I have always dreamed of faraway places. Ever since I was a kid, I could get lost for hours flipping through the pages of a world atlas or watching documentaries about people living on the other side of the world. So, it was natural that a year after college, I took off to travel. In no hurry to go home, I then moved to Guatemala.
Though my soul was bohemian, my head was begging for safety. I knew I could never be a bartending wanderer or do some other kind of unsteady work just to scrape by. I wanted a solid money cushion to support my crazy adventures, whether I’d need a $2,000 last-minute flight home or enough to settle down and furnish a new place.
So, when other working travelers were struggling, I was working for a law firm in the city, making around $3,000 a month. My rent was $200 (which included a weekly maid, all bills, HOA, doorman and gardening) for a shared apartment in the best neighborhood of the city. I could walk to bars and cycle to work.
Spending less than 7 percent of my take-home pay on housing and an occasional $3 for a taxi meant I was able to save a lot of money early on. This isn’t the case for most people, of course. The average American household dedicates about 33 percent of their income to housing, and 16 percent to transportation. If you’re doing the math, yes, that is about half of your income. It is these items that you should tackle first if you are trying to increase your savings rate.
The third line of any American’s budget is food, at around 13 percent of take-home pay. My Guatemalan diet included delicious fruits and vegetables, meat on a daily basis and little treats like an expensive piece of French cheese now and again. Dining out cost about $2 for a quick lunch and about $12 when I would go out with my friends. My total food budget was around $150 a month, or 5 percent of my paycheck, and could have been a third of that if I stopped dining out or paid more attention when grocery shopping.
When you sum up these “Big Three” — housing, transportation and food — Americans are spending 62 percent of their money. I spent 12 percent. This meant I could save 50 percent of my income and still live on 38 percent after my “Big Three” were covered.
That said, I did not move to Guatemala for the money. It is an amazing country with a lot of diversity, natural beauty and cultural wonders, and I love how easy life is down there. I spent three years living in the city and then moved to Europe on a whim because, hey, money buys options.
Five years later, though, I started missing Guatemala. And, before I knew it, I was crossing the ocean again with two suitcases and dreams of building a guest house. By then, I was living off my writing income, which had surpassed my last job’s income. I was prepared to quit my day job and become a location-independent freelancer.
When I left, my investments were generating enough passive income for me to live pretty lean. Should I lose all my writing clients, I would have to tighten the belt pretty hard to make ends meet, but I was confident in my ability to generate an income while letting my nest egg grow and adding to it.
Once again, having money made taking the leap much easier. And living in such a cheap country shaved years off my financial independence date. As soon as I landed, I started renovating a guest house, investing in land and growing my finance blog. After three years, my passive income streams were covering my expenses many times over.
You are usually considered financially independent when you have 25 years of living expenses saved. You can then use the 4 percent safe withdrawal rate rule to live off your nest egg forever. If you live on $40,000 a year, you would need to save $1,000,000 to retire. But, if you can live on $20,000, you would only need $500,000.
More on Retiring: How Long $500K Will Last in Retirement in Every State
With the median American income around $50,000, it would take 20 years of saving 50 percent of your income in order to save that extra $500,000. By moving to Guatemala and slashing my expenses in more than half while maintaining my income, I could reach financial independence in just a few years.
Now, I am not saying you should drop everything and move to a developing country. I love this place, but it is not for everyone. However, there are lots of opportunities for arbitrage even in the U.S. Moving to a lower cost of living area, especially if you are able to maintain your income level, can help you become financially independent and retire early. Think about it — it costs over 30 percent more to live in the District of Columbia or Hawaii than it does to live in Mississippi or Oklahoma. Is it worth your financial freedom?
More From Our Smart Money Squad