Financial Independence: How to achieve FIRE w/ $1.5 million

Financial independence is the moment when your investments start paying more than your expenses. Once that happens, youre free.

Free from havingto work for a living.

Free from having to worry about paying rent on time.

And free from a TON of other financial obligations.

BUT how long would it take the average American to become financially independent?

Assuming you earn $75,000 a yearandyour annual expenses are about $60,000, you need to save roughly $1,500,000 to become financially independent.

When youre done picking your jaw up off the floor, Ill let you in on the process of how to get there:

There are no slick tactics or sexy ways to go about this. If youre the average American who needs $1,500,000 to hit your FIRE goal, you need to work hard and be determined. But the feeling of freedom when you reach financial independence will make it all worth it.

Were using the $1,500,000 goal based on the average salary and living expenses of Americans. If you want to find a number more specific to YOUR situation though, youll have to use the 4% Rule.

The 4% Rule is known as the safe withdrawal rate,or the amount of expenses you should be able to withdraw from your savings each year when you retire without touching the principal. (This number is based on a study from Trinity University.)

Finding out your safe withdrawal rate is the first step to learning how to become financially independent.

So how do you find out how much you need to save? Do two things:

This will give you enough expenses to withdraw 4% for years and years to come.

Heres a handy chart to show you how much youll need to save based on possible yearly expenses.

Using the above information coupled with your annual after-tax income, youll be able to come up with an annual savings rate (i.e., how much you need to save each year).

Luckily, you dont have to strain too hard with back-of-the-napkin math to figure it out, as there are a bunch of retirement calculators online. This one is our favorite. It outlines exactly how many years itll take to save depending on your savings rate.

Play around with the calculator until youve come up with a savings rate that works for you. After that, youll know exactly how much you should be saving every time you get a paycheck.

In terms of the percentage, I suggest you save 65% of your after-tax income, says Mad Fientist. That may seem like a ton but its possible. I averaged around 75% to 80% when I was saving.

Meanwhile, Physician on FIRE suggests you should actually save about 50% of your income to go towards your goals.

When pursuing FIRE, PoF says, keep in mind that youre locking yourself into the same lifestyle as when you reach financial independence. [So] if youre making too many frugal choices that dont jive with your persona, start living the way you want to and base your FI target on that.

Remember our example using the average salary and expenses? Looking at the chart, we know now that the average American needs to save about $1,500,000 in order to retire early. Our savings rate will then be about 32% of our annual income each year in order to save enough money to retire early (well go into how long itll take later).

Everyone that goes for FI has to decide something important:Should you try to live as frugally and retire as early as possible and minimize your expenses, or would you rathertake part in the finer things in lifebut retire later?

Luckily, there are two communities that embrace FIRE in different ways that can help you decide.

Bonus: Struggling to take control of your expenses? Check out my Ultimate Guide to Personal Finance to learn how to automate your finances so you can reach financial independence sooner.

There are typically two schools of thought when it comes to financial independence: leanFIRE and fatFIRE.

Though they sound more like weight loss supplements or descriptions of my latest mixtapethan systems for financial independence, theres no need to be intimidated by them.

LeanFIRE and fatFIRE are just terms for how much you plan to live on when you retire, the Mad Fientist says. Theres no better way. Just test out your spending until you find a method that works for you.

While both have the same goal of achieving financial independence, aspects such as how much you spend, save, and even quality of life can be affected by which approach you choose.

leanFIRE

This approach requires you to have a low spending rate each year (typically less than $40,000/year).

To be leanFIRE is to subsist on a comparatively low level of spending much like most of us did in college, PoF says.

This means adopting a frugal lifestyle and sacrificing certain luxuries like cars. It can even determine the places in the world you can live in (its easier to live cheaply in Norman, Oklahoma, than NYC for instance).

On the other side of the coin, theres a FIRE movement that aims to keep up the benefits of financial independence while still retaining a life of semi-luxury: fatFIRE.

Bonus: A higher salary could help you reach financial independence sooner. Check out my huge free guide to salary negotiation to get the raise you deserve.

fatFIRE

FatFIRE is the system of financial independence that allows you to live a more high-class lifestyle. But it takes longer to complete.

FatFIRE is to be financially independent on a more typical level of spending, PoF says. Id say to qualify as fat, your anticipated spending should probably be somewhere north of the national average.

According to PoF, thatd be an annual spending rate of around at least $80,000. That lends itself nicely to a round number of $2 million saved to have a budget with a 4% annual withdrawal rate, he says.

