Some of you (or most of you) reading this are probably around 40, about the time when you realize “What am I doing with my life????”.  The job that you’ve done for the past 15 years seems boring and repetitive, buying things is no longer fulfilling, and what you discover is what you really want, more than anything else, is more free time.

Time to spend with family, time to work on your own projects, time to travel, etc, these are things that start to emerge as you get older.  You realize that working your job forever just to make some sort of management position is just ridiculous, and that no matter what you do you’re not going to get any more than a 3% raise.

3% annual raise

3% raise, that’s what it boils down to.  Company accomplishes major sales and makes millions and millions off your work, 3% raise.  Company struggles, 3% raise.  You just begin to realize that to the company, you’re just a number.

You also begin to realize that promotions have very little to do with production.  It’s all about who you know above you.  Most of the people I know that got promoted either got promoted because they were the first person on that project, or because they were good friends with the boss.  Very rarely did someone get promoted because of outstanding work.  In fact, most of the time I saw high performers get denied promotions because they weren’t considered management material basically because they worked too hard.

Employee A vs B

To elaborate more on that, Employee A spends half his day socializing with coworkers.  Going from office to office, he rarely gets too much done.  Makes a ton of friends, but not a huge amount of work.  Employee B however spends his time keeping the project on track, doing much of the work that Employee A is supposed to be doing.  When it comes to promotion time though, who is seen as the manager candidate?  Employee A, the person who doesn’t get anything done.  Employee B is seen as not being outgoing enough or social enough.  Punishment for a job well done I guess.

To make matters worse, a lot of time Employee A is oblivious to the fact that Employee B was doing all the work.  So now you have a chain where the overall boss thinks Employee A was a big contributor and knows nothing about B, and now even Employee A thinks he’s a top contributor and thinks nothing about B.  What does Employee B get for all this?

You guessed it.  3%

Is it too late for financial independence at 40?

Is it too late at 40?  No, definitely not, as long as you haven’t dug yourself too deep of a debt hole.  Hopefully you’ve been moderately saving as most people have who come to research this topic.  If you haven’t been saving all this time and want to reach FI, then it’s probably going to take some major life adjustments.

Let’s consider the three different paths people usually take.

Three Paths to Financial Independence

Family one has been saving tons of money in their 401k for years.  They also have considerable savings but not enough to reach FI.  Their core problem?  Sustainable cash flow.  How can you retire if the money coming in doesn’t equal the money going out?  Answer is, you can’t.  This is starting point A, where you have cash available to deploy to investments but not enough investments to generate cash flow.

Family two has saved some money in their 401k.  They also have some savings, but not a huge amount.  They have two problems.  One, their retirement account is underfunded, which means they need to pick up contributions to that, and two, their investments are pretty small.  This starting point B, where you have very little to deploy at the start.

Family three has no money saved in 401k.  They also have no savings.  They do have a gigantic house, 2 new SUV’s, and a lake house though (and huge credit card debt). Basically, they’re huge consumers, and have the debt to prove it.  This is starting point C, where you’re in the red substantially to start.

Paths Converge

Luckily, all these paths aren’t super different, and they all converge eventually.  Basically, in order to get going, the C’s need to move up to B and then to A, and the B’s just need to move to A eventually.  And A just has to switch their investment and expense philosophy some.

The first thing C needs to do is pay off debt.  Downsizing cars, sell off the lake house, etc.  These are tough things if you’re used to this life of excess, but if you want free time you’re going to have to give them up.  It’s going to take a year or two probably to get it all done.  It will also be hard at first, it takes a lot of discipline.  I recommend reading some books at this point off my 5 Best Financial Independence Books list.


Alongside this debt pay down, expenses have to be looked at very in depth.  All subscriptions, monthly bills, excessive shopping, etc need to be looked at very closely to see if they’re really needed.  When you really look close at what’s important to you, you’ll realize that most of the things that make you happy really aren’t that expensive.  It’s the vehicles and other shopping habits that can really do you in.  The best way to analyze your financial position is to input everything into Mint or Personal Capital.  Putting my financials into them was one of the best things I’ve ever done as it gives me a clear picture of our finances on a daily basis.

Once you’ve whittled down your debt to zero and cut back expenses significantly, you’re now ready to start saving.  First step, get your 401k started at least to get all of the employer match.  I would recommend choosing S&P 500 index funds with your money, they’re low fees and will deliver a solid return that will beat most other options.  This will reduce your taxable income as well, so it can save you money on two fronts.


Second step is to start saving.  A LOT.  Like 50% of your income or more.  Initially, you’ll want to just build up your bank accounts to have a few months worth of expenses in there, if you don’t already have them.  After that, I would suggest starting with putting the money in Vanguard S&P 500 index funds and start letting it accumulate.  There are other investment options, but to start the stock market is easy and offers decent returns.  You need a lot of money saved up to get you to starting point B.  It will probably take you a couple years of saving to turn around your credit scores and financial health.  Once you do though, you’ll have a much clearer understanding of the power of saving and how spending tons of money on depreciating assets can really wreck your finances.

