How to FI: A Step-by-Step Guide to Financial Independence (2024)

What if you NEVER had to worry about money again? It’s not as hard as you might thing as millions of people are reaching this status, called Financial Independence (FI), each year.

In this article, we’ll provide aneasy-to-follow step-by-step guideon how to reach FI, fromcalculating your target numberright through tosmart investing strategies.

Ready forfinancial freedom? Let’s dive in!

Key Takeaways

• Financial Independence (FI) is a state where yoursavings and investmentsgenerate enough incometocover your living expenses, allowing you the option towork or pursue other interests.
• Tocalculate your FI number, track your yearly spending and multiply it by 25 or divide it by 4% (thesafe withdrawal rate) to estimate the amount needed in your investment portfolio.
• Achieving financial independence requires developing anaggressive savings strategy, selecting the appropriate investment mix, consistently saving and investing, boosting income, making adjustments as needed, avoiding distractions like unnecessary spending or market volatility, and periodically reevaluating your situation once FI is achieved.

What Is Financial Independence (FI)?

Financial Independence (FI) essentially represents a financial state where one’s income from savings and investmentsis sufficient to cover their living expenses.

Work becomes optional sinceyour accumulated wealth can meet your living expenses. The journey toward FI involves diligent planning,aggressive saving, wise investing, and adisciplined approach to spending.

A key component of pursuing Financial Independence is calculating your ‘FI number’ – an estimate of the amount you’d need in your investment portfolio to generate enough returns for covering regular life expenses safely without diminishing your principal amount too quickly.

This calculation often pivots around concepts like safe withdrawal rates (typically 4%), annual expenses, and factoring in regular debts that require attention before delving headfirst into accruing or investing sizable funds.

What Is a FI Number?

The FI number is a critical tool to assess your readiness for retirement. It helps address the question, “How much do I need to retire?“

Consider it a savings goalpost that can offer a basic framework for your retirement savings plan.

Nevertheless, many tweak it to better fit their long-term goals and buffer against unforeseen financial emergencies.

Before you calculate your FI number, you should factor in:

1. Overall monthly expenses
2. Monthly earnings
3. Rate of savings
4. Current investments and their yield

Applying the Safe Withdrawal Rate of 4%

Understanding theSafe Withdrawal Rate of 4% is important in achieving financial independence. Also known as the 4% rule, this rate represents how much money can be safely drawn from investments each year without depleting the portfolio prematurely.

To calculate your FI number using this method, multiply your yearly living expenses by 25 or divide them by 0.04 (equivalent to 4%).

This calculation estimates the portfolio value you’ll need to uphold your current lifestyle post-retirement entirely through investment income.

However, remember that these numbers are based on average market returns and might not factor in individual circ*mstances or sudden market fluctuations. Regular reassessment and fine-tuning are essential for successfully applying this rule on your journey toward financial independence.

7 Steps to Achieve Financial Independence

Here are the 7 steps to reach FI:

#1. Develop an Aggressive Savings Strategy

Saving a significant portion of your income is essential for building a substantial nest egg and reaching your FI goals faster.

As a side note, we were able to initially aggressively save early in my dental career by staying in our “starter” home the first 15 years of when I opened my practice.

Studies show thatsaving 30%, 40%, or even 50% of your income can help you attain financial independence earlier than saving only the recommended 10%-20%. Bycutting unnecessary expenses, being mindful about spending, and prioritizing saving, you can accelerate the growth of your savings.

Additionally,investing wisely in assets with higher potential returns, such as real estate syndications, further boosts your chances of achieving financial independence. The key is to make consistent contributions towards your savingsand stay disciplined with your savings plan.

#2. Select the Appropriate Investment Mix

Choosing the right investment mix involves selecting investments that align with your:

• risk tolerance
• time horizon
• financial goals

Awell-diversified portfoliocan help mitigate risks and maximize returns over the long term. This may include investing in a mix ofstocks, bonds, real estate, exchange-traded funds (ETFs), and other assets such as real estate.

By carefully considering your investment options and regularly reviewing your portfolio, you can ensure that you are on track to reach your financial independence goals. Remember, it’s important toseek professional advice or do thorough researchbefore making any investment decisions.

#3. Save and Invest Consistently

Individuals can accumulate funds over time and build their investment portfolio by developing a habit of saving regularly.

Setting aside a portion of each paycheck or income towards savings helps create a safety net for unexpected expenses and provides the capital needed for investments.

Consistency is key here; even small amounts savedand invested consistently can grow significantly over time due to thepower of compounding.

#4. Boost Your Income

By increasing the amount of money you earn, you can accelerate your savings and investment goals.

There are several ways to boost your income, such as taking on aside hustle or finding opportunities for career advancement.

Increasing your income not only allows you to save more money, but it alsoprovides a cushion against unexpected expenses and market fluctuations.

#5. Make Adjustments as Needed

As you progress towards FI, it’s important to be flexible and make adjustmentsalong the way. Life circ*mstances can change, and yourfinancial goals may need reassessment.

This could includereevaluating your budget,adjusting your savings rate, orconsidering new income-generating opportunities. Bystaying adaptable and open-minded, you can ensure that you stay on track toward achieving financial independence while also maintaining a balanced lifestyle.

Remember, reaching financial independence is a long-term goal that requires patience and consistency, so being willing to make adjustments as needed will help you stay focused and motivated on your path to financial freedom.

#6. Avoid Distractions

One MAJOR distraction is being influenced by society’s consumer-driven culture (aka “Keeping up with the Joneses.”)

