The Secret to Reaching to Financial Independence
The idea of reaching financial independence or FIRE (Financial Independence Retire Early) appeals to a vast majority of people. How many dream of winning the lottery and not ever having to work again? The reality, however, is that reaching financial independence does not take luck! It is something attainable to just about everyone who wants it and is willing to do two things.
The secret to reaching financial independence has two main ingredients:
- A shift in your mindset,
- Executing as many smart money habits as possible.
Now let’s dive deeper into what each of these mean exactly.
THE FIRST SECRET TO FINANCIAL INDEPENDENCE IS YOUR MINDSET
The first secret to reaching financial independence is to fix your mindset about money. If you believe you can never achieve financial success – you are right. You won’t.
“Whether you think you can, or you think you can’t – you’re right.”Henry Ford
You must first believe that you have everything you need to change your financial situation and what you don’t have can be learned.
It is also important to know WHY you want to achieve financial independence. This will be the fuel that keeps you moving forward in your journey.
Lastly, you’ll need to set your goals. These will be realistic goals – but also ones that continually stretch you and will be your roadmap for your journey to Financial Independence. Setting these goals will also mean you have an understanding of exactly what it means to be financially independent.
We’ll go further into detail of each of these below.
THE SECOND SECRET TO FINANCIAL INDEPENDENCE IS EXECUTING GOOD MONEY HABITS
The great thing about Financial Independence is that the journey is tailored to your own personal circumstances. That is why this second secret does not tell you that you MUST follow a set number of steps in order.
What WILL propel you exponentially closer to your goals of financial independence is to put into practice as many good financial habits as possible. Some may not appeal to you or fit your life, and that’s OK!
SECRET 1: CHANGING YOUR MONEY MINDSET
Gaining Confidence in Your Abilities to Manage Your Money
If you are like me, maybe your relationship with money has not always been great. Or maybe you are insecure in your knowledge about money because you were not raised to learn about how money and investing works. That’s OK! If you are here, it means you want to and that is the best first step you can take.
You can learn everything you need to know about money to make competent decisions with your money going forward. There are a wealth of podcasts, books, YouTube and communities that will help you and mentor you along the way.
Some of our favorite books are listed below:
Have a Clear Understanding of WHY You Want to Achieve Financial Independence
Understand your motivation for wanting to achieve financial independence. Ask yourself and reflect on the following questions:
- What about becoming financially independent appeals to you?
- When you envision your life after financial independence what does it look like?
- What about your life will be different?
- Understand what reaching financial independence cannot do for you.
For instance, our main reason for wanting to become financially independent is to create generational wealth for our children and their legacy. It is important to us to teach them to be financially literate and involve them in our investing decisions and our real estate business.
We want them to understand that financial independence gives them innumerable choices otherwise not available to them if they are burdened by debt and without enough income to support themselves.
CLEAR AND ACHIEVABLE FINANCIAL GOALS
The final component of your financial independence mindset is to have clear and achievable goals. This involves understanding what it means to be financially independent and what level of financial independence you want for your future.
The Definition of Financial Independence:
You have reached financial independence once you are generating enough income so that you never have to work again if you don’t want to. This income can come from savings, investments, a business, other passive income streams and any combination thereof.
The FI Calculator:
But how do you know when you have achieved that amount of income?
The answer widely accepted by the Fire Community is to save 25 times your expected expenses at retirement. This is based upon utilizing a Safe Withdrawal Rate of 4% once retired.
You believe you can live on $40,000 a year once you retire.
25 X $40,000 = $1,000,000.00
You will need $1,000,000.00 invested in the market to be able to “safely” withdraw 4% each year for the rest of your life once you retire.
The 4% Rule was made most popular by the Trinity Study. In the study it was found that, “withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At these rates, retirees who wish to bequeath large estates to their heirs will likely be successful.”
The second way to reach Financial Independence is to generate enough income to sustain your living expenses throughout retirement.
So for instance, you many have real estate investments that cash-flow enough for you to live on for the rest of your life. Or you have a business that generates income that you no longer have to be actively involved.
Or you utilize a combination of the two methods.
This is our plan. We are both saving and investing in our retirement accounts as well as building income that will continue long after we retire.
