6 min read
One of the most common debates in the personal finance blogosphere is whether or not you actually need a high income to achieve financial independence.
Let’s define financial independence as having 25 times your expected annual expenses during retirement. So, if you plan to spend $40k per year in retirement, you need $1 million (25 x $40k) to achieve financial independence.
Although I would argue that saving up 25 times your expenses and never working again might not be a strategy that optimizes for happiness, let’s assume it’s a goal you still want to pursue.
One way to determine if you actually need a high income to achieve financial independence is to look at it from a mathematical perspective. We can do this using the Financial Independence Grid, which assumes that you start with $0 and that you invest the difference between your post-tax income and expenses each year at a 5% return. The grid tells you how many years it will take to reach financial independence based on your annual post-tax income and expenses:
According to the grid, a household that earns $40k per year post-tax and spends just $20k per year can achieve financial independence in 16.6 years.
Likewise, a household that earns $80k per year post-tax and spends just $40k per year can also achieve financial independence in 16.6 years.
The grid illustrates an important concept: the time it takes you to achieve financial independence is dependent on your savings rate. For a household who is able to save and invest 50% of their post-tax income each year, they’ll be able to achieve financial independence in 16.6 years at every income level.
So, if we look at this debate purely from a mathematical perspective then we get a simple answer: No, you do not necessarily need a high income to achieve financial independence. You just need a high savings rate.
Unfortunately, life isn’t lived on pretty grids and spreadsheets. While the math tells us that a household who can survive on just $20k per year only needs to earn $40k per year to achieve F.I. in 16.6 years, the reality is that it’s very difficult for most households to survive on just $20k per year.
The Truth: Income Matters
There are many factors that contribute to how much your household spends each year like your household size, the cost of living in your city, and your general lifestyle.
And it’s certainly possible to lower your annual spending through smart grocery shopping, buying less expensive cars, living in a home that suits your needs rather than impresses your peers, and finding joy in things that are free like spending time in nature.
But you can only reduce your expenses so much. At some point, you have to increase your income if you hope to reach financial independence in a reasonable amount of time.
This is why I personally don’t try to convince people that they can achieve F.I. at any income level, but rather I try to convince them that they’re capable of increasing their income to a level where they can achieve F.I. in a reasonable amount of time.
Minimize the “Big Three” Expenses
If a household came to me and asked how they could achieve financial independence as fast as possible, I’d tell them: reduce your spending to a reasonable level, then focus on growing your income.
In particular, get your “Big Three” spending under control: your housing, transportation, and food bills. Data tells us that these three expenses account for over 60% of total household spending. Once you get these three to a reasonable level, your attention should shift to growing your income because there is a lower limit that you’ll hit on your spending but there is no upper limit on your income.
For example, consider a household who is able to minimize their “Big Three” spending and reduce their total annual expenses from $60k to $40k. Instead of finding tiny ways to cut costs further and get spending down to $37k, they’re far better off looking for ways to grow their income.
Grow Your Damn Income
There are three primary ways you can grow your income. Depending on your situation and how much free time you have outside of your day job, one of these methods might make more sense for you than the others.
1. Invest in assets.
Assets are things that pay you. Examples include stocks, bonds, REITs, websites, or anything else that puts money in your pocket simply for owning it.
Related: Buy Less Stuff. Buy More Assets.
Suppose you earn $4,000 per month after taxes. If you use $2,000 to buy shares in a stock index fund with a 3% dividend yield, you will get paid $66 each year just for owning those shares. That’s $5.50 each month. Now, instead of earning $4,000 per month, you will start earning $4,005.50 per month.
This number seems small, but the more assets you own, the more dividends you’ll receive. If you continue to buy assets each month using income from your day job, your monthly income will continue to increase.
2. Build Your Own Assets
Along with buying assets, you can simply build your own.
One example of an asset you could build is a website. Two years ago I decided to start this site. Now, each month I earn money from mostly through ads and affiliate links. In October alone I made over $1,600.
I also built statology.org, a statistics educational site, which I hope to monetize over the course of the next year. There are virtually no barriers to entry if you want to build a website. You simply purchase a domain name, a hosting plan, and start writing content. Granted, it can take well over a year to earn a single dime from a website, but for those who are consistent and patient, a website can turn into a wonderful income stream.
The best part of all is that he only needs to create a design one time, upload it online, and sit back and wait for people to purchase it. As he continues to build up his online inventory, his income will likely continue to increase over time.
Building assets can be a great way to create your own income stream. The one drawback is that it often takes months or even years to see the payoff from building your own assets. But if you’re patient and maintain a long-term perspective, this isn’t a problem.
Personally, when I feel impatient and wish that I could earn income faster, I think of this quote from Steven Pressfield in Tribe of Mentors:
“I’m 74. Believe me, you’ve got all the time in the world. You’ve got ten lifetimes ahead of you. Don’t worry about your friends “beating” you or “getting somewhere” ahead of you. Get out into the real dirt world and start failing.”
3. Provide a Service
The third way to boost your income is to provide a service. Often people refer to this as a “side hustle” since it’s something you do on the side outside of your day job to earn extra income.
There are hundreds of examples of people earning extra income outside of their day job through providing services.
Personally I earn $40-50 per hour tutoring college students in statistics.
Jennifer Chan, a full-time lawyer, found a way to turn freelance writing into an income stream.
Kenzi from Kenzi Writes was able to turn freelance writing into her full-time job.
Kevin from Financial Panther frequently earns over $3,000 each month with side hustles like Airbnb hosting, Rover dogsitting, and DoorDash food delivery.
Young FIRE Knight found a way to earn over $300 per month charging electric scooters.
Millionaire Dojo earns hundreds per month selling items on eBay.
There are countless ways to earn income outside of your day job. Test out many different side hustles, see which ones are worth your time, and commit a few hours each week to working on them.
To me, it’s silly to spend my time trying to convince people that F.I. is possible at any income level. I’d rather tell it like it is: your income plays a huge role in determining how long it will take you to achieve financial independence, but fortunately there are ways you can increase your income through hard work and patience.
For anyone out there on the road to financial independence, focus on getting your “Big Three” expenses down to a reasonable level, then shift your focus to growing your income. No matter how you look at it, your income matters.
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
Although the bulk of his net worth is invested in index funds, his favorite place to invest in individual stocks is M1 Finance, a site that allows you to build a custom portfolio of stocks for free.
His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
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