Personal Finance

Here’s the Key to Financial Independence (& It Has NOTHING to Do With Real Estate)

Expertise: Real Estate Investing Basics, Personal Development, Business Management, Personal Finance
49 Articles Written

Real estate investing is a wonderful tool. But the key to financial independence or any other worthwhile financial goal has nothing to do with real estate.

Instead, the basics of building wealth—whether that’s with real estate, stock investing, or starting a business—has three basic steps:

  1. Save money
  2. Invest the money wisely
  3. Harvest your wealth so that you can live off your investments

It’s fun to talk about No. 2: How to invest wisely. And real estate can be an excellent investment. This is why most of the articles, podcasts, and videos you see go into detail about that topic. 

And occasionally you’ll see content or a book (like mine, Retire Early With Real Estate) that spend time on No. 3: harvesting and living off your investments. Real estate is also a fantastic vehicle for this goal. 

But No. 1—how to save money—isn’t that sexy. Yet it’s the first step and the key to achieving success with real estate or any other wealth-building path that you take. I first learned about the power of saving money as a 23-year-old college grad, when I heard the story of “the gap.”

Related: Don’t Wait on Happiness: How to Enjoy the Peak and the Plateaus

The Story of the Gap

The fall after I graduated from college I was trying to figure out what I wanted to do with my life. I was an above-average college football player at Clemson University (Go Tigers!), but professional football didn’t work out. 

I wasn’t ready to begin a normal work career or to apply to medical school (I was a biology major in college). So, I decided to just take some extra classes at Clemson University for the fun of it. I loved to learn, and it would give me some time and space to think. 

My classes during that extra semester included entomology (the study of insects), the philosophy of science (yeah, I’m a nerd), accounting, finance, and business management. I loved all of my classes, but the professor in my business management class changed the course of my life.  

My professor was named Dr. Louis Stone, and he eventually became my friend, mentor, and private investor in real estate. Soon after I met Louis, he told me a story about a simple formula to build wealth (aka the gap). The story stuck with me and gave me a basic formula for achieving financial independence relatively quickly in my own life. 

Two paths with different heights of coins.

How to Become Rich

When Louis was in his 20s working in North Carolina, he met an older, wealthy gentleman. One day the old man asked him:

“Louis, do you want to know how to become rich?”

“Of course!” Louis enthusiastically said. (So did I when Louis asked me!)

“If you want to be rich, Louis, you need to learn to live on less than you earn.  If you earn $40,000, live on less than $40,000. Got it, Louis?”

“Got it!”

“Next, you need to earn $80,000. But you need to still live on $40,000. Got it, Louis?”

“Got it!”

“Finally, you need to earn $120,000. But you need to still live on $40,000. Got it, Louis?”

“Yes, got it!”

“Louis, if you keep doing that, you can’t help but become rich. And it will happen faster than you think.”

The point of the story was to create a larger and larger gap between income and spending. This savings gap is the magic of building wealth quickly and steadily. And Louis’ old mentor knew the natural tendency of young people in the workforce to inflate their lifestyle. And this, more than anything, destroys their chances to build wealth VERY quickly.

Related: The Simple Math of Early Retirement With Real Estate [With Real-Life Example!]

But Louis listened. So did I. And now it’s your chance. 

This simple idea of a savings gap has worked for many people. In fact, an entire book called The Millionaire Next Door shares example after example of millionaires who followed this simple path to wealth.  They lived simply, earned above-average income, and regularly saved an enormous amount of money. Nothing fancy. But very powerful. 

And although the concept is simple, it also has some interesting math behind it that I’ll share in the next section.

Mr. Money Mustache’s Simple Math to Retire Early

Pete Adeney, more commonly known as the popular blogger Mr. Money Mustache, retired at 30 years old after almost 10 years of work as a software engineer. Pete is a smart and funny dude who writes about his story and principles at  

One of my favorite articles from Pete is called “The Shockingly Simple Math Behind Early Retirement.” In the article, Pete shares that one factor more than any other allowed him to retire early. 

The key factor was his savings rate, or the percentage of his take-home pay that he saved.

