Achieving financial independence can often feel like an audacious goal. And to be clear, it is. But there are practical steps you can take to make this dream a reality. As of writing, 29% of Americans under the age of 55 say that they will never be able to retire. On the flip side, 1 in 4 Americans say they are financially secure. While that means only 28% of Americans currently are financially independent (or could be without income whenever they choose), it also means that you can be too. With the right education and dedication to your long-term goals, it is possible to achieve financial independence at any age.
In this article, we will cover:
- What is FI
- 15 Ways to Achieve FI
- How long does it take to reach FI?
- Your FI number
What is FI?
FI is short for “Financial independence”. Your FI number is the amount of money you need to have saved or invested in order to support your lifestyle without needing to rely on traditional employment for income. Achieving your FI number means you have reached a point where your investments and passive income generate enough money to cover your expenses.
15 Ways to Achieve FI
1. Set clear goals
Define what financial independence means to you. Does that look like getting to retire? Retire early? Do you want to keep living within the means you do now or do you want additional income every month? Determine your target savings, investment, and desired lifestyle.
Don’t be afraid to dream a bit big here. It would be much better to have too much money than to have too little.
2. Create a budget
If you aren’t already, now is a great time to set a budget (and keep it!). You’ll want to track your income, expenses, and savings. This helps you understand where your money is going and identify areas for improvement.
Reminder: Budgets aren’t supposed to be super restrictive, because ultimately, that won’t be sustainable. They are supposed to help empower you to know your money is going towards what you care the most about. That’s why I like values-based budgeting.
It’s a good idea to look at the last three months of your expenses and see where your money went. This can give you a good idea of your baseline. Maybe you want to make some tweaks or even big changes, but trying to do a full 180 might be disorienting. If you are new to budgeting, baby steps can be super helpful.
3. Live below your means
You might be thinking “Well, obviously!” If you want to save and invest, you have to spend less than you make. It’s that simple (and…that tricky). There is no way around it. When you are creating your budget, I recommend starting with the concept of “paying yourself first”. This means that you automatically designate the money for your savings and investing goals before you do anything else. This will ensure you are getting closer and closer to your FI goals every month.
There are two major strategies to help you live below your means. The first is to spend less than you make. You will have to do this for the second option as well, but it’s worth mentioning that if you aren’t super happy with how much you can put towards your financial goals every month, you can also focus on increasing your income. I have some ideas on how to make six figures here.
4. Save consistently
It’s all good and well to have goals, a budget, and a plan to live beneath your means, but it won’t mean much if you aren’t consistent. If you want to reach financial independence (or any financial goals), it’s going to take you showing up for those goals every month.
If you find that you aren’t able to stick to your plan, try to find the root of the problem. Is it an adjustment that needs to be made in your budget?
Example: You always end up spending more on health costs than you predict, so to make up for it, you cut a little from your shopping budget.
Our money behavior is informed by our mindset. If you are having a difficult time being consistent, I would recommend spending some time doing mindset practices. I have a free guide to help you with that here.
You can also check out The Power of Mindset in Personal Finance.
5. Build an emergency fund
One of the old stand-bys for anyone in the finance community, and for good reason. Every single person should have an emergency fund. To keep it brief: how are you ever going to make financial progress if your plans keep getting interrupted by emergency expenses?
A good emergency fund will cover 3-6 months of your necessary expenses. I personally think keeping your emergency fund in a High Yield Savings Account (HYSA) is a great idea. Learn more about why everyone needs a High Yield Savings Account here.
6. Invest wisely
While the other steps are absolutely important, this is the step that can be life-changing. Let’s say you save $250k over the course of ten years. That’s amazing. But what would happen if you ended up investing that much instead?
If you started with an investment of $20,000 and continued to invest $2,000 every month, in ten years you would likely have over $360k. The kicker? You will have only contributed $240k. You can see an example here.
Note: A 6% interest fee is considered the conservative end for an equation like this, so it’s highly possible you would actually have even more in your pockets.
So how do you start investing? There is a free class here that will get you started. The class is hosted live with a Q&A at the end, so bring all your investing questions.
7. Increase your income
We touched on this a little already, but if you want to speed up the journey to financial independence, you’ll likely have to increase your income. Recent studies have shown that transitioning out of a company every two years is one of the best strategies to continue to increase your income.
However, this brings up an important question: Are you in a line of work with income potential that will ultimately align with your goals? If you look up the ladder and see that your projected earning potential caps out at a salary you aren’t satisfied with, it might be time to think about a career transition or finding additional revenue sources.
