Financial independence (FI) is a term that has gained a lot of traction in recent years. It refers to the ability to maintain your current lifestyle without having to rely on a traditional job for income. Achieving financial independence is a goal for many people, and it’s often seen as a path to greater freedom and flexibility in life.
FI is not one of the common topics among physicians, and even less common among primary care physicians. We just don’t focus on it, we typically focus on our love of medicine and taking care of patients.
I want to change that, and help you take care of your patients while also taking care of you!
One important concept in the pursuit of financial independence is the FI number. This number represents the amount of money you need to save and invest in order to reach a point where your passive income covers your expenses. In other words, it’s the amount of money you need to achieve financial independence. Knowing your FI number is crucial if you want to work towards this goal, as it gives you a clear target to aim for and helps you track your progress along the way.
In this article, we’ll explore the concept of the FI number in more detail and look at how you can use it to achieve financial independence. We’ll cover everything from how to calculate your FI number to strategies for saving and investing the money you need to reach it. By the end of this article, you’ll have a better understanding of what it takes to achieve financial independence and how the FI number can help you get there.
Understanding the FI Number
Defining FI and Its Importance
FI, or financial independence, is the state of having enough passive income to cover all of our expenses without relying on traditional employment. Achieving FI provides us with the freedom to pursue our passions and interests, without being tied to a job solely for financial reasons.
The importance of FI lies in the freedom and security it provides. By reaching FI, we no longer have to worry about job security, market fluctuations, or economic downturns. We can focus on our personal growth, spend time with loved ones, and pursue our dreams.
Calculating Your FI Number
Calculating your FI number involves determining your annual expenses and multiplying that number by a factor of 25. This factor is derived from the 4% rule, which states that we can safely withdraw 4% of our portfolio each year without depleting it.
For example, if your annual expenses are $40,000, your FI number would be $1,000,000 ($40,000 x 25). This represents the amount of money you need to have invested in assets that generate passive income to cover your expenses.
The Role of the 4% Rule
The 4% rule is a guideline used to determine the safe withdrawal rate from our portfolio in retirement. It is based on historical market data and provides a high probability of not running out of money over a 30-year retirement period.
While the 4% rule is not foolproof and should be adjusted based on individual circumstances, it provides a useful starting point for calculating our FI number and planning for retirement.
In conclusion, understanding the FI number is crucial for achieving financial independence and the freedom it provides. By calculating our FI number using the 4% rule, we can determine the amount of money needed to cover our expenses and work towards achieving our financial goals.
Creating a Financial Plan
When it comes to achieving financial independence, having a solid plan in place is crucial. In this section, we will discuss the key steps to creating a financial plan that is centered around your FI Number.
Assessing Current Financial Health
Before you can create a plan, it’s important to assess your current financial health. This includes understanding your income, expenses. I recommend that you just sit down and write this out. Keep it simple, open up a word document and write out your income, and your expenses. This can include creating a budget, tracking your expenses, and knowing where your money is going and how much of it you have coming in.
Setting Realistic Goals
Once you have a clear understanding of your current financial situation, it’s time to set realistic goals. This includes determining your FI number, or the amount of money you need to save to achieve financial independence. It’s important to set realistic goals that take into account your current income and expenses.
You can use an investment calculator that you can search for, or like I show you in my course on building a FI plan using your FI number you can simply use the future value calculator in excel to make this happen.
Budgeting for Success
Finally, to achieve financial independence, you need to budget for success. This includes creating a budget that allows you to save a significant portion of your income each month. We recommend using a zero-based budget, which means that every dollar you earn is allocated to a specific category. This can help you stay on track and avoid overspending.
In summary, creating a financial plan is essential to achieving financial independence. By assessing your current financial health, setting realistic goals, and budgeting for success, you can create a plan that will help you reach your FI number and achieve financial freedom.
Investment Strategies
When it comes to achieving your FI number, choosing the right investment strategy is crucial. Here are some investment strategies that can help you reach your financial goals.
Stock Market Investments
Stock market investments can offer high returns but come with a higher level of risk. It is important to diversify your portfolio and invest in a mix of stocks, bonds, and other assets to reduce risk. We recommend investing in low-cost index funds that track the performance of the entire stock market, rather than trying to pick individual stocks. This includes things like S&P 500 ETF’s or total stock market ETF’s/funds.
