What does it mean to get out of the rat race?

To me, the phrase “getting out of the rat race” represents the desire and drive within most of us to live our passions and achieve our goals. If you are living the life of your dreams at a 9 to 5, then the rat race does not exist for you. If, however, you are simply working at a 9 to 5 (or 8 to 5, or 7 to 3, etc…), out of safety and inertia, not out of love and passion, then you could be looking to get out of the rat race, too.
I currently have it good for my stage in life, and compared to many other people and where I could be, I really have no right to complain. I do, however, still feel that I am leaving something behind. I don’t want to do 9 to 5 for the rest of my life, and I believe that something better is possible.
The keys here are to both increase income and reduce expenses.

What are your financial dreams?

Getting out of the rat race is one of my own financial dreams, and achieving it means having the ability and freedom to just pack up and take off anywhere I want, without wondering how I’m going to pay the mortgage next month. My job is pretty good for a 9 to 5, and I currently make a good living, but nothing is certain in life; I never know what can happen next year. Also, a 9 to 5 career does not intellectually nor emotionally appeal to me.
I don’t just want to sit on my ass in an office all day; I want to get out there, do things, and see the world. I do want to continue working, and hopefully begin generating significant income online.
There are financial barriers to just packing up and heading up today, but there are emotional barriers as well. Without a significant wall of savings, there is less security, and without that security, I don’t feel that I’m ready to leave the 9 to 5 just yet. I need to start working on my infinite portfolio before I can do that.

How do you start building up your financial scaffolding and leap over your emotional barriers?

Pay down debt

I believe that the primary source of insecurity is debt. Mortgage debt, consumer debt, student debt are simply some of the different types of debt that we can have. Debt is lurking around every corner, and waiting to take ahold of us if we are not careful.

Dealing with the largest debt of all: housing debt

In some situations, debt is unavoidable. In Canada, housing prices are on the high side, though not the extreme side. Higher housing prices necessitate taking on more debt, so unless you have a lot of cash sitting on the side or you are willing to rent for the next couple of decades, you will need to take out a mortgage.
You also need to ensure that you have adequate insurance, just in case something bad happens. You need to make sure that all your bills are paid on time, as you don’t want to end up like the man whose house burned down, with the firefighters just looking on because he hadn’t paid his bill! There are services to compare home insurance plans, such as Policy Expert.
I, for one, am not willing to rent for the next couple of decades. The rental stock around here is of inferior quality, and rents are not significantly lower than housing prices when discussing similar locations. I need to consider the quality of life, not only for myself, but also for my partner in life. Therefore, I do currently carry around mortgage debt.
My personal recommendations are that total housing expenses should not exceed 33% of net income, with some planning for future interest rate increases. Some leeway is acceptable, but if you find yourself in 38%-40% territory and beyond, perhaps you should reconsider your decision to purchase.
The important thing to understand is that debt is not evil nor objectively bad. When debt is used with caution, then it can be a wise choice. Ultimately, however, if one wants to speak about getting out of the rat race, then one has to pay down debt, supplant that debt with income, or use that debt to invest.
By doubling our mortgage payment, we could bring down the mortgage to a very small amount in 7 years time, and completely pay it off by 9 years time. We would be in our mid to late thirties by then, but with no mortgage debt.

Diversify income

In addition to paying down debt, the other key to getting out of the rat race is by diversifying your income. If I had enough side income to support a backpacker’s style of traveling, then I could conceivably take off for a year and just travel around the world. One of the ways that I personally want to focus on is building up online income.
What about the condo? Market rents in the area are high enough that it could be rented out at between a small gain and small loss in cash flow. At the worst case, the burden might be $300 to $400 a month.
Instead of renting the condo out and taking off, I could also use that side income to accelerate the down payment of debt and investment, thus allowing me to pay off the mortgage fully in 5 years instead of 9 while taking a nice vacation each year, or I can use that side income to expand and generate more side income!
Diversifying your income so that you are not solely reliant on your 9 to 5 opens up a new world of possibilities.

What is your rat race number?

Your rat race number is simply the amount of money you need to have in your investment portfolio in order to never have to work another day in your life. This is what I call the infinite portfolio. The formula for the rat race number is very simple: (expenses – income) / 3%.
Over the long run, a 75% stock/25% bond portfolio with a maximum of a 3% rate of withdrawal appears to do pretty well, even through depressionary events. Going all-in stocks when the markets crash will simply increase returns. Being all-in stocks the entire time might also increase returns, but opens yourself up to more variance in income and long droughts, such as the last 10 years.
I recommend a maximum of a 3% rate of withdrawal because this allows you to build up capital reserves during the good years, which can then be drawn down during the bad years without having to drastically alter your standard of living.
So, what do different rat race numbers look like? See below:

Costs for a couple (examples)
Item	Monthly Expense	Rat race number @ 3% withdrawals
Internet	$40	$16,000
Food	$350	$140,000
Shelter (no mortgage or rented)	$700	$280,000
Shelter (mortgage)	$2,000	$800,000
Public transportation	$100	$40,000
Transportation via used car	$470	$188,000
New car	$720	$288,000

So, once you have $16,000 invested, you’ll likely never need to work to pay for the Internet ever again.
These numbers look large, but don’t succumb to sticker shock. While you carry a mortgage around and a new car, it will be difficult for you to exit the rat race. What about if you pay off the mortgage and go with a used car? Your base monthly expenses might be around $1600 for a couple. If you never worked a day again in your life, you would need a rat race portfolio of about $640,000 in order to accommodate your base expenses. Since the markets have historically returned more than 3% over the long run, your portfolio and income will continue to grow over time.
Wait a second, I am asking you guys to both pay off your mortgage AND save up $640,000? I agree, that is a tall order, but this is just what I consider the minimum number to be safe, if you never work a day again in your life. What if you do continue to work? Generating $2000 a month for a couple is very doable, and with a rat race portfolio of only $320,000 and an income of $2000, you would spin off plenty of income to travel and enjoy life with. One guy is already doing it and enjoying life with less than that.
The best way to exit the rat race might simply be to generate as much income as you can during the most productive years of your life. I don’t believe you need a massive income either; $60,000 to $100,000 for a couple is very reasonable and doable. Some familes have had success with much less than that.
Before you hit 40, focus on your career and on your side business income and generate as much income as you can. Aim for a savings rate of at least 25%, but 40% or more is even better. Don’t forget to enjoy life and take vacations, but build up your reserves and pay down that debt. Reduce your expenses as much as you can, and take advantage of ways to save money, like a tax free exchange. By the time you are in your mid 30s, you’ll have built up a nice war chest that should spin off dividends and that will continue to grow with time, and help you achieve your dreams of getting out of the rat race. This is what I’m personally hoping to do!