confirms what I had always suspected was the case. That, like every other category of spending, the amount we spend on child-raising is largely within our control. It can cost an absolute fortune. Or it can cost a modest amount.
A savvy household can ensure their children have all the love, attention, teaching and support they could ever need, stopping short of pampering them and lighting their cash on fire.
Now, admittedly I have zero experience here, but from what I’ve observed, a reasonable amount to spend raising a small human is in the region of $5k to $10k per year (with $10k being on the extreme end). Again, see MMM’s article on this for the correct way to think about child raising and its associated costs.
The beautiful irony is, the parents who spend a more reasonable amount on their kids (and elsewhere), are the ones who’ll be able to spend the most time with them, ultimately giving their kids something the high-spenders can’t. That’s worth thinking about for a moment.
I know what you’re thinking. “But it’s different here, houses are insanely expensive!”
But if we’re looking at things rationally, that’s not necessarily true. Australia is a huge place and there is an endless list of more affordable places you can live, outside of the wealthy suburbs of Sydney and Melbourne. In fact, I’ve written about this before: Rent vs Buy – The Aussie Housing Dilemma
So what’s the solution? Don’t live in an expensive area, or city. If you are, then you should be taking advantage of the higher income opportunities there. And if not, then it’s simply a self-imposed trap.
If living in a fancy area is important to you, then work harder at improving other areas of your spending to make up for it. Going car-free is one great place to start, as the more expensive areas tend to have great walkability, access to jobs, shops, transport, etc.
And don’t forget, there’s also that other crazy option… Renting!
In fact, you might find that by renting instead of owning, and investing elsewhere, you could reach FI far sooner than you thought. Rents haven’t grown nearly as much as home prices over the last few decades, as can be seen in the declining rental yields below…
The chart is a bit old but you get the idea. On average, yields have declined further since 2014, with rents not moving much during the recent property boom.
In some cases, people are unknowingly choosing home ownership over their freedom, which is absolutely bonkers. Also, it’s sometimes assumed that you need to be debt-free to retire early. That’s not true at all. As long as you have enough investments to cover your spending, it doesn’t matter whether your house is paid off or not.
Of course, some people prefer to be debt-free, and that’s totally fine. But home ownership and having that house paid off, are both optional. So it’s a matter of priorities. For those who want to be hyper-efficient about their progress, investing tends to offer better returns than paying down a home loan. See here: Mortgage, Investing or Super – Where Should You Put Your Money?
Yes, interest rates are cheap, and for some, owning a home is a great form of forced saving. But property ownership comes with a long list of costs outside of mortgage payments!
So make your own decision here. But don’t be swayed by peer pressure or the fear of being ‘locked out’ of owning a home. For those who can manage their money well and invest regularly (which is hopefully everyone who follows this blog!), you have absolutely nothing to worry about 🙂
The role of frugality
If you’ve followed this blog for a while, then you know how important saving your money is. And this is even more true for those on lower income levels. Because there is simply less cash available to waste!
As a side note, from all the reader emails I’ve had since starting this blog, only one person has been in a genuine low income scenario that would make becoming FI very difficult.
On the other hand, I’ve had more emails from people with HUGE incomes and/or wealth who are having trouble retiring early. Why? Because they’re either completely wedded to their high spending, reluctant to sell their investment properties, or fearful of not having enough money.
Back to my point. Low income earners should always be on the lookout for ways to earn more cash. Whether through overtime, getting higher-paid work through training/education, finding a better company or simply through promotion. And if that doesn’t happen (or even if it does) then becoming a King/Queen of optimising your spending will be the best skill you ever develop.
Think about all the people you know. How many of them earn middle-income wages and save absolutely nothing? Hell, how many people earn multiples of that and still get nowhere? And how many believe that more income is the solution?
That’s right, almost everyone. But lack of income is not the problem. Their attitude, habits and desires are the problem. Their desires grow one step ahead of their income, no matter what. Kinda like this…
More money is not the solution. It won’t give people the breathing space they want. It will only create more desires.
Instead, these people need to think about how they’re living and where it’s taking them. In short, they need to adopt a more sensible and healthy way to approach life and money.
That’s where the FIRE Philosophy comes in. And instead of comparing their lives to the prosperous few above them on the income and wealth scale, they need to compare their lives to the less fortunate masses below.
As we can can see, achieving Financial Independence on a low income in Australia is totally possible. Yes, it’s easier for couples. Yes, a higher income helps. And there are people out there with genuinely difficult situations for whom this stuff isn’t going to work.
But luckily, the majority of Aussies are not in that camp. Being brutally honest, most of us just suck at managing money and are quick to rule something out as “too hard,” or reach for excuses to why it’s not possible.
Achieving FI on a lower income just takes more effort, more conscious spending, more creativity and yes, a bit more time. But the bottom line is, if you want to live a free, self-directed life, you can make it happen.
Let’s assume you buy into this idea. You really change how you spend money, and where you derive happiness from. What happens?
Well, for your peers, the first decade or two of their careers leaves them with a lifestyle and bills they can barely keep up with. In contrast, your decade or two spent working and learning leaves you with 50+ years of freedom to enjoy.
Now that’s what I call a damn good return on investment! If that isn’t motivating, then what is?
If you know someone on a low/middle-income who doesn’t believe FI is possible, please send them to this blog so we can sort them out together 😉