At this point, family three has dug themselves out of their hole and is now close to family two in financial status (which is having some savings and some retirement).  Now that you’re at this point, it’s time to start looking at making your money work for you more.  The stock market is great, but it has one major issue…it doesn’t throw off much living cash.  Some of your best dividend stocks only pay 4%, so even if you have a million dollars it will only earn 40,000 a year.  $40,000 isn’t a big return on a million, and on top of that the market is pretty volatile in short bursts, going up or down 25% to 50% about every 10 years, making it hard to depend on it longer term.

Savings Snowball

Between your new savings rate and investments, your money should start to snowball.  Keep watching it in Mint and Personal Capital to make sure things are going according to plan, and keep expenses in check.  Don’t blow money on new vehicles or other things that could really set back your savings.

After a couple more years, you should be up to same state as family #1.

Now that you’re up to family #1 status, you can really leverage your cash and investments to really start snowballing your income.  To do this, you’re going to have to find some investments outside of stocks.  Stocks are great for the most part (7% to 10% gain average over time) but their volatility is very high and you have little control over the investment.

Alternative Investments

There are lots of alternative investments, but you also have to make sure that your investment doesn’t turn into a job.  Some of the best alternative investments (besides the rental houses and web sites mentioned above) are:

  • Real estate syndicates
  • Self Storage
  • Businesses

They all put off varying returns.  Real estate syndicates can be good due to tax advantages and their passive nature.  Some offer an IRR of up to 20%.  However, you don’t have much control and your money is tied up for a long period usually (5 to 10 years on average).  Also a lot of research needs to take place in order to vet the opportunity to make sure you don’t lose money on the deal.

Rental Houses

One of the better alternative investments is buying a rental house.  However, this takes a lot of up front education to make sure it will work for you.  If you’re not willing to put in the up front time, it probably isn’t going to work the greatest.  What a lot of people do is buy a house with a mortgage that makes a couple hundred per month to start.  That doesn’t sound like a lot, but if you put in $14k and get $2400 per year on it (not counting loan paydown or appreciation) that turns out to be a 17% ROI (return on investment).  Hiring a property manager for 10% of the rent can make it a very hands off investment.

Rental houses can offer good returns but the return varies wildly depending on the area.  Some areas are a lot better than others for rentals.  This also means taking on a lot more debt, so you have to be comfortable for that.  One major advantage of rentals is that you can leverage your money in this category, which means instead of spending 100k to earn 7% back on your money, you can use that 100k to buy 5 houses and make 10% on rent on top of 5x the appreciation and 5x the loan paydown.  Of course, if the market crashes, you can also be down 5x as much, so be aware of the risks.

The best places to learn about rental houses are books and the Bigger Pockets website.

Self Storage

Self storage is more of a job than other categories, but in the right place it can be a good deal.  There are opportunities all over but I would recommend getting educated before ever buying anything in this category.


Businesses are also often for sale.  You don’t want a job though, so it would have to be a business where you can sit back as an owner (preferably in an industry that you have knowledge about).  Earnings can be great or terrible, depending on the option.

Web Sites

Web sites are another good source IF you know how to maintain them.  Websites cost about 30x monthly earnings, so $30k will buy you a website that makes $1k a month.  Tax wise though it can hurt if you’re already making a good income, it isn’t dividend or capital gains.  If you have the technical know-how, it could be ok.  Starting with a cheaper website off Flippa that has aged a few years (don’t buy brand new sites) you should be ok.

Web sites are an up and coming play but they’re also somewhat volatile in both directions.  Websites can explode higher or lower with earnings with little warning.  One month you might make $100, the next you might make $500, then $50, then $1000.  It’s very erratic and seasonal usually, and Google updates can send you in either direction on a whim.  I would only suggest this if have technical knowledge or a high willingness to learn.

Covering Expenses

The whole goal of this is that you have to earn enough passively to cover all of your expenses.  So if your expenses are $30000 a year, you’re going to have to make at least $30000 a year in order to reach financial independence.  In fact you’ll likely have to make a lot more just so you can save additional money, when you’re later in life your money has less time to grow so you’ll need to keep saving even after you exceed your expenses.

The extra will also come into play when some larger expense comes into play like a roof for your house or your air conditioner needs to be replaced.  All of this is totally possible though with discipline.

Wrap Up

Hopefully this article has laid out the steps for financial independence over 40, no matter where you’re starting from.  I think most blogs/books state that most people can become financially free within 7 to 10 years no matter where they’re starting from IF they’re disciplined enough to make it happen.  If they’re not willing to make the sacrifices, then it isn’t going to happen.

My wife and I have been taking all the steps to make things happen.  We’ve got a wildcard though that a lot of people don’t have, a child with special medical needs.  Due to those, we’re going to have to have a lot more income than most just to cover that expense.  I’m sure a lot of other people have similar situations where their expenses are abnormally high due to a random circumstance.




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