If you can capture the returns of the market you can count on 8-10% average over the years. Some years will be down, others will be up, but it will average 8-10%.
I mentioned above that some can offer higher risk but higher returns, this is true. Some stocks are of new growth companies that just released their initial public offering (IPO) and they are flashy, but don’t do it.
Focus on capturing the market return of 8-10% annually (averaged) and you will be fine.
Real Estate and Other Options
Real estate is another popular investment option that can offer a steady stream of income and potential capital appreciation. However, investing in real estate requires a significant amount of capital and expertise. Other investment options include peer-to-peer lending, cryptocurrency, and syndications. It is important to research and understand the risks associated with these investments before investing.
Managing Investment Risks
Managing investment risks is an important part of any investment strategy. It is important to understand your risk tolerance and invest accordingly. I recommend diversifying your portfolio and periodically rebalancing your assets to ensure that your investments align with your financial goals. It is also important to have an emergency fund to cover unexpected expenses and avoid the need to sell investments during a market downturn.
Overall, choosing the right investment strategy is a crucial step towards achieving your FI number. By diversifying your portfolio, managing investment risks, and staying disciplined, you can increase your chances of reaching your financial goals.
Really, you can get there by hitting the market average of 8-10% annually by simply investing in ETF’s and/or funds that capture market averages.
Maximizing Savings
Effective Saving Techniques
To maximize our savings, we need to be intentional about our spending habits. One effective technique is to create a budget and stick to it. We can use budgeting apps or spreadsheets to track our expenses and identify areas where we can cut back.
Another technique is to automate our savings. We can set up automatic transfers from our checking account to our savings account each month. This way, we are consistently saving without having to think about it.
Utilizing Tax-Advantaged Accounts
Tax-advantaged accounts such as 401(k)s, IRAs, and HSAs can help us save money on taxes while also growing our wealth. By contributing to these accounts, we can reduce our taxable income and increase our savings rate.
It’s important to understand the contribution limits and eligibility requirements for each account. For example, in 2024, the contribution limit for a 401(k) is $20,500, while the limit for an IRA is $7,000 for those over 50 years old.
Debt Management
Managing our debt is a crucial part of maximizing our savings. High-interest debt such as credit card debt can quickly eat away at our savings and hinder our progress towards financial independence.
One strategy is to focus on paying off high-interest debt first, while making minimum payments on other debts. This can help us save money on interest and reduce our overall debt burden.
In conclusion, by implementing effective saving techniques, utilizing tax-advantaged accounts, and managing our debt, we can maximize our savings and reach our FI number faster.
Life After Achieving FI
Once we have achieved our FI number and are financially independent, we can start to enjoy the fruits of our labor. However, it is important to remember that we still need to manage our finances and plan for the future.
Sustainable Withdrawal Strategies
One of the most important considerations after achieving FI is how to sustain our lifestyle without depleting our retirement savings too quickly. This is where sustainable withdrawal strategies come into play. We need to determine a safe withdrawal rate that will allow us to maintain our lifestyle without running out of money.
There are several strategies we can use to determine our withdrawal rate, such as the 4% rule or the dynamic spending rule. It is important to consider our retirement expenses and adjust our withdrawal rate accordingly.
Lifestyle Considerations
Achieving FI means that we have the freedom to choose how we want to live our lives. We can choose to continue working, pursue our passions, or travel the world. However, it is important to consider the impact of our lifestyle choices on our retirement savings.
We need to be mindful of our spending in retirement and ensure that our expenses align with our retirement income. We may need to adjust our lifestyle to maintain our financial independence.
Continued Financial Management
Even after achieving FI, we still need to manage our finances and plan for the future. We need to monitor our retirement savings, review our investment strategy, and adjust our withdrawal rate as needed.
It is also important to plan for unexpected expenses and emergencies. We may need to consider long-term care insurance or estate planning to protect our assets and ensure that our loved ones are taken care of.
In conclusion, achieving FI is a major milestone, but it is just the beginning of our financial journey. We need to continue to manage our finances and plan for the future to ensure that we can maintain our lifestyle and enjoy our retirement years.
Overall, knowing your FI number is super important as it gives you a goal to aim for. If you need help creating your FI Plan, then check out this course, where I walk you through building a FI plan around your personal FI number .