This, of course, is the same as the savings gap that Louis, I, and now you have learned. And the results of the math relationship Pete found basically look like this:

This is a graph of the relationship between savings rate and time until you retire. As you can see, the relationship is not a straight line. The time to retirement gets significantly shorter the more you save. Here are the same results in chart form:

Savings Rate Years of Work Before Retirement
5% 66
10% 51
20% 37
50% 17
64% 10.9
75% 7

There are, of course, assumptions to this math, which you can see in the article linked above. For example, your expenses before and after retirement are assumed to be the same. And investment returns are 5% above inflation and withdrawal rates after retirement are 4%. 

There is also the very real challenge of income inequality and the unequal obstacles that people from different backgrounds face to increase income or to reduce their expenses. Simple math doesn’t solve those complex, long-standing problems that we should face as a society.

 But the main point I’m trying to make using Pete’s math is this: 

If you want to reach financial independence in a much shorter time than average, focus on becoming much better than average with your savings rate.

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And in this case, being average as a saver is not good for your early retirement plans.

You Need to Be an Above-Average Saver

The average savings rate in the U.S. as of December 2018 was only 7.96%. Sweden’s average rate was 15.35%, Canada’s was 1.49%, and the United Kingdom’s was .37% (less than 1%). 

Is it any wonder people are stuck at jobs their whole lives without being able to retire and take control of their money? The rate of 7.96% in the U.S. puts people on the FAR end of the graph with between 50 to 60 years to retire (without outside government help). 

If you want to retire earlier, even using incredible real estate strategies that somehow earn 25% returns won’t help you without savings. And that’s the whole point of this article. 

You FIRST need the savings rate, then you can focus on growing those savings with amazing investment strategies. Without first saving money, you’ll never make true financial progress. 

The Savings Rate Challenge

So, my challenge to you is to figure out your own savings rate. In rough numbers, estimate:

  1. Your total income
  2. Your total expenses 
  3. The gap or amount of savings
  4. The savings rate (savings ÷ total income)

Then, find your savings rate in the chart in this article to figure out how much longer it will take you to retire. Whatever your savings rate happens to be, the point is not to judge you. The point is to offer you a wake-up call. 

If you want to have more flexibility, freedom, and options in life, you need to improve your savings rate. The math and the concept are relatively simple. But applying the math to your life will make all the difference.

I wish you the best of luck with this important first step!

Do you know your savings rate? Have you calculated how long it will take you to reach financial independence?

I’d love to hear from you in the comments below.

