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The Complete Guide to Achieving Financial Independence Through Simplifying [Free Calculator]
Wouldn’t it be cool to never have to worry about money again? Achieving financial independence to do what you want and not having to work sounds pretty good, right?
But who has the patience to be disciplined for 40 years? Why can’t you learn how to live a meaningful life today and fast track your way to financial independence?
I figured out a way. And it’s not what you may think. You see, you may think the only solution to achieving financial independence is making more money. Although that’s one way, it’s not the best way.
The quickest way is through simplifying. That’s right! The most effective way to reaching financial independence is by simplifying your life and adopting a minimalist lifestyle.
Here are ways you can get started on the path to financial independence, and you don’t have to wait 30+ years to start living the life of your dreams. You can start today.
Why is financial independence important?
The number one question you have to ask yourself if you’re going to start down this path is, why? If the reason why you want to reach financial independence isn’t clear in your mind, you’ll probably give up.
Most people are pursuing one or two common goals:
- Becoming debt-free
- Making more money
While these are reasonable goals, neither has become a significant focus in my life. Becoming debt-free would be nice, but it’s not my main goal. Becoming debt-free is ultimately a stepping stone to where I want to go, it’s not the end goal.
Don’t delay your happiness for the day you become debt-free or start making more money.
For me, my “why” is getting to the point where I no longer have to work for money. I want to get to the point where my passive income or interest on investments is enough to cover my living expenses, and I can spend my time doing what I love. I never plan to retire early. Once you retire, you stop progressing. I intend to keep working and helping as many people as I can, and if money happens to come because of that, great.
Read: Financial Independence Defined
During my childhood, I didn’t get time with my dad. My mom was a single mom, and money was a constant stress. I want to provide the future for my wife and my children I never had. Ultimately, I want to design my perfect life, do what it takes to get there and find a way to enjoy the journey.
As a reminder to myself, I renamed my Wifi network name to WHYFI. That way, each time I connect to the internet, I’m reminding myself why I’m pursuing financial independence.
Why is it important for you?
What is the difference between financial freedom and financial independence?
A phrase I stopped using is financial freedom. When I was younger, I wanted to be financially free, but I had no idea what that meant. It was a vague goal with no real sense of direction of where I wanted to go.
That was until I understood what it meant to be financially independent.
Read: Why I Stopped Pursuing Financial Freedom
Years ago, I was listening to a podcast. It was a relatively new podcast, and they were talking about this concept that was foreign to me.
I’d been interested in personal finance for years, how had I never heard of this concept of FI before?
Financial independence wasn’t arbitrary to me. It sounded attainable and actionable—a goal anyone could achieve. By definition, when you have 25x of your living expenses saved up, you’ve achieved financial independence. It made sense in my mind, but why 25 times?
What is the 4% rule?
The 4% rule tells you what percentage of your assets you could live on annually without running out of money. Withdrawing 4% of your portfolio not only preserves your principal balance but almost always results in growth.
Take a look at the chart below. Assuming you’re 40 years old and you officially become financially independent by saving $1,000,000. That means you could comfortably live on 40,000 per year without working ($1,000,000 x 0.04). By running a Monte Carlo analysis (1,000 tests), we see in nearly all cases your $1 million not only is preserved but grows. In many cases, over $5,000,000 during a 30-year time horizon.
What does this mean for you? If you can manage to save enough money, based on the research you’ll never have to work another day in your life if you don’t want to.
Understanding the 4% rule will help you know how much money you need to save. For example, if you spent $60,000 last year, you times the number by 25 ($60,000 x 25 = $1,500,000). The 4% rule states, to live off a $60,000 per year from your portfolio, you need to create a net worth of $1.5 million.
Achieving financial independence isn’t possible for many people. But the hardest part is the beginning. Once you start consistently saving money, compound interest starts to take over. Are you one of the few who has what it takes to reach financial independence?
Free Financial Independence Calculator
How long will it take you to reach financial independence? This calculator will tell you.
If you can’t see the entire calculator, press enter or tab to go to the next field.
Credit: The Wealthy Finn
Considerations
- Input your expenses as your net income (your monthly accumulation)
- Inflation is assumed to be 2%
- Age and gender are used to calculate a life expectancy
What is the savings rate?
People who are trying to reach financial independence talk about a savings rate. Some even brag their savings rate is 80 – 90%. What does that mean?
Your savings rate is a percentage of your income set aside for savings.
For example, If you earn $60,000 a year and find a way to save $10,000, your savings rate is 16.67%.
The amount of money you save will have a direct impact on when you’ll reach financial independence. This article called the Shockingly Simple Math Behind Early Retirement from Mr. Money Mustache sums it up pretty good.
