Financial Independence (FI) is the idea that you have enough money to cover your living expenses without having to work. It's that magical moment when your investments start paying you more than your expenses.
That sounds pretty sweet huh?
Getting to that point can be hard because you either have to save a ridiculous amount of money or have a business that supplements your income. My goal is to have a little bit of both.
Another term that is being used frequently is FIRE, or Financial Independence Retire Early. This is a similar concept but with the goal of being able to retire early, obviously. I mean, it's right there in the name.
What's the difference?
To me, financial independence is the concept of having money set aside, or an alternative stream of income, to allow you to live the life you want and/or pursue your passions. I think this idea is much more attainable and realistic for people since you would still be bringing in money.
To me, FIRE is the concept of having a lot of money in the bank and strictly living off that without bringing in any additional income. As the acronym states, you are financially independent and are going to retire early!
I'm way more interested in the FI path because I know I'll stay busy and eventually I'll want to monetize that. Maybe I'll want to coach basketball, just work 3 days a week, real estate will always be a hobby that makes me money. I'll be up to something other than waking up just to nap and watch Netflix.
How To Achieve Financial Independence?
The first step is to figuring out how much you spend each year. If you don't know how much money you live off, or at least a ballpark, you can either track your expenses or create a budget to help figure that out.
Next, we can calculate how much you'll need in your investment accounts. Trinity University did a study and found the safe withdrawal rate to be 4%. Basically you should be able to take out 4% of your investment each year without touching the principal.
In theory, if you saved a $1,000,000 you should be fine living off $40,000 each year with your million dollars staying in tact. If you want to know how much you'll need to save to be able to do this you can multiply your living expenses by 25. If you currently live off $60,000 per year you'll need $1,500,000 to retire and keep your lifestyle.
If you are like me, you might be wondering how you'd get access to that money if it's in a retirement account? Wouldn't there be a penalty? There is this whole thing called the Roth Conversion Ladder that I'll have to write a post on. You basically transfer money out of your retirement account into an IRA and withdraw after 5 years.
So how long does this take?
Using a compound interest calculator at investor.gov here are some projections on how long it would take you to get $1,000,000 if you started with $0 and got an 8% return compounded annually.
I don't know about for you but that is saving a lot per month on a consistent basis and still looks like it'll take a long time.
Different Levels Of Financial Independence
Naturally there are different levels depending on how much you are able to live off each year and I learned these definitions for this post. Side note - it makes me laugh that from a far the FI community rejects the normal American status symbols like cars, houses, and clothes, yet created their own to describe how "independent" they are. Anywho, here are the two levels.
This approach requires you to have a low spending rate each year (typically less than $40,000/year). By this qualification I could be financially independent! At my lowest point I was living off $970 a month when I was house hacking in my quadruplex. I would be able to cover those expenses if I moved back into my 500 sq ft unit and never got a new car, or had a kid, or had any real changes in my life! I'll keep going as that doesn't feel like "independence".
FatFIRE is the level of financial independence that allows you to live a more “high-class” lifestyle. If you plan to spend $80,000 a year keep in mind that you'll need $2 million.
Earlier I talked about how my goal is financial independence as that seems easier to get, and hopefully you can now see why. Working in a public school as a Speech Language Pathologist I'll never be bringing in the big bucks or able to invest at the rate I used in my projections. But, slowly increasing my rental portfolio and investing the way I am will allow me to achieve financial independence much quicker and provide me a more enjoyable path along the way.
HELLO AND WELCOME!
I'm Jake, a dude interested in personal finance and travel creating the life I choose.
In 5 years I went from living in a basement with Craigslist roommates to paying off 90k of debt, backpacking 3 continents, getting a house for myself and 5 rental units.
Read my story in the about me section.
All photos on the blog are from my travels
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