Chad Carson is an entrepreneur, writer, and teacher who used real estate investing to reach financial independence before the age of 37. He wrote an Amazon bestselling book
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    David Pere Rental Property Investor from Oceanside, CA
    Replied 6 months ago
    CHAD!!! This is an important article for everybody to read. Savings Gap is such an important topic, that not enough people understand. As I always say, your income is rarely the problem...your expenses are.
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    Thanks for adding your thoughts, David! For people making good income, expenses are definitely the problem. I know there are certainly people who have low incomes as well, and in that case the challenge is building job skills to make more or building side-hustles to supplement the day job.
    Larry Melton
    Replied 6 months ago
    Nice post Chad!! keep up the good work!
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    Thanks for reading, Larry!
    Jason Rushin
    Replied 6 months ago
    Great content Chad, I can't wait to apply it in my plan!!!
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    Good luck, Jason! Thanks for reading.
    Chad McLeod
    Replied 6 months ago
    Great article! Frugality is definitely huge to building wealth. I’m guessing most people here have already read it, but The Millionaire Next Door is one of the best books ever written on this topic, IMO. Long story short, the people who look like they have money rarely do, and vice versa.
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    Yes, the Millionaire Next Door book is definitely a game-changer. Thanks for reading!
    Chad Lanting Rental Property Investor from Escondido, CA
    Replied 6 months ago
    Had to post, so if only for a moment, Chad’s were in the majority of contributors on this page. On a more serious note though, good article. It’s motivating to take an honest look at savings rate. Then while getting that ramped up, one can get back to talking about investing that money, or the fun one as Chad puts it.
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    The number of Chad's posting here really was weird! Lol. Thanks for joining the party:)
    Sri Ram Rental Property Investor from West Palm Beach, FL
    Replied 6 months ago
    Nice article. At the same time I think people need to be motivated and engaged in a manner that is healthy and for there retirement years. Lot of people can think of retiring at 30 or 40, but the main thing is to be maintain lifestyle which is gratifying, engaged, healthy for the 30 to 50 years of retirement. It takes a lot of planning.
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    I agree. The goal is to enjoy and be engaged in life both now and later into traditional retirement years.
    Avril Ann
    Replied 6 months ago
    Great article! I also believe that the initial focus on saving helps develop discipline and mindset, and gives you time to do research into the different investment vehicles.
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    Good point. The benefits of that initial focus on savings go beyond just the money you save.
    Ricardo A Perez from Hollywood Florida
    Replied 6 months ago
    @chad Carson hey Coach ! Thank you so much for the article. Thanks for keeping it simple save more than you spend.
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    You got it! That's the message. Thanks for reading.
    Michael Recinos from Columbia, SC
    Replied 6 months ago
    I was under the impression that savers are playing a losing game. Why would you leave your life savings in an account that yields >1%? Talk about risky.
    Chad Carson Investor from Clemson, SC
    Replied 6 months ago
    If you never invest the savings that'd be true. But those savings can be invest in real estate or other options that produce much more than 1%.
    Michele Orgel Rental Property Investor from Seattle, WA
    Replied 6 months ago
    I agree, Michael Recinos! But, I think he is actually saying to save that money to invest, not let it sit in an account. See #2 at the beginning. I am much more concerned about the part that truly applies to the majority, where Chad Carson says, "There is also the very real challenge of income inequality and the unequal obstacles that people from different backgrounds face to increase income or to reduce their expenses. Simple math doesn’t solve those complex, long-standing problems that we should face as a society." Breaking free from a gig-wage society, or heaven forbid, from minimum wage, is really out of the question for most Americans. Perhaps we should focus on solving that problem, at least simultaneously.
    Brad Stegall Rental Property Investor from Peoria, IL
    Replied 6 months ago
    I love this article!! Can’t invest what you don’t have because you spent it all. Since I have started investing in RE I have always reinvested the cashflow to buy more properties. It’s a forced savings account.
    Jeff Summers Rental Property Investor from Tennessee
    Replied 6 months ago