If you saved 0% of your income, you’d never become financially independent. On the flip side, if you keep 100% of your income, you could retire today. We all know life isn’t that black and white, and we have to find a balance between YOLO and saving money.
How do you calculate savings rate?
To calculate your savings rate, divide your savings by your income and you’ll get a percentage.
Annual Savings/Annual Income = Savings Rate
You can calculate this either with net income (after taxes) or gross income (before taxes). If you calculate your savings rate based on net income, it tends to be more accurate and, in most cases, is higher.
How can I increase my savings rate?
Are you thinking, “how can I save more money?” Good question.
Of course, we would all like to have a higher savings rate. You can increase it in one of two ways
- Simplify your life
- Increase your income
I’d be lying if I said you don’t need a high income to increase your savings rate. But it’s not the only way. I argue that the most straight forward way to increase your income is to lower your expenses and keep more of the money you’re already making.
One isn’t better than the other, and I recommend focusing on both. To increase your income, focus on what skills you’re bringing to the table. If you’re struggling to make a high income, you don’t have a money problem; you have a skills problem.
Increase your skills and the money will follow.
A few suggestions are:
- Contributing more to your current job and asking for a raise
- Creating a side business around your passion
- Asking to work overtime
- Choose a few of the many ways to make a side income
Related: The Ultimate Guide to Making Side Income
Is financial independence possible?
If you’re new to this idea, you may be thinking, “is this is even possible?” Maybe you’re stuck at a dead-end job, not making near as much as you should be. Or you make good money, but controlling your spending has been an ongoing struggle.
Less than 1% of Americans get to enjoy a financially independent lifestyle. Of those that try achieving financial independence, less than 40% get there.
This isn’t an easy way to live.
However, it’s possible. And even if you achieving financial independence doesn’t happen, it’s worth pursuing. I’m an absolute believer anyone can achieve financial independence with the right discipline and systems.
First, you need to have clear goals of where you want to go. Next, you need to have a system to help you get there. For example, a way to track your spending and net worth, or a budgeting app that helps you plan and stick to a budget.
Read: Personal Capital Review: 4 Powerful Free Features
Lastly, you have to maintain a longterm perspective.
“One reason so few of us achieve what we truly want is that we never direct our focus; we never concentrate our power. Most people dabble their way through life, never deciding to master anything in particular.”
Tony Robbins
How much money is enough?
All of this leads me to my next point. Is it possible to get to the point where you have enough?
The world is always telling us we need more. More money, more comfort, more house, more cars, more, more, more.
This cycle repeats itself until you go most of your life never feeling like you’re satisfied.
Understand you are enough. Being self-aware to the point you feel like you’re enough is a big challenge. We all want to be more and do more, which is admirable.
I don’t feel like I’m good enough at times. But I have to take a step back and realize it’s ok not to be where I want to be. Instead of feeling down, I have to ask myself, how can I find joy in the journey?
I believe I will get to the point in my life where I’ve made enough and saved enough money to not only be financially independent but believe deep down I don’t need more.
The biggest challenge in life is getting to the point where enough is enough. Financial independence makes that possible. And it doesn’t have to be hundreds of millions of dollars to get there.
How much do I need to save to be financially independent?
This number is based entirely on your annual expenses. The more money you spend every year, the more money you’re going to have to save to reach FI.
For a single person spending $24,000 a year, they’d need to save up $600,000 to reach FI. On the flip side, if a couple is spending $200,000 a year, they’d need to save $5,000,000 to reach FI.
If the average household spends $50,000 a year, the number to reach is $1,250,000. But how long will it take you to get there?
Related: 5 Simple Ways to Reach Financial Independence
As we mentioned above, the more you save, the quicker you get there. But let me touch on an important concept—compound interest. When your money is compounding, that’s when you’ll see the most growth.
Don’t think you have to save ALL $1.25 million in your bank account. The truth is you’ll end up saving a fraction of that, and compound interested will take care of the rest.
If you saved $1,750 a month for 20 years, you’d have had saved $420,000 of your dollars. But if your money were earning 10% interest the entire time you were saving, the value of your money would be $1,250,000. Thank you, compound interest!
The hardest part is always the beginning. Once you’ve built up a decent amount of savings, you’ll start to see your money make money and your savings will grow exponentially.
Can I live off the interest of a million dollars?
Of course! Assuming a safe withdrawal rate of 4%, you could withdraw up to $40,000 per year from your million dollar portfolio.
What about inflation? Won’t inflation eat away at your million dollars and eventually you’ll lose all of your principle?
