There’s no trick, no easy way of accumulating enough wealth to live off of for the rest of your life. It requires a lot of hard work and sacrifices but is very rewarding in the end. Although it isn’t easy, you can become financially independent and retire early by aggressively saving and investing.

As a teenager, beginning to become financially literate and learn about saving, investing, and budgeting will give you a huge head start as an adult. Although it might not sound interesting, understanding the steps of becoming financially independent will allow you to retire early and spend the rest of your life doing what you want. And the early you start, the early you can start spending your time however you want. Sounds pretty great, right?

FI/RE definition 

FIRE, which is an acronym the stands for Financial Independence/Retiring Early, is a community of dedicated people committed to achieving their major financial goals. The acronym FIRE combines two ideas: financial independence and retiring early. 

Being financially independent means having the ability to stop working and still live comfortably for the rest of your life. However, many people choose to keep working even after they’re financially independent so that they can have a higher quality of life in retirement.

Retiring early means taking the step to stop working once you’ve accumulated enough wealth, far before the average retirement age.

You might be thinking of retirement in the traditional sense and not be too thrilled about doing the stereotypical things that retirees do. But the truth is retiring early gives you the opportunity of pursuing your passions.

Whether you want to travel the world, write a book, become an artist, or any of the other endless possibilities, retiring early allows you to pursue whatever you want while you’re still young.

How to retire early

Retiring early relies on having enough money invested so that you make enough yearly income from your investments to sustain yourself. 

But, how do you actually do that?

You need to consistently save a high percentage of your income to accelerate how quickly you can retire. 

But if you’re just saving, it will take a LONG time to accumulate enough money to retire. Thats why investing is so crucial.

To help you understand why investing is so important and just having a lot of money won’t allow you to retire, consider this example. If you had $1,000,000 saved up at age 40 and spent $50,000 per year, you would be able to live off that money for just 20 years until you’re 60. 

In contrast, if you invested $1,000,000 conservatively, making at least an average of 5% per year (approximately half the average return of the S&P 500), you would make at least $50,000 a year indefinitely. This means you could live off your initial $1,000,000 investment for as long as you live and even increase your spending over time because otherwise, you would pass away with roughly one million dollars of unused money from your initial investments.

This example is, of course, a simplification, as it doesn’t take into account taxes or inflation, but it still demonstrates the enormous benefit of investing your money.

Calculate how much you need to retire

The first thing to do in order to retire early is decide how much money you need to retire. 

First, think about the lifestyle you want to have. If you’re content living a relatively minimalist lifestyle and not indulging in expensive purchases, you likely won’t need that much money to retire. But if you want to live a life of luxury, living in a mansion, frequenting expensive restaurants, and going on vacations, you have to plan accordingly.

Do a little bit of research and calculations to figure out how much annual income you would need to live the lifestyle you want to live. Once you have that number, multiply it by 20 to 25. This will give you the APPROXIMATE amount of money required to generate your desired income from investments, allowing you to spend 4% to 5% of your retirement money indefinitely.

This number is what you’ll be working towards to allow you to retire off of investment income eventually. 

How to build wealth quickly

In order to build wealth quickly, you have to save a significant percent of your income and will likely have to sacrifice short-term pleasures for long-term happiness. Although this percent is somewhat flexible depending on your income, you’ll likely have to save at least 50% of your income. 

But if you’re only saving up money, it will take a very long time to reach your goal of becoming financially independent. Thats why it’s crucial to invest your money so that it grows over time, instead of decaying from inflation.

What to invest in

It’s important that you choose good things to invest in so that you grow your wealth instead of squandering your hard work. There are many things to invest in, like real estate, cryptocurrency, and bonds, but investing in the stock market is the easiest and best way of saving for retirement. 

Index funds often provide some of the most consistent, long-term returns in the stock market, making them the ideal investment for long-term growth. 

“An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets” – Jason Fernando, Investopedia.

Although it’s not as glamorous as looking for the next big company like Tesla, whose stock skyrocketed in just a few months, index funds are one of the best and least risky ways to grow your wealth. This is mainly because index funds benefit from broad diversification.

“Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others. The benefits of diversification hold only if the securities in the portfolio are not perfectly correlated—that is, they respond differently, often in opposing ways, to market influences” – Troy Segal, Investopedia.

The best part is it’s not difficult to invest in index funds. In fact, there are many index funds that you can buy and sell, just like an individual company’s stock.

For example, SPY is an index fund that tracks the S&P 500, a group of the 500 largest US companies. This means that if you buy a share of SPY, you own a small portion of the 500 largest US companies. Pretty cool, right?

The one main drawback to investing in index funds is that it cost money to invest in them because of what’s called an expense ratio.

“An expense ratio (ER), also sometimes known as the management expense ratio (MER), measures how much of a fund’s assets are used for administrative and other operating expenses. An expense ratio is determined by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund’s assets, thereby reducing the return to investors” – Adam Hayes, Investopedia.

For example, if an index fund’s expense ratio is 0.05%, and you were to invest $10,000 in it, $5 of its profits would be used to pay management costs. This is an insignificant amount of money in the scheme of things, especially considering that the typical expense ratio of an index fund is less than 0.10%. 

Although investing in index funds is great, I do want to emphasize that investing in index funds is not the most lucrative investment. By definition, index funds provide “average” returns. 

If you are good at consistently picking individual companies to invest in, you’ll likely make more money than investing in index funds. But even the vast majority of professional investors underperform major indices, so picking stocks isn’t as easy as it may sound.

Where index funds shine is their consistency. You don’t have to deal with the volatility of individual companies. You can just relax knowing that you will receive long-term growth.

Avoid lifestyle inflation

As your net worth increase and your investments grow, it can be tempting to change your lifestyle once you can afford to. Maybe when you reach a net worth of $500,000, you decide to buy a new car or upgrade to a better apartment. This is called “lifestyle inflation.” 

“Lifestyle inflation refers to an increase in spending when an individual’s income goes up. Lifestyle inflation tends to become greater every time an individual gets a raise and can make it difficult to get out of debt, save for retirement, or meet other big-picture financial goals” – Will Kenton, Investopedia.

All though it may seem relatively harmless to reward yourself, this is very dangerous. Indulging before your planned retirement date is a slippery slope that can lead to squandering your wealth and wasting your time and effort.

How to invest as a teenager

As a teenager (or kid), it’s also possible to invest in stocks, but it is a bit more complicated than doing so as an adult. You can open a custodial investment account (UGMA) with the help of one of your parents.

“The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities” – Investopedia. 

Essentially, this means that with the approval of your custodian (the parent you set the account up with), you can invest in the stock market.

Chose the right brokerage

It’s also important that you choose the right brokerage to open a custodial account with. Each brokerage has different pros and cons that are especially noticeable for custodial accounts. Based on my research and experience as a teenager myself, I’ve found that the best brokerages for custodial accounts are Stockpile, M1 Finance, and Charles Schwab.

To learn more about the best custodial accounts for kids and teenagers, you can click here to read my article about it!

Understand the benefits of starting as a teenager

Although it may be overwhelming at first, it’s a great idea to start building good habits that will allow you to retire early and have the freedom to live life how you want. 

The number one most important thing to do as a teenager in order to set yourself up for financial success is becoming financially literate. 

“Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money, and it is a life-long journey of learning. The earlier you start, the better off you will be because education is the key to success when it comes to money” – Jason Fernando, Investopedia.

This will make it infinitely easier to begin investing, saving, budgeting, building a credit score, etc. Even though these are by no means required skills for teenagers to have, these are all absolutely critical skills for adults to know. The earlier you start learning about them, the easier it will be for you to apply them as an adult.

Although learning about personal finance is a good first step, beginning to build the habits of earning, saving, and investing is the best way to learn. You’ll make important mistakes that you can learn from so that you don’t make the same mistakes as an adult when you have more money and the stakes are higher. For these reasons, even if you’re still a teenager, it’s a very good idea to learn about money so that you can retire early and live life to the fullest.