Last update on July 19, Is financial independence possible for you? Since discovering the financial independence or FI movement, have you asked yourself how much you will need to reach financial independence? I wanted to understand how people in their 30s and 40s were actually retiring.
I read a make calculations for 10 years of financial independence of news articles and blog posts about people who left the traditional workforce to pursue a passion project, work part-time, or left the workforce completely. Along with reading online stories, I incorporated watching YouTube videos, listening to podcasts, and reading books about financial independence.
I wanted to know more about the FIRE journey. But first, I needed to know if it was possible for me. What is my financial independence number?
The concept of financial independence had never occurred to me. How were they accomplishing early retirement? How much did you have to earn to be financially free? Were they all six-figure earners? Did they live off ramen noodles?
Had they received some sort of windfall, like an inheritance?
How to Get the Freedom to Retire in 10 Years (or Less) - Nat Eliason
Then what did they do? Some get there in 10 years or less. While for others, the journey is twice as long. As I discovered the world of financial freedom, I realized that it was possible to leave the workforce much younger than Reaching financial independence required that we decrease expenses, invest more, and earn more. Our financial lives had to change. It was time to take control of our finances and change our money story.
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Four Factors to Consider Before you Calculate Your FI Number Before you can calculate your FI number, here are some things to consider: The total amount of monthly expenses not monthly income Overall savings rate Your income Investment performance I had been using the same Excel budget template since college so it was easy to see where we had been spending our money. Our income was high enough that even after our living expenses were paid, we had money leftover.
Most of our disposable income was going towards eating out, clothing, shoes, parking tickets, and entertainment which included things like sporting events, concerts, and movies. Simply put, calculate your yearly expenses and multiply by 25 or if you want to be a little more conservative multiply by This is how to calculate your FI number: Do not use your gross income!
To retire 5 years from now
Out of that 75k, how much of this amount goes to paying off debt including student loans, credit card payments, and interest fees? The money you need to reach financial independence is determined by your expenses. This is why I emphasize reducing your make calculations for 10 years of financial independence.
Increasing your income is the other.
Some on the FIRE journey will live extremely frugally sacrificing their quality of life. While others, begin freelancing or start new side hustles. None of this was of interest to me as a long term plan. What to include when calculating your expenses?
Include anything you think is worth working for! Then do it!
Want to keep that pricey and well-used gym membership, then go for it. Just know the true cost of that expense. You can use this budget template to determine your expenses.
Once you know your expenses, you can determine if there are expenses you can cut comfortably and eliminate. Are there leaks in your budget? There has to be a gap between the income you earn and your expenses. The gap between those two numbers is the money you will use to save and invest. The higher your income and the lower your expenses the more you have to save and invest. Simple but not always easy, there are three ways to increase the gap. Cut your expenses.
Earn more money. Side gigs, working overtime, 2nd jobs, change jobs, etc.
Financial independence calculator and what to consider (with case study)
Cut your expenses and earn more money! Doing both is the ultimate win. Handle that Debt Get rid of all high-interest rate debt.
The interest you accrue monthly is an expense. We learned in tip 1 that decreasing expenses and increasing the income is what will get you where you need to go.
Paying off our student loans, credit card bills and car note made room in our budget to put those additional funds toward increasing the money we save and invested each month. Focusing on high-interest debt is the priority but getting make calculations for 10 years of financial independence of any debt that is not earning you money is just as important.
Know your Savings Rate What is a savings rate? Your savings rate is the amount you save in relation to your income. I do not include short-term savings goal amounts, i. At the start of my journey, I was a federal employee and had access to the Thrift Savings Plan.
How does this sound to you? For some, this may be a realistic and satisfying plan. For me, I wanted to know if I could reduce my retirement age by a decade or more. The truth was if I made adjustments to my weekly and monthly spending, I could contribute additional money to my retirement accounts and work towards having additional investment accounts.
Simply putting money into your savings account will not give you the boost you need to grow your money.
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Saving money is no longer enough, you must invest. Investing is key to getting your money working for you. I previously wrote about the magic of compound interest. Compound interest and growth in the stock market is the vehicle that will give you the boost you need on your journey to financial independence. Where to Invest? We are fortunate to have good retirement plans.
Financial Freedom Income Streams
Not all businesses offer retirement plans. Make sure to be familiar with the ones available to you. You must be proactive in getting information about your money. No one will care about your finances more than you do. A few key things to look at is the historical rate of returns and expense ratios.
Rather than choose tech, communication, energy, or any specific sector, I prefer to track the top companies or the stock market as a whole.
Here's How to Calculate Your FI Number • Millers on Fire
Picking individual stocks companies is the only thing I was aware of when I thought about investing. Trying to decipher which companies and sectors would have the best gains over the long-term seemed daunting.
Will a company that exists today still exist and be profitable 10 years from now? What about 30 years from now?