If you’re into personal finance you’ve probably heard the term “financially independent,” but what does that even mean? Financial independence is the ability to live off the income of your own personal resources. Those personal resources could be stocks, bonds, real estates, businesses, annuities, royalties, or any other investments.

Being financially independent (abbreviated as FI) means that you are no longer required to work in order to provide for your lifestyle (assuming you don’t outspend your available income). Sounds pretty good right?

Defining financial independence is the easy part, the harder part is figuring out what you need to do to get you there. Some might believe that unless you’re a professional athlete, Hollywood actor, have a platinum music album, win the lottery, or have a trust fund then your only hope for financial independence is to work for 30+ years until your investments have grown and social security kicks in.

This way of thinking doesn’t have to apply to you. The path to financial independence can be much shorter than you would think.

How’s that you ask? Well, it’s a matter of figuring out how much money will you need to save in order to sustain your current lifestyle the rest of your life. There are all sorts of formulas and rules of thumb out there that attempt to forecast your needs for retirement. The worst ones are those that project your retirement needs based on a percentage of your income. These can all be very confusing and often over-complicate things.

When you strip it down, it’s really quite simple. The only thing you need to understand is what percentage of your take-home pay do you save? Understanding this number will allow you to forecast how long it will take for you to reach FI.

Reaching financial independence is no more than a math problem. Saving 10% of your income is saving 10%, regardless of the amount. It doesn’t matter if you make $20K, $200K, or $200M.

If a professional athlete makes $30M a year and spends $30M a year, he will NEVER be financially independent, he will always be required to make more money. Whereas, a plumber who only takes home $40k a year and is able to save $10k a year (25% savings rate) will reach FI in 25 years.

The lower your expenses

and the more you invest,

the faster you’ll reach FI.

If you could somehow spend nothing and save 100% of your money, you would immediately be FI. If, however, you save 0% of your income, you will never reach FI.

If you want to figure out how long it will take you to reach FI you can check out this handy chart from Networthify below. How it works is you find your savings rate along the horizontal x-axis. Next, match up the top of the bar from your savings rate to the year on the vertical y-axis. This will tell you how many years it will take you to reach FI at your current savings rate.

Retire*Note these assumptions are based on take-home pay and don’t factor in Social Security
*Assumes 8% average rate of return for your portfolio

And there you have it!

Do you want to retire in 30 years? You need to save about 18% of your income.

What if you can save 50% of your income? You can retire in 14.3 years. That means if you start your working career at age 24, then you could be retired by 40!

The specific numbers for income and expenses don’t matter, the premise behind this math is “how fast can you amass 25X your annual expenses.”

This is known as The 4% Rule, meaning, you can pull out 4% of your investment portfolio annually, and your money should never run out and should continue to grow and increase with inflation. In simple terms, if you want to spend $40K a year in retirement, that means you multiply that number by 25 and that’s your FI number, 40,000 X 25 = $1M. Pretty simple!

Now that you know the math, let’s revisit our plumber who is bringing home $40K. Right now he’s doing a great job saving 25% of his income- $10K a year.

Did you know that the average cable subscription bill is $103 a month? What if our plumber friend decided to ditch this $103 a month expense? That means he would save an additional $1,236 a year, for a new total annual savings of $11,236 per year. Before cutting cable he was on pace to retire in 25.3 years, now he’s lowered it to 23.6 years! He can retire 1.7 years earlier by making that one simple change.

I am not saying cable is bad and you shouldn’t have it, but I give this example rather to point out the clear correlation between the money you spend and the additional time it requires you to work to pay for it. Think about the money you spend- is eating out every day for lunch worth the additional years it will tack on to your career? What about that car lease? Kitchen remodel?

If you don’t want to cut things out, the other tactic to reach FI quicker is to increase your earnings. Let’s say the plumber didn’t want to give up his cable, so instead, he figured out a way to expand and grow his business. If he found a way to grow his income from $40K to $50K a year, but managed to avoid lifestyle inflation and kept his spending the same- he would save $20K a year instead of $10K. Saving an extra $10K a year (without increasing his spending) would bump him up to a 40% savings rate (instead of 25%). Now he’d be on pace to retire in 18 years; 5.6 years sooner than if he had he just cut cable. By earning more and increasing his savings rate he not only gets to retire earlier, but he also gets to keep his cable while doing so.

I don’t like the saying “it’s not what you earn, it’s what you keep,” because frankly both are essetial. I prefer: It’s what you make AND what you keep. Cutting expenses is a great way to trim your time to financial independence, but you can only cut so far. It’s important to maximize income as well.

The Magic Number

I like to refer to 64% as the “magic number.” A 64% savings rate of your take-home pay puts you on pace to retire in 9.8 years. That should be encouraging to everyone. What if you’re 55 and late to the game? There’s still time! What if you’re 23, and are staring down a 30-year career and don’t like what you see? You have options!

A 64% savings rate seems impossible at first, but I assure you, many people do this with all types of incomes. To get there you just need to follow these two simple steps:

  1. Figure out how you can improve your money situation by 1%
  2. Repeat step #1

You’ve heard the saying- “How do you eat an elephant?……one bite at a time.”

The same principle applies for reaching FI. It won’t happen overnight, so start by taking the 1% challenge today!

8 thoughts on “What is financial independence?

  1. Good introduction, I like the clear cut explanation that it’s both about what you make and keep. I think it’s easier to visualize that as a sliding scale!


    1. Making things visual with clear cut examples has helped me to make sense of personal finance, which can be a very complex topic.
      Thanks for the positive feedback!


  2. It’s something we can all get better at! But the beauty is, thanks to compound interest, the more money you can put to work early, the less work you need to do. That’s the goal I’m striving for now.


  3. Financial independence is when you plan your finances so well you do not have to worry about any future’s financial crisis. Financial independence typically means having enough income to pay your living expenses for the rest of your life without having to work full time.


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