Determining Your FIRE Goals
Now that you know the calculation for achieving your FI goals, you will need to decide how much you believe you will need to live on. The following are considerations in determining that number:
- Where will you live
- Whether or not you will be debt-free
- Whether or not you will have a mortgage
- Healthcare costs
- Other pension and/or retirement income
- Whether or not you will still have dependents
- Do you want to have more saved than you need
- Do you want to use it all or leave an inheritance
- What are your contingency plans
So now that you understand the financial mindset necessary to reach Financial Independence and you have a clear goal, or destination, in mind, now it’s time to create your road map to get there.
THE SECOND SECRET TO FINANCIAL INDEPENDENCE – YOUR MONEY HABITS
The following wealth generating habits will propel you forward and help you reach Financial Independence:
Get Rid of Debt. Debt can be one of the biggest hurdles to becoming financially independent. Every dollar you spend on debt is money that cannot be put to work for you and you miss out on the benefit of time and compound interest. Paying off debt should be one of the very first objectives.
Use a Budget. Your budget is where you put your money to work for you. It is how you will decide what amount goes to debt, savings, living and expenses and what to do with what’s left. If you are not using a budget, you are invariably leaving money unaccounted for and not being as intentional with your money as you could be.
Reduce Expenses/Frugality. Reducing your expenses aggressively will free up money in your budget to either pay off your debt more quickly and/or increase your savings rate. Decreasing your expenses is one area where you can see the immediate benefit of your actions. We recommend that you question every expense. Analyze your last three months of spending and ask, 1. Can I eliminate this expense entirely, or 2. Can I reduce it? It all adds up. Another really great way to cut expenses is to use cash for all discretionary spending.
Increase Your Savings Rate. The average American saves less that 5% of their income. 5% will not get you to Financial Independence. But jumping to a 50% savings rate overnight is likely not practical either. When we began our journey, our savings rate fluctuated between 5-7%. We have increased that, over time, to almost 30%. We suggest that you increase your savings rate as much as you feel comfortable and then decide on an incremental time frame that you will increase it and by how much. We look at our savings every quarter and increase our retirement contributions by a few hundred dollars every time. If it ever gets to be too much, we can pause. So far we have not needed to do that, we have simply adjusted our spending.
Tax-Optimization. Tax-optimization is another tool in the Fire Movement’s tool box. It simply means you are utilizing the legally available tax strategies that benefit you financially. This includes pre and post-tax investment accounts, Roth-conversion strategies, draw down and withdrawal strategies. Since we are not tax professionals, you should do your due diligence to see what options are available to you and how you can utilize them to your advantage.
Increase Your Income. More income means there are more opportunities to save and pay off debt. Look for opportunities to earn more money where you are. Advocate for a raise, apply for better paying positions, work over-time, if able. Then take any extra funds and put it to work.
Create Multiple Income Streams. In the same vain, look for opportunities to create multiple streams of income. Any extra income can help you super-charge your financial goals. It also diversifies your income so that if the unthinkable happens, and you lose one income stream, you have mitigated your loss.
Raise Financially Literate Children. Your children are your legacy. It would be a shame to create all this wealth and not have it continue as you intend. Involve your children, teach them about finances. If you have a business, help them understand what it is and what it does. This is what separates the wealthy from the rest of the world. You have the ability to change your family tree and your children play a critical role in that. JL Collins wrote a wonderful article on building 7 Generations of Wealth. It is a wonderful perspective and worth a read.
“You’re the average of the 5 people you spend the most time with.”– Jim Rohn
Community. You are the company you keep. Do your friends and family support your Financial Independence journey? Are they like-minded when it comes to money. Or do they sabotage your progress, either intentionally or not? Many are not going to understand what Financial Independence means, nor do they care to. And that is OK, but it’s not good for your progress. Make sure you have people in your life who understand and support your plans. If you don’t know anyone like that, then surround yourself with knowledge via books, podcasts, or YouTube channels. Also take advantage of local and/or online meet-ups and groups.
Curtis and I have made FIRE friends all over the world. No one in our “real-life” circles quite understand what we are trying to do, but our “FIRE friends” do. They are where we receive encouragement, support and mentorship. This is one of THE most important things you can do to guarantee your success.
Stay the Course. Finally, stay the course. This may take you less than 10 years or it could take more. It really depends on your personal circumstances. But there may be times when you are fatigued, you feel you are not making progress or you have set-backs. During these times, it’s important to focus on WHY you want to be Financially Independent to begin with. Expect there will be bumps in the road. But stay the course. Be flexible when your circumstances change. Our money and lives are fluid and so by being flexible you can adjust your plans when things change.