    Chad Bravo man. You’ve nailed it and it’s cool to see you get that advice early in life. I read The Millionaire Next Door in 1996 before I opened my first business. It quite literally changed my life. I’d always been a saver but Dr. Stanley made frugality seem just fine. And it is. I’ve always gotten more of a charge from my net worth than from what I drove. I’ve followed that path since then and at 50 I was actually quoted in his last book. My point is - a few of us got lucky enough to have 1 person who helped us early. That’s makes all the difference. I’m passing your story along to my 23 year old son who just graduated UT and has started his career. (He will listen to you ). Keep up the great work and thanks for the share! Best- Jeff S.
    Lionel Balland
    Replied 6 months ago
    That was good, thanks a lot!! Thought I was saving a good amount, but will increase the percentage after reading this! Makes a lot of sense, thanks! :)
    Chad Carson Investor from Clemson, SC
    Replied 5 months ago
    Always room to improve! But nice job for already saving as much as you have.
    Andrew Jaramillo from Snellville, Georgia
    Replied 6 months ago
    Thanks for the article. I definitely have an income problem. I'm great at saving but I also need to increase my income. Thanks again for the advice. (At least, I know I have part of the formula right and I'm on the right track).
    Chad Carson Investor from Clemson, SC
    Replied 5 months ago
    Yeah, the income problem can definitely get you stuck in wealth building. It's where side hustles (real estate or non-real estate) or new careers can help. But that can take a lot of preparation and work to execute. Do you have any particular plans to increase your income?
    Eric Salgado Rental Property Investor from Gilbert, AZ
    Replied 6 months ago
    Just had this talk with the boss (the wife) and couldn't agree more. Make more and save it. Big Fan Chad thanks for the post.
    Timeo Williams
    Replied 6 months ago
    Great post Chad!
    Lyle Gentry from Wichita, Kansas
    Replied 6 months ago
    I'm a big fan of savings but you've got to have income in order to have anything to save. I don't know about everyone else, but our income has been substantially reduced during the past few months due to the ongoing pandemic.
    Seneca Pena-Collazo Rental Property Investor from Dothan, AL
    Replied 6 months ago
    I’m a bit conflicted on the article. Disciplined spending is absolutely a key component of financial freedom, but it is a fine line to tread between disciplined spending and scarcity mindset/penny pinching. The Millionaire Next Door is great if you want to live like a miser and not enjoy socially fulfilling experiences for you and your family along the way, like traveling abroad. Having lived abroad, I think of the opportunity cost to me and my family’s cultural development if I waited until 65 to take trips through Europe, Asia, and Africa. I personally would look to leverage disciplined spending to ensure that the investment vehicles that are building passive income are sufficiently funded to ensure self sustaining cash flow. It’s a slightly different focus of working to create abundance instead of saving your way to independence. This enables a more measured approach to quality of life increases. I would like to think that I’m working hard so we can enjoy a great steak, high quality bourbon, and a cruise every once in a while vs. I can rest comfortably knowing that I scrimped and saved so can continue to live like a college kid when I retire. At the end of the day, I think we all can relate the fact that a luxury once experienced often becomes a necessity. Lastly, any inflation calculator will show that living on $40k in the 90s is like living on $20k in 2020. Savings is definitely a part of the equation, but it’s not the whole equation - and may not even be the most important priority.
    Nick Falcone Foreclosure Specialist from Grosse Pointe Shores, MI
    Replied 6 months ago
    If you're not saving at least 30% of your income and increasing your income yearly you won't achieve financial freedom early in life. If you want to get away from your 9-5 job you need to shed all extra expenses and work on building your income. I would even say increasing income is the most important thing. No one gets rich by saving money, not before they're 60 at least. I started saving 30% of my income and as it increased so did my percentage of savings. So I saved 30% of $50K but once I was making $100K I was saving over 50% and as my savings increased so did my Investments in cash flow producing assets which created a nice synergy enabling me to grow my income and net worth yearly by double digits. Had I allowed myself luxuries early on it would have taken me alot longer than 10 years to achieve financial freedom. Now, with the internet we can eliminate so much of the trial and error of investing with the knowledge available that it is much easier now to achieve your financial goals than before when I did it in the 90's.
    Jerome Kaidor Investor from Hayward, California
    Replied 6 months ago
    I did this. As a software engineer in the 80's and 90's, I saved about half of my income. When I was given a nice stock option, I paid off my house. When the parking lot at work filled with new BMWs and Benz's, I soldiered on in my old truck. In 1996 we bought a fourplex. Then in 2001, an 8-unit building. In 2003, a 52-unit complex. Then in 2006, a 20-unit complex. And in 2015, a 13-unit building. It hasn't all been smooth sailing; the 20-unit guy was a big loser - I lost about a million dollars on that deal. And lost another $350K on company stock. But it all worked out. And it all started with us having saved that $60K cash for a down payment on the fourplex.
    Sankalp Pandya New to Real Estate
    Replied 6 months ago