8. Passive income streams
While increasing your income through your 9-5 is one of the best ways to increase your income, creating passive income streams is how you stop trading time for money. Passive income streams require an upfront time commitment and can require some upkeep, they typically require far less attention than your traditional job.
Some examples of passive income are rental properties, affiliate marketing, digital downloads, and e-commerce shops. The goal when choosing a passive income stream is to find the highest profiting option that best suits your skills and risk preferences. You can read more about passive income streams here.
9. Invest in education
It might seem counterintuitive to spend money when you are trying to reach financial independence, but if you keep hitting the same wall over and over, it might be time to get some outside expertise.
This might look like spending time reading more blogs and books, or it might look like hiring a financial coach or signing up for a course. We have a class here that has helped thousands learn how to build wealth on autopilot, and while we would love to see you in class, it’s important that you find a coach that aligns with your goals and personality. Having access to someone who has achieved the goals you are trying to accomplish can help you significantly cut down on your process of trial and error.
10. Delay lifestyle inflation
While you might be working hard to increase your income, lifestyle creep is always lurking around the corner. It’s incredibly common that when people earn more, they spend more. So if you want to achieve financial independence, keep an eye out for lifestyle inflation.
Now, does this mean you shouldn’t go out to dinner to celebrate that big promotion? Of course not! But if suddenly you find yourself on Zillow scrolling mansions, it might be a good time to remind yourself of your financial goals. Back to budgeting basics, as you earn more money, keep track that your funds are going toward what you value and your financial independence goals.
11. Consider a move
This option isn’t for everyone, but when you are working towards financial independence, it’s important to look at the major expenses in your life, and where you live plays a big factor in that. If you aren’t fully satisfied with your current living situation, it might be time to consider a move. This could look like downsizing or moving across the country. There are so many options, once you start the conversation!
Choosing to move might make a significant impact on your financial goals. While it might not be the move for everyone, it’s worth it to have this be an option as you consider how you want to reach financial independence.
12. Invest in Your Health
For many, health gets put on the back burner as they hone in on their financial goals. The problem? Delaying your health now will likely lead to more costly health complications down the road. This goes for both physical and mental health. My favorite way to approach health is to focus on what I am adding to my life, not on what I am taking away. When our schedules are fueled by choices that help us feel our best, we are more likely to stick to our goals in other areas of our lives (such as our finances).
Some easy and affordable ways to invest in your physical health include:
- Regular walks or home workouts
- Getting outside for 30 minutes a day
- Stretching and yoga
- Having fat, fiber, and protein at each meal
- Getting that water intake up
Some easy and affordable ways to invest in your mental health include:
- Deep breathing
- Creativity and play
- Connecting with friends
- Spending time unplugged and outdoors
- Simplifying tasks and reducing overwhelm
By adding routines that help you physically and mentally feel good, the habits you create will be infectious and spread to other areas of your life. Building self-trust in any area of your life will help you feel more confident and comfortable reaching for big goals in other areas, like setting out a goal to retire early or pay off debt.
13. Network and Relationships
Building a strong community of like-minded people is a surefire way to reach your goals faster. Life isn’t a solo sport, it’s a lot about who you surround yourself with. This can come in handy when you are looking to change jobs, but it can also help on a day-to-day basis.
Maybe you feel like your social calendar is already too full, in which case, it might be time to do a little social inventory. Some questions to ask yourself include:
- Do you feel like your friends understand and support your financial goals?
- Do you feel pressured to spend money on social gatherings that is not in the budget?
- Who do you spend most of your day with? Do you feel better after spending time with them?
- Is there anyone you would like to get to know more? Could you make time for that new connection?
A great book about the importance of friendships and how to make meaningful friends in adulthood is Platonic by Marisa G. Franco.
If you want to dig deeper into the conversation of friends and money, listen to this podcast.
14. Have important conversations
Sometimes we get so excited by a goal that we forget to bring others in on the conversation. If you are in a long-term relationship and are hoping to reach these goals with your partner, this might seem obvious, but have you thought about other people who it might be beneficial to have this conversation with?
Whether you are single or in a relationship, these are some potential candidates to let in on your plans:
- Spouse or partner
- Close friends
- Family members
- Online communities (having that extra support can go a long way!)
- Professional contacts
- Accountability partners
Now, not every person on this list needs the same level of disclosure. However, having these conversations can help you reach your goals and can help those close to you understand if your behavior starts to change.
