Achieving financial independence (FI) is not just a pipe dream reserved for the lucky few. It’s totally doable. 

And faster than you think. 

In this article, I’ll teach you how to FI in six straightforward steps. Whether you’re just starting out or looking to speed up your journey to reach FI, these steps will provide the tools you need.

What is Financial Independence?

Achieving financial independence (FI) means you have built up enough savings, investments, or other passive income streams to pay for your living expenses without needing to actively work. 

It means reaching a point where you can choose whether you want to work or not. 

And let’s get one thing clear: achieving FI doesn’t mean retiring early and lounging on a beach for the rest of your days (unless that’s what you want).

You become “work optional” and have the time and space to work on projects that truly inspire you, take career risks without the fear of financial ruin, or even pursue entrepreneurial ventures that align with your values and aspirations.

And that’s where the true power lies.

The 5 types of FI

When it comes to financial independence (FI), there are various paths you can take to achieve it. 

Understanding the different types of financial independence can help you determine the best approach for your goals and preferences. 

Let’s explore your options:

Regular FI

Regular FI refers to achieving a level of financial independence where you have accumulated enough wealth and passive income to cover your yearly spending. 

With Regular FI, you can sustain your current lifestyle without relying on a traditional job. 

You can pursue your passions freely and spend time on activities that bring you joy.

Lean FI

Lean FI takes a more minimalist approach to financial independence. 

It involves living a frugal lifestyle and reducing expenses to the bare essentials. 

With Lean FI, you aim to cover your basic needs and essential expenses, allowing you to break free from the constraints of a traditional job sooner. Lean FI focuses on simplicity and finding fulfillment in non-materialistic aspects of life.

Fat FI

On the other end of the spectrum, Fat FI involves accumulating substantial wealth and passive income streams that provide a luxurious lifestyle.

With fat FI, you have more financial resources to indulge in your desired experiences, travel extensively, or support causes and charities that are important to you.

Barista FI

Barista FI offers a middle ground between traditional employment and full retirement.

In this type of financial independence, you have enough savings and passive income to step away from your current job and transition to less demanding or more enjoyable part-time or flexible work.

Barista FI allows you to balance financial stability and pursue activities that bring you fulfillment.

Coast FI

Coast FI is when, even if you stop making additional contributions, your investments will grow to cover your future expenses by your target financial independence date.

With Coast FI, you have already saved and invested enough to let your assets grow without significant additional savings. 

It allows you to take a break from actively saving money while still benefiting from the power of compounding.

How To FI in 6 Steps 

Now that you understand the essence of FI, here is the plan for how to FI in six ridiculously easy steps that will pave the way to achieve financial independence.

Step 1: Know where you stand today 

Before you can get into the details of how to FI, you must assess your current financial situation. 

You’ll start by evaluating your annual spending and income, both present and projected. And take a closer look at your yearly spending habits, identify areas for potential savings, and explore opportunities for increasing your income. 

By knowing where you stand today, you can set realistic goals and make a game plan that aligns with your path to FI.

Reflecting on your current and expected income 

Consider your primary job, side hustles, and potential passive income sources. Now factor in anticipated salary increases, promotions, or career advancements of the number of years left to reach traditional retirement and your dream date to reach FI. 

If you want to be conservative, you can simply assume the average annual salary increase of the state you live in and /or anticipate living in.

Reflecting on your current and expected expenses

Now pull your bank account and credit card statements from the past 12 months to determine your annual expenses in your current lifestyle.

Next, consider your ideal “Freedom” lifestyle and the associated expenses. 

• Will you be traveling frequently?
• Pursuing expensive hobbies? 
• Invest in weekly housekeeping?
• Maybe you have a virtual assistant?

Keep in mind that certain expenses may decrease over time, such as a paid-off mortgage or car, an empty nest, or a different living location where property taxes are lower.

Step 2: Calculate your safe withdrawal rate

A safe withdrawal rate, or SWR, is the amount of money you can take out from your investments each year without needing to make more money. By following a safe withdrawal rate, you can feel comfortable that your money will support you throughout your retirement years.

There are a number of ways to determine your SWR, but the most widely used is the 4% rule. 

The 4% rule suggests you can withdraw 4% of your initial retirement portfolio balance each year, adjusted for inflation, without running out of money over 30 years. This rule provides a rough estimate for sustainable withdrawals, considering factors such as stock market investment returns, inflation, and the length of your retirement. 

You may opt for a lower withdrawal rate for a more conservative approach, like the 3% rule. Same principle, but the amount you need to save to reach FI will be higher. 

Example: You have diligently saved $1 million for your retirement. You could withdraw roughly $40,000 a year (give or take according to inflation and savings and investment returns) for approximately 30 years without needing to make more money.

