4 min read
Suppose you earn $60k per year and spend $30k per year. Assuming you start with a net worth of $0 and invest your savings at a 5% return each year, the Financial Independence Grid tells us that it would take you about 16.6 years to achieve financial independence.
Note: I define “financial independence” as having 25 times your annual expenses.
This means that you would need to earn $996,000 (16.6 years * $60,000) during your lifetime to achieve financial independence.
Suppose instead that you earn $100k per year, but still spend $30k per year. According to the Financial Independence Grid, it would only take you 8.8 years to achieve F.I.
This means that you would need to earn $880,000 (8.8 years * $100,000) during your lifetime to achieve financial independence.
If we perform this simple calculation for every combination of annual income and annual spending on the Financial Independence Grid, we can create a new grid that shows the lifetime earnings needed to achieve F.I. at different income and spending levels:
It’s fascinating to see that a higher savings rate translates to less mandatory working years and less lifetime earnings needed to achieve financial independence.
Some Interesting Observations
If you spend $40k per year, then at every income level you need to earn at least $1 million during your lifetime to achieve F.I.
If you spend $70k per year, then at every income level you need to earn at least $2 million during your lifetime to achieve F.I.
If you spend $100k per year, then at every income level you need to earn at least $3 million during your lifetime to achieve F.I.
Consider person A who earns $80k per year and spends $70k per year. Then consider person B who earns $100k per year and also spends $70k per year. Person B would need to earn about a million bucks less during their lifetime than person A to achieve financial independence:
These grids teach us a few simple lessons:
- A higher savings rate allows you to achieve F.I. in less time (pretty obvious)
- A higher savings rate means you need to earn less during your lifetime to achieve F.I. Going back to our example from earlier, someone who earns $60k and spends $30k per year would need $750k ($30k * 25) to achieve F.I. and it turns out that they would need to earn $996k during their lifetime to do so. Conversely, someone who earns $100k and spends $30k per year would also need $750k to achieve F.I., but they would only need to earn $880k during their lifetime to do so.
- Increasing your savings rate even by a small amount could allow you to earn hundreds of thousands of dollars less during your lifetime and still achieve F.I.
Download the Excel Genius Toolkit to learn how to create grids like the ones in this post.
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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