Achieving Financial Independence in 3 Steps

4 min read

We just celebrated American Independence Day. Now it’s time to achieve financial independence.

You may love working your full-time job. But your job security is only as good as your health.  One day you will have to support yourself without trading hours for dollars. You need to be financially independent.

We can achieve financial independence in our lifetime. Many don’t work towards this goal because they don’t understand the steps required.

It’s a shame.

However, you won’t have this problem. Because I am going to show you how to calculate the money required for financial independence. And how to determine your savings rate per month. 

Financial Independence Day

Welcome to freedom. Let me show you what you can do with a few dollars and compound interest.

What is Financial Independence?

For those new to the world of early retirement, I’d like to explain what financial independence is. Financial independence, or (F.I.) in personal finance circles, is the ability to meet your financial obligations without having to trade time for money. In other words, it’s when your investments spin-off enough cash that you don’t have to work again.

It sounds like an impossible feat. But, the goal is attainable if you exercise financial discipline and increase your monthly cash flow.

How Much is Enough?

The size of your investment portfolio required for financial independence is determined by the 4% rule. This rule was determined by the Trinity Study. And it states that if you withdraw 4% of your initial portfolio every year, you can sustain this withdrawal rate for at least 30 years.

This study has been used by many early retirees as a guideline in building their portfolios. However, when considering periods longer than 30 years the 4% rule must be scrutinized. Withdrawal rates may need to be scaled to 3%-3.5% to support a 40-year retirement.

For our calculations today, we will use the 4% number.

1. Know Your Expenses

Use a tool like Mint to figure out your monthly spending. After you register for an account, you will need to input your credit card and bank information. Then, mint will download your transactions from the last 90 days.

3 months of data is perfectly fine for this analysis. We are trying to get a ballpark estimate to forecast spending for the year.

I’m sure there’s some fat in your budget we could trim. But that’s not our concern right now.

We need a general idea of the lump sum you need for F.U. money.

Once the data is imported, go to the Trends tab and make sure the graph for spending “over time” is selected. 

Now calculate the average of the last 3 months spending and multiply by 12. This will be your annual spending for the calculation.

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Avg. Monthly Expenses X 12 = Annual Spending

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2. Find Your Number

To find your number we will take your annual spending and multiply by 25. This will give you the lump sum that is required to reach financial independence.

Congratulations! Now you know how much money you need to read F.U. status.

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Annual Spending X 25 = F.U. Money

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3. Calculate Monthly Savings

The lump-sum is great, but we can break this down to actionable steps. Use the calculator below to figure out how much money you need to save each month to reach financial independence. 

Input what age you would like to reach financial independence. You don’t have to stop working at this age, but you should consider when you might like to make a career change.

Include all retirement and brokerage accounts in the “Current Savings?” row. Do not include money in your savings account. Invested dollars are the only thing that matters for financial independence.

Input your portfolio’s expected rate of return should be in the “Interest Rate” row. If you don’t know what to use, I would assume a balanced portfolio of 60% stocks/ 40% bonds. This portfolio historically returns an 8.77% nominal interest rate. But we need to subtract the average inflation rate to calculate savings in today’s dollars.

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Nominal Rate (8.77%) - 106 Yr Average Inflation (3.10%) = 5.67%

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The average inflation rate since 1913 is 3.10%. The resulting interest rate for the calculator will be 5.67%.

Last, input your F.U. Money from step 2 in the “Retirement Goal?”. Then, click the “Calc” button at the bottom of the app.

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Don’t be intimidated by that monthly savings number. Consider it motivation to step up your game and become a super saver.

For those of you that get matching contributions from your employer, include that money towards the monthly savings amount. If you don’t have any retirement help from your job, work longer, and retire a little bit later.

You Ain’t The Boss of Me

Now that you know the steps, there is no going back. Find the lump sum that works for you, and start saving for that F.U. money.

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