Step 3: Calculate your FI number 

Now, let’s dive into the process of calculating your FI number. 

Calculating your financial independence number provides a tangible goal to work towards, fueling your motivation and guiding your financial decisions. It gives you a clear target to aim for and a roadmap to track your progress toward financial independence.

The FI number formula is simple.

If you determined that your SWR is 4%, use the following formula.

Or, if you want to take a more conservative approach and use a 3% SWR, you will multiply your expected annual spending by 33. 

However, everyone’s financial situation is unique. Factors such as desired retirement age, expected income growth rate, lifespan, and risk tolerance can influence the multiplication factor. So make adjustments as necessary to tailor the calculation to your specific circumstances.

Example: Assume your expected annual expenses are $50,000. By multiplying by 25, your FI number would be $1,250,000. To achieve financial independence, you need to accumulate $1,250,000 in your investment portfolio to sustain your desired lifestyle.

Step 4: Calculate years to FI

Now that you have your FI number, it’s time to determine how many years it will take to reach that financial milestone.

This step allows you to gauge your progress and set realistic expectations for FI.

To calculate the estimated years to FI, use the following formula.

But note that the number of years can vary based on your savings rate, investment income, and any unexpected windfalls or setbacks. So regularly assess your progress and adjust your strategies as you move forward.

Example: If your FI number is $1,250,000 and you have already saved $400,000, the difference is $850,000. Now, suppose you save $50,000 per year. By dividing $850,000 by $50,000, you’ll get 17. This means it will take approximately 17 years to reach FI.

Step 5: How to FI as quickly as possible

To achieve financial independence faster, there are endless ways to increase your savings rate.

Try these.

Pay off your debt

Eliminating debt brings a sense of financial freedom and provides numerous benefits on your path to FI. 

Plus, by paying off debts, you free up cash flow and reduce the burden of interest payments, allowing you to redirect those funds toward your financial goals. 

Win, win, win all around.

To grasp the impact of debt elimination, consider this: 

Example: You have $10,000 in credit card debt with an interest rate of 15%. If you pay the bare minimum (say $96) on that debt until it’s paid off in 10 years, you’ll pay roughly $19,341 ($10k principal + 9.3k in interest. OR you can double your monthly payment, paying the debt down in 5 years, pay interest (at a total of $14k), and then invest that extra $192 a month for the next 5 years, leaving you with no debt and almost $14k ($11.5k invested + $2.5k in returns) closer to FI, just by paying an extra $96 a month.

Convinced? 

Try these strategies for accelerating debt repayment:

• Pay More than Once a Month: Increase the frequency of your debt payments by making extra payments each month. This reduces the principal faster, saving you on interest payments.
• Pay More than the Minimum Required: Pay more than the minimum payment required on your debts whenever possible. Contributing more towards the principal will accelerate the payoff process and reduce the overall interest you’ll pay.
• Debt Snowball: Start by paying off your smallest debt while at the same time making minimum payments on any other debt. As you eliminate each small debt, you gain momentum and motivation to tackle larger ones.
• Debt Avalanche: Prioritize paying off the high-interest rate debt and simply make minimum payments on the others. Once the highest-interest debt is eliminated, move to the next one. 

Increase income

Another lever you can pull to expedite financial independence is to boost your income.

Think of your current monthly income as just a starting point.

By increasing your earning potential, you’ll have more funds to save and invest, accelerating your progress toward financial independence. 

Here are some strategies to increase your earnings.

You can:

• Negotiate a raise: Advocate for yourself at your day job and explore opportunities for a salary increase. Highlight your achievements and the value you bring to the company. A well-prepared negotiation can lead to a higher income, allowing you to save and invest more toward your financial independence goals.
• Side hustles: Consider taking on a side hustle or freelance work to generate additional income. Look for creative ways to turn your skills and assets into income-generating opportunities.
• Sell or rent out your stuff: Consider exploring other creative ways to boost your income, such as selling or renting out your unused stuff. Try renting out possessions like outdoor equipment, your car, or even a spare room. 

Let’s consider how this could speed up FI.

Example: What happens if you make just $1k more a month? Assuming an 8% investment return, a starting savings amount of $10,000, and a FI number of $1,000,000.  Saving $1,500 a month (i.e., 30% of $60k take home pay), you’ll reach FI in 21 years. But my saving $1,800 a month (i.e., 30% of $72k take home pay), you’ll reach FI in 19 years.

Reduce expenses 

Reducing expenses is a powerful way to expedite your path to financial independence. 

In fact, it’s so powerful that for every $100 of monthly expenses you can eliminate, you also reduce the amount you need to hit financial independence by a whopping $30,000.

Read that again. 

