Most people define “financial independence” as having 25 times your annual expenses. For example, if you spend $40,000 per year, you need $1 million (25 *$40,000) to be financially independent.
Let’s explore what financial independence looks like visually.
Pretend this tiny red block represents $1,000 in annual spending:
Maybe you spend it on Chipotle, Netflix, buying groceries, paying rent, attending concerts, buying clothes, paying bills, taking vacations, or whatever else. It simply represents $1,000 you spend each year.
Now pretend this tiny green block represents $1,000 in savings:
For every tiny red block, you need 25 tiny green blocks to be financially independent:
So if you spend $30,000 per year, you need $750,000 to be financially independent. Here’s what that looks like:
Or if you spend $60,000 per year, you need $1.5 million in savings. Here’ what that looks like:
Going from spending $30,000 per year to $60,000 per year increases the amount you need to save to reach financial independence by $750,000. That’s mind-boggling. It’s because for every additional $1,000 you spend each year, you need $25,000 more in savings.
But on the flip side, for every $1,000 less you spend each year, you need $25,000 less in savings to reach F.I.
For example, if you can reduce your spending each year by $5,000, you would need to save $125,000 less to reach F.I.
When you think about expenses this way, it becomes pretty clear that even tiny recurring expenses can actually have a huge impact on how much you need to save.
For example, in a recent post I mentioned that I save about $1,500 each year by bringing my lunch to work instead of eating out. That might not sound like much, but it means I need to save about $37,500 less (25 * $1,500) to reach financial independence.
In that same post I mentioned that I can save almost $1,000 each year by using my Keurig instead of buying a coffee every morning. This means I need to save $25,000 less to reach F.I. all because I make my own coffee. That’s a pretty good trade-off.
Most people who have been able to reach F.I. in a ridiculously short period of time have figured out this simple math: when your annual expenses are low, it dramatically decreases how much you need to save. This means you can reach F.I. much quicker than most people.
For example, if you spend less than $40,000 per year on average, you don’t even need one million dollars to be financially independent. That’s the power of low expenses.
The most effective way to lower your annual expenses is to develop daily money-saving habits like packing your lunch and making your own coffee. Or by reducing how much you spend on entertainment by taking advantage of free entertainment provided by nature. These little habits can reduce how much you need to save to reach financial independence by thousands of dollars.
So, start looking for ways to reduce your yearly spending. Less spending means less savings needed to be financially independent, which means a shorter mandatory working life, which means more freedom to do what you love and live life to the fullest.
- How to Live Like a Millionaire Without $1 Million - July 8, 2020
- Sunday is for Sharing: Volume 159 - July 5, 2020
- The Road to My First $7,000/Month in Online Income - July 1, 2020
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.