“Stop trying to keep up with the Joneses. They’re BROKE too.” – Dave Ramsey

It’s easy to get caught up in thedesire for material possessionsandunnecessary spending, which can hinder your progress towards FI.

Another distraction may come in the form ofmarket volatilityorfear during bear markets.

It’s critical to stick to your long-term investment strategy and not let short-term fluctuations derail your goals. By maintaining financial discipline and staying true to your plan, you can navigate these distractions and stay on track toward achieving FI.

#7. Reevaluate Once FI is Achieved

Once you have achieved FI, it is important to reevaluate your situation periodically. This includesreviewing your budget,investment portfolio, andoverall financial goals.

By reassessing your finances, you can ensure that you are still on track and make any necessary adjustments. It’s also a good time to consider whether you want to continue working or if you have the option to retire early.

Want to learn more about how I’m on the path to achieving FI? Check out this video:

Strategies for Reaching Your FI Portfolio

Here are 4 strategies for reaching your FI Portfolio:

Pay off debt, reduce expenses, expand your income, and invest wisely.

Investing Towards FI

Making Investments Automatic

By setting up automated contributions to your investment accounts, you can ensure that a portion of your income goes directly toward growing your portfolio.

This eliminates the need for constant manual transfers and helps you stay consistent with your savings and investment goals. Automatic investing also takes advantage ofdollar-cost averaging, where you buy more shares when prices are low and fewer when prices are high.

Over time, this strategy can potentially increase overall returns while reducing the impact of market volatility. So, whether through employer-sponsored retirement plans or automatic contributions to brokerage accounts, making investments automatic sets you on the path to financial independence without requiring constant monitoring or decision-making.

Choosing an Index Portfolio

An index portfolio consists of low-cost index fundsthat track the performance of a specific market index, such as the S&P 500.

These funds providebroad market exposureanddiversification, reducing individual stock risk. By selecting an index portfolio, you can benefit from long-term growth potential and avoid the pitfalls of trying to time the market or picking individual stocks.

Tracking Your Progress

By regularly monitoring and assessing your financial situation, you can stay motivated and make necessary adjustments to reach your goals.

One important way to track progress is bycalculating your FI number (previously discussed).

You can also use tools likenet worth calculatorsorspreadsheetsto keep tabs on yoursavings rate,debt reduction,investment growth, and overall financial health. Regularly reviewing these numbers will help you stay accountable and make informed decisions on your path to achieving FI.

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5 Different Types of FI

#1. Regular FI

Regular FIrefers to achieving enough wealth and passive income to sustain one’s current lifestylewithout relying on a traditional job.

This meanshaving a portfolio value and investment incomethatcovers all regular expenses, giving individuals the freedom and flexibility to pursue their passions instead of being tied to a 9-to-5 job.

Regular FIprovides financial stabilityand theability to maintain one’s current standard of livingwithout the need for additional sources of income or significant lifestyle adjustments.

#2. Lean FI

Lean FI focuses on reducing expensesto achieve financial freedom earlier. It emphasizes aminimalist lifestyleand cutting back on non-essential expenses.

Lean FI recognizes the importance ofdebt reduction in lowering the income requirement for FI, and recommends savings rates of 30%, 40%, or even 50% of income.

#3. Fat FI

Fat FI refers to a comfortable and luxurious lifestyle in retirement.

With Fat FI, individuals can enjoy the finer things in life and have the freedom to pursue their passions and dreams without any financial constraints.

#4. Barista FI

Barista FI offers a middle ground between traditional employment and full retirement, allowing individuals totransition to less demanding or more enjoyable part-time or flexible work.

With Barista FI, people can have the freedom to pursue their passions while still earning some income, providing them with a sense of security and fulfillment. This option allows for abalanced approach to achieving financial independence.

It canbe an attractive choice for those who desire more flexibility in their lifestyle without completely leaving the workforce.

#5. Coast FI

Coast FI is where you have saved enough money to cover your basic living expenses during retirement, even if you stop contributing to your savings and investments.

In other words, you can let your existing portfolio grow on its own without making any additional contributions. This type of FI allows for a more relaxed approach to reaching financial independence and may be suitable for those who prioritize work-life balance or enjoy their current job but still want the security of knowing they could retire early if desired.

Conclusion

In conclusion, financial independence requires careful planning, disciplined saving and investing, and a commitment to adjustments.

Byunderstanding your FI number,developing an aggressive savings strategy, boosting your income, andinvesting wisely, you can take control of your finances and work towards the goal of financial independence.

FAQs

1. What is financial independence?

Financial independence refers to the ability to live comfortably and cover all expenses without relying on a full-time job or external sources of income. It means having enough savings, investments, and passive income streams to support one’s desired lifestyle.

2. How can I achieve financial independence?

Achieving financial independence requires careful planning and disciplined money management. It involves saving a significant portion of your income, investing wisely for long-term growth, reducing debt, and creating multiple passive income streams.

3. How long does it take to achieve financial independence?

The time it takes to achieve financial independence varies greatly depending on circ*mstances such as current savings, expenses, investment returns, and desired financial freedom. However, with consistent effort and smart financial choices, most people can reach this goal within 10-20 years.

4. What are some strategies for reaching financial independence faster?

To accelerate the journey towards financial independence, you can consider strategies like increasing your income through side hustles or career advancement, minimizing expenses by adopting frugal habits and budgeting effectively, and diversifying your investments across different asset classes for higher returns potential while managing risk carefully. Additionally, staying educated about personal finance principles and seeking professional guidance can also be beneficial.