Look to the following common expenses to begin identifying places you can save money:

• Transportation: Consider alternatives to owning a car, such as public transportation, biking, or carpooling. If owning a vehicle is necessary, explore options for fuel-efficient or used cars that offer lower maintenance and insurance costs.
• Housing: Explore ways to reduce housing costs, such as downsizing, sharing accommodation with roommates, or considering more affordable neighborhoods. 
• Food: Adopt frugal habits when grocery shopping and dining out. Plan meals in advance, create a grocery list, and stick to it. Consider cooking at home more often, which not only saves more money but also promotes healthier eating habits.
• Random Spending: Be mindful of random spending, such as entertainment, subscriptions, and impulse purchases. Prioritize your spending based on your values and cut back on non-essential items.

Example: Your current monthly expenses are $8k, including $3k for housing. Bringing your FI number to ($8k x 12) X 25 = $2.4M. If you cut your housing cost in half by moving to a smaller place or cheaper location, your monthly expenses are now $6.5k, and your FI number drops to $1.95M = ($6.5K x 12) x 25.

Invest what you save

Don’t let your (non-emergency fund) cash sit idle in a savings account. 

Instead, invest it. 

While it may involve some risk, the potential rewards are worth it. By investing your savings, you can grow wealth and accelerate your path to FI. 

Try this:

• Low-Cost Index Funds: Consider investing in low-cost index funds, which offer broad market exposure and typically have lower fees than actively managed funds. The stock market may be your FI best friend.
• Real Estate: Explore opportunities in rental properties or investment trusts (REITs) to generate passive income through rental payments or portfolio returns.
• Starting a Business: Entrepreneurship can provide unlimited opportunities for wealth creation. So consider starting a business an investment.

Example: Let’s say you have $100,000. And your FI number is $1M. You can put that $100k in a high-yield savings account at 4% interest, let it sit, and in about 60 years you’ll hit FI. Or you can put it in an index fund that earns, on average, 8% a year and hit FI in 30 years.

Step 6: Revisit annually 

Financial independence is not a set-it-and-forget-it goal. 

It requires regular evaluation and adjustment to stay on track. 

Significant changes in income, yearly spending, or personal circumstances can impact your FI plans.

So revisit your financial independence goals annually to make sure they still align with your evolving financial circumstances and life priorities.

Include the following in your review:

• Income and expenses: Determine if there have been any changes in your income or expenses. Adjust your savings rate accordingly to accommodate new financial circumstances.
• Investment performance: Evaluate the performance of your investment portfolio. Consider rebalancing or reallocating assets if needed to optimize returns and manage risk.
• FI Number: As your lifestyle or priorities change, reassess your FI number. A realistic target that reflects your desired standard of living and future goals is essential.

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Your burning questions on how to FI

You might still have a few burning questions about how to FI.

Let’s address them briefly:

How much money does it take to reach FI? 

The amount of money required to reach financial independence varies for each person. This is why it’s crucial to evaluate your unique circumstances and adjust accordingly.

However, multiplying your yearly expenses by 25 or 33 provides a rough estimate. 

How do you calculate your FI number?

To calculate your FI number, multiply your yearly expenses by 25 or 33. 

This represents the amount needed to sustain your desired lifestyle without relying on traditional employment. And regularly reassess and refine your FI calculations as you progress on your journey.

How can I be financially independent by 50?

To achieve financial independence by age 50, you need a combination of disciplined savings, smart investments, and strategic decision-making.

Start by evaluating your current financial situation, setting clear goals, and developing a comprehensive plan. Increase your savings rate, reduce expenses, and consider income-generating opportunities. 

Finally, regularly review and adjust your strategies to stay on track. 

How to FI with social security or a pension?

Consider including Social Security or pensions when calculating your financial independence goals. 

Here’s a quick guide to how to build these into the FI formula:

1. Identify your expected Social Security benefits: Estimate what you will receive from Social Security. You can find this information by creating an account on the Social Security Administration’s website.
2. Assess your pension benefits: If you are eligible, gather information about the amount you can receive during your retirement years. This may require contacting your pension provider or referring to your employment documents.
3. Calculate the impact on your FI number: Subtract the annual amount of these income streams from your yearly expenses, starting at the age you expect to receive these additional income streams. This will tell you how much less you need to achieve FI.
4. Adjust your savings target: Adjust your savings plan or FI target date based on the results to #3.

How to FI: As quickly or as leisurely as you like! 

You’ve now learned the six ridiculously easy steps to achieve financial freedom and reach financial independence faster.

By following these steps, you’ll gain control over your financial future, reduce stress, and create opportunities for a life of freedom and fulfillment.

So take action today: reflect on your current situation, calculate your FI number, and develop a plan. Then practice mindful spending, save diligently, and invest wisely to hit your goals. 

Still trying to figure out what your FI number is? Download my FREE FI Formula to assist you in your pursuit of financial independence.

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