What is financial independence? The basics of FI explained in plain English

Nearly everyone I know wants to become financially independent, to retire early. But most folks have no idea how to do so. The method I describe in this article is simple to understand, although it might be tough to implement. I call it the “Money Boss method”.

With the Money Boss method, you manage your personal accounts as if you were managing a business. Doing so allows you to maximize profit and pursue Financial Independence – or any other any other money goal you choose.

For more on this concept, check out the Get Rich Slowly course, which teaches you how to become the CFO of your own life.

Financial Independence occurs when you’ve saved enough to support your current spending habits for the rest of your life without the need to earn more money. You might choose to work for other reasons – such as passion or purpose – but you no longer need a job to fund your lifestyle.

To achieve Financial Independence – or achieve other money goals – heed the basic rule of personal finance: To build wealth, you must spend less than you earn. Forget the standard advice to save 10% or 20% of your income. To be a money boss, practice extreme saving. Your goal should be to save half of everything you earn. (And more is better.)

Sound impossible? It’s not. Most of the advice here at Get Rich Slowly 3.0 is built around helping you save half. To do so, you’ll need to conduct a three-pronged attack.

Spend Less

First, minimize spending. Because a handful of expenses consume most of your budget, pursue these first (and with greatest vigor).

  • Choose a home in an area with a low cost of living. Reject the advice to “buy as much home as you can afford”. Buy as little as you need. Take out a small mortgage at a low interest rate. Repay it as quickly as possible. Don’t be afraid to rent. Spend no more than 25% of your income on housing – less is better.
  • Reduce your use of motor vehicles. Walk, bike, or take the bus. If you must have a car, buy a fuel-efficient used model and drive it until it’s dead.
  • Be frugal with food. Eat out less, be a savvy shopper, and eliminate food waste.

With the Money Boss method, these won’t seem like sacrifices. They’ll be trade-offs made to pursue a more important purpose. Plus, with mindful spending you’ll still have the freedom to spend on the things that matter most to you.

Earn More

Next, maximize your income. It’s great to cut expenses and develop thrifty habits, but there’s only so much fat you can trim from your budget. In theory, there’s no limit to how much you can earn.

  • Your job is your most important asset. Treat it as such. Negotiate your salary, learn new skills, connect with colleagues, and actively manage your career.
  • Become better educated. Studies confirm that greater education tends to bring greater pay.
  • Sell your stuff. It’ll improve both your mental and financial health.
  • Start a side gig. Make money from your hobby. Take a second job.

Depending on your preferences and priorities, your path to Financial Independence might emphasize frugality. Popular blogs like Mr. Money Mustache and Early Retirement Extreme tend to promote the power of thrift. Other people prefer a road to wealth that emphasizes income. For them, sites like I Will Teach You to Be Rich can prove valuable.

Me? I think it’s best to do both. You’ll have the best results if you reduce spending and increase earnings. Your goal should be to create a wide gap between the two.

Aim to save half your income.

Invest Wisely

Finally, funnel your profit into smart investments. (“Profit” is the same as “savings” — we prefer to talk about profit with the Money Boss method.) Take advantage of employer- and government-sponsored retirement plans first. Then route profit to regular investment accounts. Don’t get fancy. Invest in low-cost, diversified mutual funds. Ideally, choose a total-market index fund, such as Vanguard’s VTSMX. Ignore the news. Ignore market fluctuations. Ignore everybody. Keep investing during good times and bad.

If you can follow the three steps, you will become rich — and sooner than you think.

With your profit, you’ll create a wealth snowball. Track its growth. Conduct an annual review. How much did you spend during the previous year? What are your investments worth? Have you achieved Financial Independence yet? To determine whether you can retire, use the following assumptions:

  • You’ll spend as much in the future as you do now. (In reality, studies show that most people spend less, but go with this.)
  • If you withdraw about 4% from your savings each year, your portfolio will continue to maintain its value against inflation. During market downturns, you might need to withdraw as little as 3%. During flush times, you might allow yourself 5%. But around 4% is generally safe.

Based on these assumptions, there’s a quick way to check whether your goal is within reach. Multiply your current annual expenses by 25. If the result is less than your savings, you’ve achieved Financial Independence. If the product is greater than your savings, you still have work to do. (If you’re conservative and/or have low risk tolerance, multiply your annual expenses by 30. If you’re aggressive and/or willing to take on greater risk, multiply by 20.)

If you save half of what you earn, you should achieve Financial Independence in about fifteen years. If you save 70%, it’ll take nine years. But if you only save 20%, you’ll need to work for thirty years before you can retire – and at 10%, you’ll need to work for forty-five years.

Enjoy Life

As I mentioned at the beginning, these principles also apply to pursuing other goals. Maybe you don’t want to retire early. Maybe you want to save to buy a home. Or to send your kids to college. Or maybe you want to quit your job and start your own business.

The Money Boss method applies to these situations too.

If you can save half your income, you can build the life you’ve always wanted.

There’s more to it, of course — but not much more. The math and mechanics of Financial Independence are simple. They’re easy to understand. The hard part comes in mastering the mindset. It’s the psychology and emotions that hold people back.

My goal at Get Rich Slowly is to help you develop that mindset. If you’ve read this article and think, “Man, saving half my income is impossible!” then Get Rich Slowly is the place for you. In the weeks and months ahead (and in the GRS archives), you’ll find tons of info about how to cut costs, increase income, and pursue your financial goals.