This is the practice that PoF embraces and his reason might convince you to pursue the lifestyle as well.

Lets assume you dont want to sacrifice your $60,000-a-year lifestyle and want to save enough money to get there. Youll need a higher rate of saving AND earning to do that

which brings us to:

Do you know how long itll take you to save $1,500,000 on a salary of $73,000 and a savings rate of 34%?

More than 26 years.

Thats a long time, and if you want to retire early, you might not want to wait that long.

Luckily theres a way to DRASTICALLY shorten that time: Earning more money.

Earning more allows you to increase your savings AND speed up your financial independence goals. While there are a lot of ways to make more money, the best way is starting a side hustle.Its a big win.

Below are our resources that have helped thousands of readers start their side hustles:

To help you get started, today, I want to show you how to find a great side hustle idea. Its one of the biggest barriers preventing people from starting their own business and making extra income. You can find a great idea by answering four simple questions about your life:

Find an answer to those questions and youll be on the same path as thousands of our students who have found a profitable business idea.

Bonus: Need help coming up with a business idea? Click here to receive your very own PDF of 30 proven business ideas.

A lot of us tend to DREAD the idea of cutting costs and with good reason. Thoughts of not being able to go to your favorite fast food restaurant or your father yelling at you when you change the thermostat just a fraction of a degree often crop up.

Scrutinize and be conscious of your spending, he says. If you see a nice BMW you think you want consider one thing: You could have the BMW or you could be a year closer to not having to work for anyone ever again. Framing it that way helps. Its not like youre saving. Youre working towards your financial freedom.

Conscious of your spending. Conscious spending

I wonder where Ive heard that before?

Conscious spending allows you to know exactly how much money is in your bank account to spend without you worrying about having to make rent and pay the bills, because its already been done for you.

How? Through automated finances. This is the system where your paycheck automatically divvies up and transfers to where it needs to go as soon as you receive it.

Heres a 12-minute video of Ramit explaining exactly how to do it.

NOTE: If youre pursuing financial independence, youre going to want to adjust the percentage of money you put away to savings when you implement your plan. You can choose to save around 65% like Mad Fientist suggests, or you can choose to put half your paycheck into your savings like PoF encourages. Or you could go a different route. Its all up to you and your savings goals.

Using a conscious spending plan also allows you to not sweat the small things you like.

Realize that the small stuff is just that small stuff, PoF says. The biggest expenses are the big stuff like housing, transportation, and travel. Dont rent or buy too much home, spend too much on a luxury auto or lengthy commute, and learn to be comfortable at a Comfort Inn.

Remember: cut things you DONT care about, to focus on the things you do. Dont just indiscriminately cut everything.

You can also learn to cut costs by leveraging retirement accounts that give you amazing tax advantages.

If you want to find out more about awesome accounts like the Roth IRA and 401k be sure to check out our articles on the topic:

But for now, I want to talk to you about an account with fantastic tax leverages you might not have heard of before: health savings accounts (HSA).

According to the Mad Fientist, HSAs are tax-advantaged savings accounts available for people who are enrolled in high-deductible health insurance plans.

He continues, HSA account holders can contribute pre-tax dollars to the account and can then withdraw money from the account, tax-free, when paying for qualified medical expenses.

So you contribute tax-free money AND withdraw tax-free money.

As of writing this, you can contribute $3,550/year for individuals and $7,100/year for families to an HSA. By maxing it out each year, you can reduce your taxable income by $3,550.

Sure, you cant take the money out other than to pay for certain medical expenses but when you turn 65 you can without incurring any penalties.

That means all that tax-free money is yours, effectively lowering your taxed income over your lifetime by $3,550/year.

You should do all that you can to legally reduce your tax burden, PoF explains. If you max out your workplace retirement accounts and an HSA [Health Savings Account], you can deduct a significant sum from your taxable income. Theres only so much a wage earner can do, but do all that you can to pay the least and save the most.

Once you have your retirement accounts set up, youve taken steps to cut costs, and youre ready to earn more money, congrats! Youre on the road to early retirement.

Now I want to offer you something to dramatically cut down the time it takes to save for retirement even MORE:

This guide will give you the exact systems you need to help you earn extra income on the side and eventually achieve financial independence (if you want it).

Youll find our tactics to:

Download a FREE copy of the Ultimate Guide today by entering your name and email below and start your financial independence journey today.

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Financial Independence: How to achieve FIRE w/ $1.5 million