The One-Page Guide to Financial Independence

Note: This article is from J.D. Roth, who founded Get Rich Slowly in 2006. J.D.s non-financial writing can be found at More Than Money.

This year, I learned a lot about money.

I think the biggest breakthrough I had in 2013 was to connect the ideas of personal and financial independence. I spent a week in Ecuador talking with folks about this subject, and then I spent a couple of months putting my thoughts onto paper. Ive done a lot of writing and thinking and speaking on this topic.

But you know what? Ive come to realize that the essentials of financial independence can be boiled down to just a single page.

Financial Independence occurs when youve saved enough to support you for the rest of your life without needing to work for money. You might choose to work for other purposes such as passion and purpose but you no longer need an income to meet your expenses.

To achieve Financial Independence as quickly as possible, follow the basic rule of personal finance: To build wealth, you must spend less than you earn. But instead of heeding the standard advice to save 10 percent or 20 percent of your income, practice extreme saving. Your goal should be to save at least 50 percent of your income and 70 percent is better.

To do this, conduct a three-pronged attack.

To begin, minimize your spending. Because a handful of expenses consume most of your budget, pursue these first (and with the greatest vigor).

Next, maximize your income. Its great to cut expenses and develop thrifty habits, but theres only so much fat you can trim. In theory, theres no limit to how much you can earn.

Finally, funnel your savings into investment accounts. Take advantage of employer- and government-sponsored plans first. Then put your money into regular investment accounts. Dont get fancy. Invest your money into low-cost diversified mutual funds. Ideally, choose a total-market index fund. Ignore the news. Ignore the fluctuations of the market. Ignore everyone. Keep investing in good times and bad.

If you follow these three steps, you will become rich.

As you work and earn and save, keep score. Track your spending. Each January, conduct a review. How much did you spend during the previous year? How much are your investments worth? Have you saved enough to retire?

To determine whether you can retire, use the following assumptions:

Based on these assumptions, theres a quick way to check whether retirement is within reach.

Multiply your current expenses by 25. If the product is greater than your savings, you still have work to do. If the result is less than your savings, youve achieved Financial Independence. (If youre conservative and/or have low risk tolerance, multiply your expenses by 33 before comparing the product to your savings.)

Thats it. Thats all you need to know. Thats the sum total of everything Ive learned about early retirement over the past decade. If you want more information, check out Jacobs always-awesome Early Retirement Extreme.

GRS is committed to helping our readers save and achieve their financial goals. Savings interest rates may be low, but that is all the more reason to shop for the best rate. Find the highest savings interest rates and CD rates from Synchrony Bank, Ally Bank, and more.

This article is about The Basics, Basics, Investing, Retirement, Savings

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The One-Page Guide to Financial Independence