For example, maybe you regularly go to happy hour with a group of friends. Now you’ve decided you want to hold back on happy hour for the next few months so that you have a little extra time to work on your passive income stream. If you don’t have an honest and upfront conversation with your friends as you make this change, they might assume you don’t want to hang out with them or potentially even think something is wrong. But if you have a conversation with them upfront, not only will they likely be understanding, but they might even offer support or encouragement.
15. Reward yourself
When working towards a huge goal like financial independence, it can be wise to label certain marker points that you want to celebrate. This can look like celebrating when you pay off debt, celebrating when you reach a certain investing milestone, or celebrating your income increase.
If you are working towards financial independence, it’s likely that this will take years, maybe even decades. But that doesn’t mean you should stop living your life in the meantime! Celebrating your achievements can look big or small, so if you want to take that trip to France to celebrate your $100k invested, by all means, put it in the budget and on the calendar!
Some affordable, smaller ways to build celebration into your financial routine include:
- Picnic in the park
- Movie nights at home (especially if there is something you have really been wanting to see!)
- Cooking a special meal
- Host a dinner party or game night
- Going on a special hike to a hot spring or other outdoor adventures
- 5-minute dance parties in your living room
- Book or clothing exchange with friends
- Karaoke party
- Beach and bonfire nights
Integrating play and celebration into your life will help make reaching your long-term goals more doable and enjoyable.
How long does it take to achieve FI?
The time it takes to achieve financial independence varies widely based on individual circumstances, goals, strategies, and starting points. There isn’t a fixed timeline that applies to everyone, as factors such as income level, expenses, savings rate, investment returns, and lifestyle choices play significant roles.
However, here are a few rough guidelines that might help you understand the potential timeline:
The 4% Rule
One common guideline is the 4% rule, which suggests that you can safely withdraw 4% of your initial investment portfolio each year during retirement without significantly depleting the principles. This rule assumes a balanced investment portfolio. If your annual expenses are $40,000, you’d need a portfolio of $1 million to consider yourself financially independent under this rule.
Your savings rate (the percentage of your income that you save and invest) is a crucial factor. A higher savings rate generally leads to faster progress towards financial independence. For instance, if you save 50% of your income, you’ll reach financial independence much faster than if you save 20%.
The average annual return on your investments will impact the time it takes to reach your financial independence goals. Historically, the stock market has averaged around 7-10% annual returns, adjusted for inflation, over the long term. However, market fluctuation can affect short-term returns.
Debt and Expenses
If you have significant debt or high expenses, it may take longer to achieve financial independence as a substantial portion of your income goes towards debt payments or maintaining your lifestyle.
The earlier you start saving and investing, the more time your money has to compound and grow. Starting young can significantly reduce the time it takes to achieve financial independence.
Given these variables, some people might achieve financial independence in their 30s, 40s, or 50s, while others might take longer. It’s crucial to create a personalized financial plan, regularly reassess your progress, and be prepared to adapt your strategies as circumstances change.
How do you calculate your FI number?
Your financial independence number is the amount of money you need to have saved or invested to sustain your desired lifestyle without needing to work for income. It’s calculated based on your estimated annual expenses and the concept of the 4% rule. The 4% rule suggests that you can withdraw 4% of your investment portfolio each year in retirement, adjusting for inflation, while having a reasonable expectation that your money will last a long time.
Here’s how you calculate your FI number:
1. Determine your annual expenses
Begin by estimating your annual expenses (or desired annual expenses if you wish to spend more than you currently do). This includes all costs associated with your desired lifestyle, such as housing, food, transportation, healthcare, entertainment, and any other regular expenditures.
2. Apply the 4% rule
Divide your estimated annual expenses by 0.04 (which is equivalent to multiplying by 25). This provides you with the approximate amount you need to have saved to sustain your annual expenses without running out of money.
Your FI Number = Annual Expenses / 0.04%.
Achieving financial independence is a huge goal that, on average, about 1 in 4 Americans achieves. If you want to achieve financial independence, it will take strategy, flexibility, and hard work, but the payoff is life-changing. Increasing your income, learning how to invest and what to invest in, and building a network of connections who have similar goals are all great steps forward to help you achieve your goal. When calculating your FI number, keep in mind that the 4% rule is more like a guideline and that you will need to regularly monitor its accuracy for your desired lifestyle and any other variables.
If you are planning to achieve FI but want help with investing, join this free class here. The path to financial independence is unique for everyone– with the right resources, motivation, and mentors, I’m sure you will have your unique map to financial independence in no time!