Stick around. Let’s build some wealth!

Note: I’ve created a one-page PDF that describes the Money Boss method. Feel free to download, print, and share!

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There are 13 comments to "What is financial independence? The basics of FI explained in plain English".

  1. Smile If You Dare says 05 March 2018 at 08:18

    You wrote:

    “…Your job is your most important asset. …”

    Yes, the most important financial asset.

    And for taking care of my self, my health is my most important asset.

    • J.D. says 05 March 2018 at 09:55

      Yep yep. Totally agree! 🙂

  2. Joe says 05 March 2018 at 08:57

    Wow, save half of what you earn. That’s a bold statement. It’s very difficult for most people to do that. Your finance has to be pretty much ideal. We are doing very well, but are a bit short right now.

    I saved more than half when I was making really good income. That’s a huge component. Our new tenant makes $40,000/year. He’s great, but I don’t think he can save much over the next few years. Hopefully, he can get some raises soon.

  3. Dave @ Accidental FIRE says 05 March 2018 at 09:14

    To Joe’s point, saving half of what you earn is a lofty goal indeed. But we should shoot for lofty goals in life. When I was still working full time I was actually exceeding that, sometimes by a lot. But now that I’m working 20 hours a week and my salary has been cut in half, a 50% rate is a challenge. I met it one month and am very close most of the time, but that’s with maximum cuts.

  4. brian @ singledadmoney says 05 March 2018 at 11:09

    HALF – that’s going to be hard, but fun, to hit. Since the beginning of the year, I bumped my savings rate from around 15% to about 28%. That bump wasn’t too hard to do, but I can see the next major bump taking some time. My rent is pretty low right now since I have a roommate. It’s around 14%. I live pretty frugally and I don’t see much room for savings rate improvement without getting a second job so I might have to do that (some day when there’s time).

  5. Jon says 05 March 2018 at 13:06

    I assume the assumption here is that your investments are held in taxable accounts? Because I invest about 37% of income a month (more if you count the pension), but almost all of that is in either a 457 or a Roth. I can’t take the money out of there until I’m much older without severe penalties. I’m on track for a big nest egg, but the ability to tap into it is what controls the situation even if it is big enough for financial independence.

    • Vivian says 06 March 2018 at 02:40

      I’ve been wondering the same thing since I found this blog and others about FI.

    • RichardP says 08 March 2018 at 17:31

      A good goal is to have your assets split between taxable and tax-advantaged accounts. Just like you should diversify types of assets, this split gives you tax diversification. Since you can withdraw from tax-advantaged accounts without penalty after age 59-1/2, having the majority of your assets in that type of account is reasonable. Personally, I retired 2 years ago and I have 66% of my assets in tax-advantaged accounts (IRA and Roth IRA) that I can’t freely access yet.

      It is worth noting, however, that there are a number of specific conditions under which you can withdraw funds from tax-advantaged accounts before age 59-1/2 without paying a penalty (just the regular taxes). I read an IRS publication about it and it’s quite a list. It might have been 8-10 circumstances that allow penalty-free withdrawals at a younger age.

  6. Luke says 08 March 2018 at 07:03

    When you talk about savings goals, is the percentage in terms of gross income, or net of taxes? If you live in a high-tax state/city like me, it makes a big difference. I know the bigger point is to save as much as you can, but I prefer to know the technicalities for modeling purposes. Thanks, love your blog!

    • J.D. says 08 March 2018 at 07:12

      Haha. You’re right: I’m really trying to make the bigger point.

      Honestly, I don’t care how people calculate saving rate as long as they’re consistent and as long as they understand that calculating from gross (pre-tax) is going to produce a very different number from net (after-tax) income.

      Most people — and that includes me — calculate budget and savings numbers based on net (after-tax) income. This isn’t strictly accurate (taxes are an expense), but because tax money is “lost” anyhow, there seems little point in including it. Plus, I figure this is the most commonly used method, so why not embrace it?

      So, when I write about the Balanced Money Formula and say that you should aim to spend less than 50% of your income on Needs, more than 20% of your income on Saving, and around 30% on Wants, I’m talking about after-tax dollars. Same when I say that if you want to retire early you should save half your income.

      (For those who are curious, if you were to calculate these things with gross (pre-tax) numbers, you’d end up with larger targets. With the Balanced Money Formula, you’d need to put more aside for Saving, you’d get more for Wants, and you’d actually get less for Needs because your taxes would be rolled into that category. With saving rate, your target would probably grow by 20% to 30%.)

  7. Peti @ The Leveraged Mama says 09 March 2018 at 11:51

    This is the kind of ‘shock’ that some of us need so that we can really understand what it’s going to take. So while it’s eye opening it’s a great article to share and grow awareness, thanks J.D.

  8. 1Life says 27 September 2018 at 05:39

    My question is this: Why do you need a pot of money where you can withdraw a percentage – 4% I believe is the magic figure, forever without reducing your pot of money? Nobody lives forever so at some point you can spend your pot of money. Of course you might want to factor in some slack to the calculation (you might live to be 100). Also if you live in the UK as I do, you can also factor in that you will receive a state pension so depending on how much you need to live you will only need to a top up when you reach state pension age. This makes a big difference to the size of the pot of money you need to save. Maybe someone could come up with some sort of calculation to work that out?

  9. Savvy History says 22 June 2019 at 14:25

    This is one of the best definitions I have come across. Thank you for making it straightforward, brief, and relevant.

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