    Very important reminder. It can be taken for granted that although we are using real estate to increase our wealth we need to be cognizant that the proportion we are saving needs to be there too.
    Michael Robinson from Fort Collins, CO
    Replied 6 months ago
    I laughed out loud at this part — "I was an above-average college football player". You were extraordinary! The humble, down-to-earth way you write and conduct yourself does not go unnoticed or unappreciated! I also really admired that you took the time to acknowledge the complex challenges we face with equality and ensuring everyone in our society has an equal opportunity to earn the kind of living wages that make your step number 1 a viable path to financial freedom. Thanks for another great article!
    Wenda Kennedy JD from Nikiski, Alaska
    Replied 6 months ago
    My husband and I ALWAYS have lived close-to-the-bone. Our life is comfortable and modest. We have what we need, but we're not very good consumers. My step kids, when they were young, complained that we were the cheapest people on earth. We washed up, mended, and reused stuff that we already had. We didn't eat out very often. And we didn't buy a lot of prepared or junk food when we did shop. We read and took long walks rather than going out for expensive events or vacations. We drove older, well-maintained vehicles. And they thought we daily worked too hard at our RE rental and other businesses. We weren't cool. Now, as young adults, they have followed our lead. Now we're smart and very money-wise in their eyes.
    Harry George Rental Property Investor from Dubai, United Arab Emirates
    Replied 6 months ago
    I am proud of my gap rate. Since moving to Dubai I was able to avoid falling into the consumerist trap that many other expats seem to do. Since 2015, I have been living in a studio apartment of 600sqft and have been able to negotiate my rent down by 31% (getting rent appraisals in a falling market) while my salary has increased by 132% (combination of Ramit Sethi principles and job hopping). Still my wife and I live in the studio and don't spend much more than when I was on -132% of salary! I drive an 11 year old second hand car and we try to follow the principles of Bea Johnson (Zero Waste Home), to minimise conspicuous consumption. The best principle of this is that by decreasing my wardrobe through attrition (as each piece falls apart), eventually I will have only a few pieces of clothing left, all of which will fit into a carry on suitcase - so when we go on holiday our apartment is instantly AirBNB ready! :D
    Byron Hunter Real Estate Agent from Dallas, TX
    Replied 6 months ago
    Thank you Chad for posting this article. My wife are at a pivotal moment in our lives (almost debt free except for the mortgage and in a transition period from my old corporate job to my new self employed Real Estate agent career). This week I simplified our spending plan, so it will be easy for us to adjust our savings rate higher. This article was motivating, simple, and concise. Thanks.
    Paul Marthaler
    Replied 6 months ago
    Great article... No matter how much one makes, rich or poor, there is always the chance to follow the GAP... just what does one want to sacrifice to get there. Any for many, following a GAP plan may not be about being rich, it may be about being able to simply retire with fewer stresses after a lifetime's work. In one's 20s, it's very hard for many to forego the temptation of the latest i-phone, drinks out 3 nights/week and so on... we have to continue to change that mentality until our GAP is where we want it. Sadly, the CV-19 will definitely be a wake up call about the need to save and be prepared.
    Phil Baker Investor from California / Costa Rica
    Replied 6 months ago
    On this theme a proud papa has a story - One day I walked into my ex wife's luxurious townhome where I picked up my then 18 year old daughter. I said, "I see your mom doesn't like money." She said, "No Dad. She likes money." Knowing a bit about her mom's finances (she a pharmacist who likes sparkly things) I corrected her. "No honey. She doesn't like money. She likes SPENDING money. If you like money you keep (save) money. You collect it sweetheart. You don't spend it." It satisfies me to say that my daughter now 7 years later saves money - EVEN THROUGH her COLLEGE YEARS!
    Chad Carson Investor from Clemson, SC
    Replied 5 months ago
    That's definitely a memorable story with a great lesson, Phil! thanks for sharing.
    AnneMarie Iorio Wholesaler from Hellertown, PA
    Replied 6 months ago
    I’m going to teach my daughter this!
    Calvin Waddy from Trenton, Michigan
    Replied 6 months ago
    Fantastic story Phil. i will be using that anecdote!
    Alan L. Coker New to Real Estate from Chandler, AZ
    Replied 5 months ago
    This is a great article. Focus on the fundamentals is key! I liked the GAP story, thanks for sharing.
    Chad Carson Investor from Clemson, SC
    Replied 5 months ago
    Glad you liked the story, too. It definitely made a big impression on me!
    Carlos Garcia Investor from Florida
    Replied 5 months ago
    Important article Chad. You must decrease expenses and increase savings or increase income but still find a way to decrease your expenses and increase your savings as well. Well said. All the best, Carlos
    Chad Carson Investor from Clemson, SC
    Replied 5 months ago
    It's all about the gap, however you get there! Thanks for reading.