Being financially secure is more important now than ever. Many women I know have prioritized financial freedom in their lives over the last couple of years. The other day, my hairdresser mentioned that she was pursuing financial security by paying off her mortgage in full. She excitedly told me that she was at the point where one month of wages would give her enough to drop her mortgage payment for good.
“Can you believe it?” She gushed, “I’m going to celebrate my 37th birthday by paying off my mortgage.”
I laughed with her, joking that instead of the normal car upgrade one might consider for a birthday, she was hustling for a much grander life goal.
But she’s not alone. The pandemic has forced many of us to reset our priorities. Some people are seeking freedom from debt, while others are reflecting on their lifestyles in general.
The goal that my husband and I have latched onto is financial independence, or FI for short.
First, What Is Financial Independence?
Jessica, 34, runs the website The Fioneers. She is a personal finance expert who began a blog that helps people along the road to financial independence. She defines financial independence as “when you have passive income that can cover your full expenses.”
Jessica uses a formula to determine how much you need to save to be financially independent. The safe withdrawal rate (SWR) is the percentage you can take out each year from your investments to live on, without spending down your principal too quickly. She says, “most people use either a 3.5 or 4% withdrawal rate which means they would need either 25 times or 28.5 times their annual expenses [invested] to be considered Financially Independent (FI).”
Calculating Your Target Financial Independence (FI) Number
How do you calculate your target, or the amount of money you will need to consider yourself “financially independent”? If your annual expenses are $60,000 per year, you would need 25 times your expenditures, or $1,500,000 in investments in order to become financially independent. Or, if you want to live more lavishly (or live in an expensive part of the country) then you may want to have $100,000 per year to spend. In this case, you would need $2,500,000. Yes, that’s a very big number, but you don’t have to earn it all outright — compounding interest plays a large part in accelerating your savings.
The Path to Financial Independence Begins With Intentionality
Financial independence begins with intentionality — taking active, concrete steps to get where you want to go. There are many ways to get started. “People approach reaching financial independence in two main ways: (1) stock market investing, and (2) generating passive cash flow,” Jessica says.
My husband and I started by saving 6-10% a year in our 401(k)s. However, we soon realized that it would take really tightening our belts to get the outcomes we wanted. Eventually, by our late 20s, we reached a point where we were saving the maximum per year in our 401(k)s. We now contribute $19,500 each, while also receiving company matches. Because the money comes out of our paycheck before it is deposited in our bank accounts, we never see it, and we aren’t tempted to spend it. (Win-win!)
Fast forward to today, at age 33, we are both saving upwards of $48,000 per year. Eventually, compounding interest will accelerate the growth of our investments. While we are 10-15 years away from financial independence, every little bit counts.
There are lots of resources for getting a good picture of your finances. One way to determine how quickly you could reach your Financial Independence number is by using a calculator on the Fioneers website.
Making It Happen
If you don’t earn enough in your full-time, 9-5 gig to make financial independence happen as quickly as you’d hoped, then it may be time to look into side gigs or freelancing. I’ve dabbled in freelancing for a while, and decided to jump back into the waters this year. Similarly, Jessica says one amazing benefit of a side hustle is that people can sometimes figure out how to monetize things that they love doing.” While side hustles are not the only way to achieve FI, they can certainly play a part. “Starting a side hustle can sometimes allow you to transition earlier to a life filled with more freedom,” she says. If you have some extra creative juices, increasing your income with a side hustle can mean more money to put away.
Lastly, Don’t Forget To Smell The Roses
If you burn yourself out in your savings journey, you’ll miss out on time and experiences, and you can’t get those back. One fundamental underpinning of financial independence (FI) is that our time is precious. Jessica says to enjoy the in-between place when you have not reached financial independence, but where you also have the comfort of some savings to allow you to live intentionally.
This gives you the ability to plan out what you would love your life to look like. Having more security allows you to map out what an ideal day is. Would you take a walk on a daily basis? Have time for a specific hobby like interior design? All of this and more? Which pieces can you incorporate now?
For Jessica, this “lifestyle design” is a key component of what the Financial Independence community calls “SlowFi”. She defines SlowFi as “a mindset or approach to financial independence that focuses on using the financial freedom you gain along the way to financial independence to design your ideal life.”
The bottom line? Plan to set yourself up for financial freedom, but don’t forget to enjoy the journey along the way!