Most people think about financial freedom, or retirement, as a point in time when they can fully cover their living expenses with some sort of passive income. This usually involves saving a significant amount of money so that a small percentage could be safely withdrawn to cover living expenses each year. To many people, this seems impossible and out of reach. However, have you considered taking baby steps and retiring just one expense at a time?

Multiply-By-25 Rule

A few days ago, I was lucky enough to see ABC interview of Rob Bennett. Rob is the author of Passion Saving and has a blog called A Rich Life. During the interview he shares the Multiply-By-25 Rule. The premise of this rule is to save 25 times the annual amount of an expense. If your savings earn 4% real return, then the expense is paid for life — effectively, getting you one step closer to retirement.

For example, if you spends $100 on books a year, you can save $2,500 and the 4% return will give you $100 per year to spend on books for the rest of your life. Of course, there are caveats like earning 4% consistently, inflation, and taxes. This simply means that you have to save a little more or earn more from your savings.

The Psychological Power of Baby Steps

Anyway, I think the idea is really powerful. Similar to the Debt Snowball, it forces you to tackle one big goal in small steps. Instead of feeling helpless looking at the big number, you can work toward retiring one expense at a time until all of your expenses are paid for and you ultimately reach your financial freedom.

For example, look at your budget and start by retiring your smallest expense category first. Once it’s “paid for” move to the next smallest category. As you do this you’ll also intuitively realize that you can retire faster by reducing your expenses. Retiring faster by spending less — what a concept!

Anyway, I hope you love this idea as much as I do because I think it’s pretty awesome.

Do you have a financial question? Ask it now at Moolanomy Answers!

Copyright © 2007 – 2009 Pinyo B. This feed is provided for the convenience of Moolanomy’s subscribers. You are not allowed to reproduce the content within this feed in any manner.

Please visit Moolanomy Personal Finance Blog, Moolanomy Finance Directory, and Moolanomy Answers for more great content.

Source: Moolanomy Personal Finance