Financial independence is a goal that is well worth the time and effort required to achieve. It’s equal parts mindset and achievement and it may be easier to obtain than you think.
How much money does it really take?
When I first started learning about financial independence I was skeptical. The idea of being able to retire from a six figure career early in life seemed so unrealistic. But the more I read, the more I found out that you don’t have to replace your income, you need to replace your spending. Being FI is all about your spending. How much will you spend on your basic necessities like food, clothing and shelter? How about insurance (life, car, homeowners, health, longterm care, etc) and taxes (income, property)? These are the basic, bare bones expenses. If you plan to travel or enjoy the finer things in life then that will obviously increase the amount you’ll need to be FI.
Budgeting is an essential part of personal finance. But if you want to know when you’re FI you’ll need to know your annual expenses. I still haven’t really tracked our family’s expenses in a super detailed manner, but in looking back at some random monthly budgets our essential spending is usually around $3,500 per month or $42,000 a year. And this doesn’t include saving anything for vacations or replacing vehicles. For the sake of example I’ll increase that to $50,000 to account for what we might spend on vacations and other random expenses.
Up until recently I always viewed the month in terms of income-outgo=0. That equation looks a little different if you want to FIRE. In that case it looks more like outgo/swr=nest egg.
What is SWR%?
SWR, or safe withdrawal rate, is whatever % of your nest egg you plan to use as for income. The most commonly accepted rate is 4% which was derived from the results of the Trinity Study. Without getting too technical, the study shows the likelihood of your nest egg being able to survive if you withdraw X% for Y years.
You become FI when you reach the point where your your outgo/swr=nest egg. In my example, $50,000/4%=$1,250,000. A more conservative approach of 3% means I’m shooting for about $1.7 million. Now, there are tons of variables to this situation. Right now the $50,000 annual spending includes health insurance that is largely subsidized by my company. Health insurance is arguably the biggest monkey wrench thrown at early retirees. Since I’m still several years from FIRE, I won’t lose much sleep worrying about this problem between now and then.
But if I did want to put my mind at east and show the math behind 6 Figure FIRE, I will assume that I’ll have to provide my own healthcare insurance. Factoring in some disposable income and travel expenses I’ll be shooting to replace spending of $100,000. With a withdrawal rate of 4% that puts our household at requiring $2,500,000 in savings.
How do I get there?
Since we’ve decided that you don’t have to replace your income, but instead replace your spending to FIRE, what can you do to help this along? If you know your annual spending you should be able to have a number in mind of what you are trying to get to. That leads us to 3 things to get to that number quicker. Earn more, save more and spend less. The more income you can earn, the more you will be able to save towards 401Ks, IRAs and rental properties. Challenge yourself to save more each month. If you are currently saving 15% of your income try raising that to 20%, or even 25%. And spend less by living a frugal lifestyle. Do a monthly budget and be mindful of your spending habits. Remember that everything in your budget has an opportunity cost. Be frugal; just don’t be cheap. If you can do a combination of these 3 things you’ll be FIRE well before you know it.
Don’t forget to enjoy the journey
If you are like me and have an addictive personality, you’ll want to get to financial independence as soon as possible. But enjoy the trip. Learn along the way. When my oldest son was taking what seemed like forever to learn to crawl I was so frustrated! I just wanted him to get on with it so that I wouldn’t have to carry him around the house. Everyone I knew kept telling me to just slow down and that I’d eventually wish he would go back to just laying there. They were so right!
The road to FIRE is (I’m assuming) the same. Don’t miss the things in life that you’ll only get to experience this one time, just to get to be able to quit work early. Find a balance between work, family life and personal growth. If you’re on this track now, you will get to your goal eventually. Set a target and be intentional in your actions to reach that target. But it’s ok if you come up a little short or a year or two off your goal.