Financial independence is becoming a hot topic and something many people strive to achieve. But, what is financial independence?
Financial independence is having enough assets or income generating assets to not have to work.
That seems simple enough. However, there are many nuisances and strategies to become financially independent that can become overwhelming. Ultimately, it boils down to increasing your income, reducing your expenses, and investing. Becoming financial independent, or simply abbreviated to FI, gives you the freedom to pursue whatever passion or activities you would like to without having to worry about earning any money. To some people this may be continuing their career, traveling the world, volunteering, or just spending more time with friends and family.
Why Do I / We Care About Financial Independence?
You may be wondering why and how does financial independence fit into a travel centric blog. Well, personally it has become an evolution as I strive to make as many aspects of my life more efficient. I became very interested in miles, points, and credit card bonuses back in college. My obsession with miles and points allowed me to travel to places I could have never dreamed of. Eventually I learned enough about miles and points to go and stay wherever I wanted. While many other travel bloggers know even more secrets, I do try to share my knowledge in a simple manner.
Since I hit the ceiling of being able to burn all the miles and points I have accumulated while still maintaining a career, I began looking at other avenues to maximize my time and money. This led me to Doctor of Credit who provides great information about bank account bonuses. So instead of purely focusing on credit cards, I added cash bonuses for new bank accounts to my repertoire. Eventually this path led to looking at strategies to invest my money wisely.
Then We Got Married and Moved Across the Country!
Fast forward a couple of years later when I become a newly wed and we had the grand idea of moving to Denver, Colorado. Looking at the higher cost of living compared to Indiana made us really think about our finances. This led to a lot of research and savings to try to get enough money for a down payment in Colorado.
All my random Googling led us to the concept of financial independence and sparked the idea of becoming financially free. By striving to increase our income, limiting unnecessary spending, reducing our tax burden, and investing our money wisely we could not only save enough money for a down payment but could also set us down a path to become financially independent.
Our plan worked and we saved enough money for a 20% down payment for a house in Colorado! We were both able to find jobs as well in the Denver as well. We packed our bags and headed out to Colorado for a lifestyle change but also brought our new found knowledge to help us to continue to achieve our financial goals.
Life In Colorado
Living here in Colorado has been wonderful as we have really enjoyed access to the mountains and the abundant sunshine. However, with life, money is one of the biggest stressors for anyone. While we both have great careers that we are passionate about, we are by no means making a ton of money. Beth is an elementary teacher and I am a consultant in the government space.
While we are not financial independent now, the amount of worrying we have regarding finances is significantly diminished as we have been building our assets and mitigating lifestyle inflation. We are striving to achieve financial independence to provide us with options in the future.
- Maybe someday we will start a family and would like to reduce the amount of time spent at work.
- Traveling is always on the top of our minds, so having the option to take extended trips and really immerse ourselves in a new place sounds wonderful.
- Pursuing new career or volunteering opportunities without having to worry about our income would be nice.
These are just a couple of our reasons.
The Basics of Financial Independence
Like we mentioned earlier the most basic recipe for becoming financially independent is:
- Increase your income through your career, additional sides jobs, or income generating assets like rental properties.
- Reduce your expenses by eliminating unnecessary spending such as going out to eat, not buying the latest and greatest toys, or changing your lifestyle.
- Save addition money by reducing your tax liabilities by utilizing as many tax advantaged accounts as possible like individual retirement accounts (IRAs), 401ks, health savings accounts (HSAs), and other vehicles.
- Invest the money you save in diversified assets such as mutual funds or exchange-traded funds (ETFs).
Now how do you know when you are financially independent?
The simplest answer is that your income from assets can cover your expenses without you having to work, then you are financially independent. For example, if we as a family spend $60,000 a year we need enough income generating assets or the ability to sell investments in our portfolio to cover those expenses. One rule of thumb for safe withdrawals is the 4% rule. This rule states that you can withdraw 4% of your investment portfolio without depleting it. Meaning that you can live indefinitely off of this. This equates to 25 times your yearly expenses. This rule works because the average market returns even accounting for inflation are higher than 4%.
Note: this is “rule” is more of a guideline as the market can fluctuate significantly and past performance is indicative of future performance.
So if spend $60,000 a year then we would need a portfolio of $1,500,000 to become financially independent. Once this number is achieved we could quit our jobs and retire early! This is known as Financial Independence, Early Retirement (FIRE). But just because we hit there number does not mean we have to retire as we may want to continue our career. Even if we do not retire early, we do have additional security. This security is the FI part and gives us enormous power in our life.
- What if the company I work for changes direction and I don’t like that, well then I can just walk out.
- Maybe I would like to spend more time walking our dog Spruce, well I can reduce my hours at work.
- Maybe I would like to spend a summer in Europe and Beth agrees to it. All right, let’s go!
So What Is Your Number to Become Financially Independent?
One thing we notice that everyone struggles with is determining how much money they actually spend. Most people can tell you how much they earn but never the amount they spend or save. This is critical as when you retire (early or at a traditional age) this number is what your life will revolve around. By also figuring out how much you spend you can determine where you are wasting your hard earned dollars. Maybe you didn’t realize that you spent so much money going out to eat! Or all those new clothes are no longer necessary.
We highly recommend setting up a budget and tracking your expenses. Mint is a great tool to help you track your expenses as it can pull in nearly any bank, credit card, or loan information into one interface. It will even categorize what types of things you are spending your money on automatically. Another great tool is personal capital which can also be used to track expenses and your assets. We find that both applications have similar features but Mint has the better interface for budgeting whereas personal capital is better for tracking your investments and other assets.
So what is your FI or FIRE number? And what is your why?
Our Favorite Financial Independence Blogs
- Mr. Money Mustache – One of the most popular FIRE bloggers and a fellow Coloradan.
- Go Curry Cracker! – Another blogger obsessed with finances and travel via miles and points.
- ChooseFI – A great podcast to get up to speed on financial independence very quickly and real life perspectives. Also the only podcast I have ever consistently listened too!
These are a just view of the great resources available in the FI community. Our hope is to share more of our experiences as we strive to become financially independent!