Retiring Young: How to Frame Your Thoughts for Financial Independence

Walking home from the train today, I was stride for stride with a lady for three quarters of the walk. She was about my age and probably had a similar destination, as there are at least half a dozen apartment buildings on my block.

We came to a six lane road, separated by a median, at exactly the same time. The crosswalk sign showed the red hand, but as I typically do, I began walking out into the street. I covered two lanes just as a car zoomed by in the third, and I reached the other side as another car raced past in the second lane. Neither were a close call, but both were a bit nerve racking.

I crossed the median and the other three lanes without issue. Looking back over my shoulder as I turned the corner, the lady with whom I was walking still stood on the side of the road, waiting for the white “walk” signal.

At that moment, I had a striking realization: the way I walked through traffic, leaving a peer behind, is reflective of the way I approach my financial life.

I take calculated risks, risks many others won’t take, to put myself ahead. Do I advocate closing your eyes and running across the road, hoping everything works out? Of course not. Similarly, I wouldn’t recommend investing your life savings in bitcoin. But there is a calculated approach, with just the right amount of risk, from which you can greatly benefit.

Alex Honnold, one of the best climbers in the world, recently said, “I differentiate between risk and consequence. Sure, falling from this building is high consequence, but, for me, it’s low risk.”

I like to apply Honnold’s risk/consequence paradigm to my investments. Ideally I would like investments that are low risk and low consequence, but those investments generally don’t provide the boost I’m seeking.

At 26 years old, most investment decisions I make are low consequence. Look at it this way: If I lose all my money on one investment, it sucks and I won’t be happy, but how bad is the outcome? I’m not married, I have no kids to support, no mortgage, a long time horizon of productive working years ahead, and I have the skills to make a lot more money – I can just start over saving.

On the other hand, if that investment turns out to be a home run and I double my money in a year, I am 27 years old with the amount of money that 30 year old me would’ve had without making the investment.

As I continue repeating the process, the potential negative consequence of each subsequent investment decreases because the money I start with is bigger every time. Also, my wealth grows exponentially, not linearly as if I were just stashing money in a savings account.  

The concept makes sense, but how do I put it into practice? Several days after my 25th birthday, I bought my first investment property. In the year that followed, I purchased three more properties, spending the majority of the money I had saved since graduating college.

Medium risk, low consequence. Worst case, I could’ve had four vacant properties, or maybe even four full properties where no tenants were paying rent.

Without evaluating the scenario from an objective perspective, many people would say it was high risk and high consequence.

Sure, there was risk. But I mitigated as much risk as possible by doing my homework and investing with a partner. Then I took action – I crossed the street in spite of the red hand.

A year and a half later, the properties are full, most tenants pay their rent on time, the headaches have been fairly minimal, and I’ve seen about a 25% return on my money.

This is one of many realistic investment possibilities for 20 somethings. The unique advantage we have at this age is low consequence, but that is a non-renewable resource, and the well is drying up a bit more each day.

If you want to retire before you’re gray, take the risk. However, if you desire the safety of linear growth and a traditional retirement at 67, wait for the walk signal.