How to FI: A Step-by-Step Guide to Achieving Financial Independence

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 an easy-to-follow step-by-step guide on how to reach FI, from calculating your target number right through to smart investing strategies.

Ready for financial freedom? Let’s dive in!

Key Takeaways

• Financial Independence (FI) is a state where your savings and investments generate enough income to cover your living expenses, allowing you the option to work or pursue other interests.
• To calculate your FI number, track your yearly spending and multiply it by 25 or divide it by 4% (the safe withdrawal rate) to estimate the amount needed in your investment portfolio.
• Achieving financial independence requires developing an aggressive 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 investments is sufficient to cover their living expenses.

Work becomes optional since your accumulated wealth can meet your living expenses. The journey toward FI involves diligent planning, aggressive saving, wise investing, and a disciplined 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 the Safe 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 circumstances 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 that saving 30%, 40%, or even 50% of your income can help you attain financial independence earlier than saving only the recommended 10%-20%. By cutting 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 savings and 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

A well-diversified portfolio can help mitigate risks and maximize returns over the long term. This may include investing in a mix of stocks, 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 to seek professional advice or do thorough research before 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 saved and invested consistently can grow significantly over time due to the power 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 a side hustle or finding opportunities for career advancement.

Increasing your income not only allows you to save more money, but it also provides 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 adjustments along the way. Life circumstances can change, and your financial goals may need reassessment.

This could include reevaluating your budget, adjusting your savings rate, or considering new income-generating opportunities. By staying 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 the desire for material possessions and unnecessary spending, which can hinder your progress towards FI.

Another distraction may come in the form of market volatility or fear 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 includes reviewing your budget, investment portfolio, and overall 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.

Strategy	Description
Paying Off Debt	Not only does paying off debt free up more cash flow, but it also allows compound interest to work in one’s favor when investing.
Reducing Expenses	It’s important to regularly review your expenses and look for areas where you can make adjustments, as even small savings can add up over time.
Expanding Your Income	One way to expand your income is by seeking promotions or bonuses in your current job, which can result in higher salaries and additional funds to invest. Another option is to explore side hustles or part-time work that align with your skills and interests, providing an extra source of income.
Investing Money Wisely	Focusing on long-term investments and diversifying your portfolio can maximize your chances of earning higher returns. Remember, investing consistently and staying disciplined even during market downturns is key for building wealth over time.

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 of dollar-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 funds that track the performance of a specific market index, such as the S&P 500.

These funds provide broad market exposure and diversification, 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 by calculating your FI number (previously discussed).

You can also use tools like net worth calculators or spreadsheets to keep tabs on your savings 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 FI refers to achieving enough wealth and passive income to sustain one’s current lifestyle without relying on a traditional job.

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

Regular FI provides financial stability and the ability to maintain one’s current standard of living without the need for additional sources of income or significant lifestyle adjustments.

#2. Lean FI

Lean FI focuses on reducing expenses to achieve financial freedom earlier. It emphasizes a minimalist lifestyle and cutting back on non-essential expenses.

Lean FI recognizes the importance of debt 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 to transition 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 a balanced approach to achieving financial independence.

It can be 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.

By understanding your FI number, developing an aggressive savings strategy, boosting your income, and investing 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 circumstances 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.

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