No, the 4% rule we mentioned above, takes into consideration inflation. The biggest question is once you reach financial independence, how are you investing those dollars and can you confidently earn a rate of return higher than 4%.
Investing is where it all starts to get complicated, and because no one has the same situation, it may be a good idea to talk with a Registered Investment Advisor about what your best options are.
Read: Who Can You Trust For Financial Advice?
How can I become financially independent by 40?
When young people learn about this concept, they get excited. I know when I first learned about it, it’s all I could think about for a while. I was fortunate to learn about this in my mid-twenties; I’ve got time to try and reach FI by the time I’m 40.
I’m in my late twenties and have made decent progress. I’m about 1/4 of the way there. And I understand the first few years are the hardest because it’s when you feel like you’re making the least progress.
But as I’ve been investing for years and own two properties, reaching financial independence is becoming a real possibility. Achieving financial independence by the time you’re 40 takes increasing your income and lowering your expenses. If you do those, it’s possible to retire 25 years earlier than most people, if you want to.
What is the meaning of simple living?
Now that you understand what financial independence is and can see it’s possible, I want to talk about a topic that doesn’t get talked about enough—pulling the second lever. The second lever is simple living.
If increasing your income is the first lever, which we all know is essential, how can we double our efforts by living a simple life?
Simple living can include a number of different voluntary practices to simplify your life. Things like reducing the amount of stuff you have, paying off debt, lowering your expenses, and increasing self-sufficiency.
You could come up with many examples, but I believe simple living means living your life’s purpose and removing anything else.
Related: Living a Life of Simplicity and Independence
One of my favorite books that opened my eyes to what it means to live a simple life was Walden by Henry David Thoreau. He talks about only needing four things to be happy; food, water, clothing, and shelter. Most of us won’t live this way, but if you did, it would cut the time it takes to achieve financial independence.
How do I start living a simple life?
First, you need to understand what your life’s purpose is. What are you doing on earth, and what are you trying to accomplish? Understanding what your identity is will make it easier to cut out the fat in your life.
Second, it’s being intentional and organized every day. Being intentional with your mornings, your commute, your relationships, and your possessions. When you’re intentional, you focus on what matters most.
Related: Financially Free By Wanting Less
There’s no one right way to live this way, but one of the best things you can do to make this a daily practice is to focus on the phrase “simplify.”
“Simplify”
If you hung this word up on your fridge or in your bathroom mirror, it will be a constant reminder of how to simplify your life.
Read: How to Simplify Your Financial Life
What is a minimalist lifestyle?
Is simple living the same things as minimalism? Yeah, pretty much. Depending on how you look at it. Even though I’m not the best at it, I consider myself a minimalist. You may not like the term, and thinking that way can cause extra stress or anxiety, which is why I like to refer to it as simple living.
Nevertheless, they’re similar, and if achieving financial independence is a focus, money, and minimalism have a lot in common.
Read: 8 Ways Money & Minimalism Are Related
A few places you can look to learn more about minimalism are The Minimalists and Mari Kondo. They both teach similar concepts when it comes to simplifying your life.
What do you do after achieving financial independence?
Suppose you’ve made it. You increased your income, and you simplified your life to the point where you’re financially independent. Congrats!
I know plenty of people who’ve gotten to this point. They work for years and years to get to reach FI, and when they finally do, it’s a bittersweet moment. They may not be as happy as they thought they’d be, and others are happy for a few months and weeks and then find themselves bored living a mini-retirement.
Achieving financial independence isn’t enough to make you happy and keep you positive. You have to live your purpose. If reaching some arbitrary number is your biggest goal, but you’re not living for a bigger cause, financial independence will feel lonely and boring.
What would your life look like after FI? For me, I don’t plan to stop working. Whether it’s woodworking, marketing, or financial coaching, I plan to help others. Helping others gets me excited. And if I happened to make money, great!
But I don’t plan to retire, sit around all day, and do nothing. I plan to keep working.
I just don’t want the pressure of being a slave to my job or stuck in the rat race. I’ve also thought about taking mini-retirement by not working for a year.
The bottom line is I want to live life on my terms, and I don’t want money to be a worry. Achieving financial independence is my way of getting there.
Conclusion
Achieving financial independence requires an insane amount of focus and discipline. But once you understand why you want to reach financial independence and apply the tools and life hacks to get you there, it’s possible.
I’m all for making more money. You do need a higher income to get where you want to go. But if you stack a high income on top of living a simple life, there’s no limit to what you can accomplish. You can design the type of life you want to live, and you don’t have to wait until you reach some number to start living.
In what ways are you achieving financial independence?
