Shortest Path to Financial Independence
What would you give up if someone said to you, “if you give up five things, you can quit your job tomorrow and won’t ever have to work again”? What else would you give up if you instead had to give up ten things? Fifteen things?
At some point it may not be worth it and you’d rather keep your job but I imagine the list of things you’d be happy to give up could be pretty long.
I actually thought about this a lot recently when creating the budget for The Perfect Life. After determining what kind of life would make my wife and I happiest, I sat down to figure out exactly how much the perfect life would cost.
Definition of Financial Independence
Before I describe the shortest path to financial independence, it’s probably a good idea to reiterate my definition of financial independence.
To me, financial independence is having enough income from your assets to cover your essential expenses so that you can survive without ever having to work again. Never having to work again is very different from never working again. Since I plan on working in some capacity after I achieve FI (on things I want to work on, rather than what my boss wants me to work on), I’m not concerned with saving up enough money to cover my discretionary expenses. I’d rather reach FI as quickly as possible, quit my full-time job, and then slowly build up the amount of “fun money” I have by doing work that I enjoy.
As Mr. Money Mustache described in his First Retire, Then Get Rich article, it’s likely you will make more money and spend less post-FI than you anticipate. Therefore, I’m happy with this plan and am in no way worried about living a boring life after financial independence.
So how can you achieve financial independence as quickly as possible?
List Current Essential Expenses
The first thing you should do is list your current essential expenses. This will allow you to understand how much you spend per month and will help you better predict how much you will need to spend after you quit your job.
The following list represents my current monthly expenses. These are my half of the expenses that my wife and I split 50/50 (My Wife’s Not a Fientist so we split all of our household expenses).
$300 – Mortgage
$125 – Property Tax
$20 – Home Insurance
$130 – Utilities
$10 – Cell Phone
$175 – Groceries
$70 – Car Insurance
$175 – Gasoline
$165 – Health Insurance
$25 – Misc.
So to achieve financial independence while maintaining our current standard of living, I would need to generate $1,195 of cash flow from my investments, per month, to cover my half of our expenses.
Assuming a 4% withdrawal rate*, that means I would need $358,500 in savings to achieve FI.
Predict Future Essential Expenses
The number you computed in the previous step assumes your post-FI life will resemble your current life. Most likely, this will not be the case. When you no longer have to work, the number of expenses that you incur should decrease.
This step is the fun part. If you really envisage your post-FI life, you can quite happily drop expenses that are no longer necessary or important to you.
Here are my projected future expenses:
$300 – Rent and Utilities
$10 – Cell Phone
$175 – Groceries
$100 – Travel
$50 – Health Insurance
$50 – Misc.
My post-FI life will only cost $685 per month! Now, I only need to save $205,500 to reach financial independence!
I will highlight some of the key differences between my current and future expenses to give you an idea of why your post-FI life could be much cheaper than your current life.
We currently own a house but plan on renting after reaching FI. There are a few reasons for this:
No Irregular Expenses – If a pipe bursts or the roof leaks, I don’t want to have to pay for it and I don’t want to budget for it. I just want to pay $x a month and not worry about any additional expenses.
Just Enough House – Right now, we have a two-bedroom, two-bathroom house but only my wife and I live there. We bought a two-bedroom house so that we could have guests and potentially have space for a nursery, if we decided to have a baby. For the most part, however, this second room has been unused. Renting will allow us to get exactly the right sized house for our current needs. We’ll be able to spend less on a studio or a 1-bedroom place and then move somewhere bigger if we do eventually need another bedroom.
Less Stuff – Rather than maintain a house full of belongings, we’re going to sell mostly everything we own and then rent furnished houses/apartments instead. The less stuff we have, the less we’ll feel attached to a particular place, the more money we’ll have in the bank, and the more flexible we’ll be.
Geographic Arbitrage – As I mentioned in The Perfect Life article, I also plan on using geographical arbitrage to bring my FI date even closer. By living somewhere like Thailand for a portion of the year, the income from my United States investments and businesses will go much further than if I lived in the States. Renting will allow us to easily move to cheaper places, as needed or desired.
Renting smaller apartments/houses in cheaper places allows me to decrease my future monthly expenses by $275 per month. This equates to $82,500 less savings I need to accumulate for FI! It’s pretty amazing to be able to achieve financial independence a couple of years sooner, just by getting rid of things I’m not going to miss (i.e. a second bedroom).
Sadly, we currently require two cars for my wife and I to get to work. The costs associated with these cars is ridiculous and if I never have to own a car again, I won’t. Post-FI, we won’t need to own a car.
Not having a car may result in additional rent and public transportation costs, as accounted for in the future budget, but by cutting out automobile ownership from our future expenses, I was able to decrease my future monthly expenses by a further $145.
I’m sure there are many expenses in your life that you’d be happy to substitute for free alternatives post-FI if you take some time to think about it. There’s a big, exciting world out there with many amazing, free things to do so why not start with those and then move on things that cost money after you get bored of all the free options? Library books instead of TV. Running instead of gym membership. Rock climbing on actual rocks instead of on a fake climbing wall that costs money to use. You get the idea.
Why Wait Until FI?
This exercise may help you decrease your current expenses even before you achieve financial independence. If you ask yourself, would I give up x if it meant I could quit my job tomorrow and you answer yes, why would you continue paying that expense now? It is obviously not that important to you so why not remove that expense and instead use that money to get one step closer to achieving FI?
Supplemental Income for Discretionary Spending
The beauty of saving enough to only cover your essential expenses is that it will force you to really scrutinize your discretionary spending after you achieve FI. If you have to go out and make extra money to buy something, you’ll most likely only buy things you really need or desire. You will truly be trading your free time for stuff so you will most likely only do that for things that are really important to you.
Again, why wait?
There’s no need to wait until FI to see if you can limit your discretionary spending to what your supplemental income can provide. If you start developing supplemental income streams by doing things you enjoy now, you’ll be able to increase your savings rate while cutting out the discretionary expenses that really aren’t meaningful to you.
In conclusion, here are the simple steps to achieve financial independence as quickly as possible:
- Record your current essential expenses
- Envision your Perfect Life
- Use your current expenses to help predict the future essential expenses in your perfect life
- Determine what assets are needed to provide the necessary cash flow to cover your future essential expenses
- Save and invest your way to that target
- Enjoy FI
What would you consider giving up if it meant you could quit your job tomorrow?
* Addendum – Due to the ongoing debate about the 4% safe-withdrawal rate, I figured I’d update the post to include links to some great articles about the subject. I’m interested in hearing your opinion so feel free to chime in below or send me an email. Do you think 4% is a safe withdrawal rate?
- For 4% – Mr. Money Mustache
- For 4% – JLCollinsNH
- Against 4% – Financial Mentor
- Against 4% – Schof