We’ve covered a lot of topics in the Financial Education Series, with the idea being that the articles will flow into one another, allowing your knowledge on the subject to advance. I think that it’s important for lessons to build upon each other just as much as it is for people to act on that knowledge and try to implement what they learn.

Today, I want to focus on FI, a term used a lot online in the financial spaces. I also use it often on this website. Financial Independence can have many definitions, but mine is simple: it’s when you’re able to meet your expected needs and budget by following the 4% rule. This is the number that might not leave enough wiggle room to set aside money for a new roof, but it’s the number that will feed your family, pay your bills, keep the lights on without requiring a job.

As we learned last time, the 4% rule works out in 98% of scenarios to leave you with more money than you started with over time. This is why maintaining your budget is so vital. This concept of FI isn’t just about retiring early, though they are often spoken together; it’s about giving you the power over your time and your life.

One of the stories that stuck with me the most from Mr. Money Mustache’s blog many years ago was about his wife choosing to work after they retired at 30 because she loved her career field, but she negotiated a part-time position and for her cell phone bill to be reimbursed. That allowed them to cut a bill from their budget and allowed her to work significantly less.

It’s important to know your FI number, because that number is your freedom to have control over your job and your life. If you don’t want to work late or on a weekend and you worry about getting fired, it doesn’t matter once you reach FI; you can take your time finding new work.

I’m going to link a very popular website calculator: https://theficalculator.com/ . This website has put in a bunch of hard work to give accurate calculations. Enter your age. Then, I would put the desired yearly expenses at your calculated budget plus 10% to cover emergencies. Current Savings should be your Emergency Fund plus Investments. Using S&P 500 100-year historical averages, assumptions should be 10% return, 7% after inflation, 3% expected inflation, and whatever you would like under months to detail.

I would also add under “monthly income” any pensions, Social Security, VA, or other pay you receive. Also Safe Withdrawal Rate should be 4% or lower if you would like.

I’ll use an example. Let’s take a $100,000 salary, and we’ll use a savings rate of $32,000, since that is both a capped 401(k) plus IRA this year. We’ll set age at 35, roughly halfway through a working career, and the savings at $100,000, which is roughly the median 401(k) balance of 35-year-olds.

This gives what I would call a “barely” early retirement in your mid 50s, but it does show key things, such as time in the market and the power of compounding, and that the more you can budget less and save more the faster you reach FI.

Now, lets look at what happens if we lower our budget by $5,000, and increase contributions by that same $5,000.

The time to FIRE went down 2 years and 2 months. That’s huge.

The point is this: Financial Independence isn’t just about when you’re comfortable stopping work. It’s about being at a point where you can sustain yourself if you needed to, which in turn gives you control over your work-life balance.

Run an FI calculator, you can find others on the internet, form and stick to your budget, and invest as much as you can as often as you can.

~~Miniwing~~
Investor, Parent, Stoic