The most basic formula for Financial Independence (FI) is:
Amount you spent last year X 25 = Total you need to be Financially Independent
Yes, it’s that simple. Once you save up 25 times the amount you spend annually you should theoretically be able to live for the rest of your life at your current standard without ever having to work again.
The 25 multiplier is fixed based on the 4% withdrawal rate. That can change some but only by around 1% and so it is fairly fixed. But the amount you spend is completely up to you. You can reduce the total amount needed by spending less or increase it as much as you want by spending more.
What Financial Independence is:
- A purpose and a plan to work towards
- A mindset change from working to live to pursuing your dreams and passion
- A way to find out what is really important to you and what you want out of life
What Financial Independence is not:
- FI is not reaching a number and going to sit on a beach for the rest of your life
- It’s not a set it and forget it plan that gets put on autopilot
- It doesn’t mean you stop working, in fact you may start working harder in more meaningful pursuit
Financial Independence? Retire Early? What does it mean to me?
I don’t believe in the FIRE movement although you will probably consider this a FIRE blog. Save as much money as possible? Yes, I save a large portion of my paycheck. Achieve financial independence? That is certainly my goal, although I’m not really sure what it truly means to me. From what I understand it means that you have enough money that you don’t need to have a full-time normal job. Or that your investments generate enough cash flow to cover your living expenses. For me it means being able to travel whenever I want for as long as I like. It means not having to work a job that I don’t enjoy. Is there a difference between financial independence and retiring early? Why would someone continue to work a 9 to 5 job if they were truly financially independent? Some people love what they do and continue to work until the day they die. What FIRE seems to be in reality if you read the online blogs is that people just change jobs to blogging about travel or early retirement, which supplements their income. So more of a job change to a passion project rather than true retirement. I mean what use are you to the world if you just retire at 35 and don’t do anything the rest of your life? You can do so many things that create value for the world.
I tend to think of myself in more the traditional retirement sense. I work a steady career for a number of years to earn money. Investing as much of the money as I can over the years so that it compounds and becomes a nice nest egg. And then once my investments give me enough cash flow to last me until I die, I can retire in a very comfortable lifestyle with the big house and the nice cars. Will I work until I am 65, hopefully not in a job that I am doing just to pay the bills. In a job that I enjoy and get a lot of fulfillment out of? Sure. In fact I believe that I will work until I die, in one way or another. I see managing my investments as a job and should be treated as a business because that’s the business that I intend to provide my income for the rest of my life.
I’ve read some articles about people “Retiring Early” at or before 30 with a whopping $500K in their account. I don’t know what that retirement looks like but I can tell you it’s not for me. Or my wife. I use many of the same principles as the FIRE movement, but I leave some out. The main one I disregard is the significant reduction in spending. I believe in enjoying life now and later, if that means I have to work a little longer so be it. I don’t spend nearly as much as many people but I like new cars over used ones and I like to live in a nice house in a good neighborhood. I also like to travel luxuriously. Where I save money is not going out to fancy restaurants to often. My wife is a really good cook who loves cooking and so we prefer to eat at home most nights. We are married so there aren’t a lot of nights out at bars or clubs. We also live in a duplex and the rent from the other half pays a lot of the expenses for our house.
I plan to maintain my current lifestyle and try to reach my Financial Independence number as soon as possible. So here we go, I’m starting my plan to attain Financial Independence and Retire Earlier than 65. I hope you’ll follow along with me.
*This post is the first part of Nine Steps You Can Take to Achieve Financial Independence.*