I am not a financial professional. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Past performance does not guarantee future returns.
Have you ever had an exhausting day at work that made you consider whether you wanted to return the next day… but then realized you did not have a choice? Otherwise, how are you going to pay off your tens of thousands of dollars of student loans from PA school? Or afford that tropical vacation you have been dreaming of for the past six months? What if I told you there was a way to become work optional way before the age of 62? (I should become a work optional before age 40). And what if I also told you that you would not need to decrease your standard of living?
You may be thinking, I just graduated, and I am nowhere close to considering retirement yet. If you just graduated and you are reading this then count yourself lucky. This is the absolute best time to start. I wish I had learned about financial independence while in PA school instead of 3 years after graduating. The reason why sooner is better is because the sooner you can take control of your finances and start investing the more time your money has to compound in the stock market.
If you feel you know nothing about how to get your financial house in order and the term stock market freaks you out, then start with this article here. Otherwise, let’s dive into the more fundamental aspects of financial independence including what it is, how to calculate your FI number, and what it could mean for your future.
What is financial independence?
Financial independence, also known as FI, is a point in time when you have accumulated enough wealth to cover your living expenses by living off interest payments indefinitely. You may have heard of the FIRE movement with the RE standing for retire early. I prefer FI over FIRE because my goal isn’t necessarily to retire early. I do love my job. I love patient care, but sometimes wish part-time was enough. What I don’t love so much is knowing that my job controls my time. I am a servant to my alarm clock before the sun has even started to rise.
How to calculate your FI number
The more commonly agreed-upon way to calculate your FI number is to take your annual expenses and multiply that number by 25.
An easy number to use as an example is $40,000. If your expenses equate to $40,000 each year and you take that number and multiply it by 25 you get $1,000,000. If you withdraw 4% of 1,000,000 dollars you get $40,000. Hence the 4% rule. Then the following year you would adjust for inflation when you withdraw your money. Historically, this would allow the retiree to not run out of money for at least 30 years.
Some people prefer the 3% rule which increases your likelihood of success and makes it more likely for your savings to last 50 years or more. Either way, for all the overachievers interested In financial independence at a younger age, the chances are you are not the type of personality to truly retire after you hit your FI number and never make another dime the rest of your life. In other words, if you’re still making some money even a little bit you should be plenty safe with this method.
If you read my last article about the financial habits physician assistants should be practicing then you’ll remember that we discussed the importance of not only increasing our income but also decreasing our spending. When you do this your annual expenses decrease and your savings increase. If we have lower annual expenses then that means our FI number is lower, which means we are that much closer to retirement.
Compound interest is your friend
When I first learned about FI I became obsessed with crunching numbers into a compound interest calculator. This is one I use from NerdWallet. You can count how much you already have saved or invested and then your expected monthly contributions. Use 7 or 8% for the expected rate of return and figure out how many years you have left before you could become work optional!
With my current monthly contributions, I am only 7 years away from hitting my FI number, which means I could retire by age 37! That is assuming my lifestyle did not inflate and stayed the same. Most likely I will be moving to a different city which means a different cost of living. If I have kids that will inevitably change my FI number.
Why you should work towards FI even if you don’t plan to retire early
The wonderful thing about FI is not necessarily retiring and never working another second in your life. The goal is to give yourself options in the future. Maybe you decide you want to take a 6-month sabbatical and go travel the world. You could do that and then go back to work without having to fear not having enough money. You have more power when you ask for things such as time off. Or you could go part-time to spend more time with family and be with your children.
Coast FI
FI allows you the flexibility to do whatever you want with your time. Some people in the FI community lovingly refer to it as FU money. If you are in a bad work environment then there’s no financial pressure to stay. You stay only if you want to. If your job brings you joy then that’s amazing! You still will benefit from having the money for retirement saved. You could become what’s known as Coast FI. Coast FI is when you’ve saved enough for retirement where you could leave your retirement accounts alone and not contribute another penny, and they will continue to compound and grow on their own. You can then scale off work and only cover your actual expenses. Or you have the option to live big and spend your entire salary instead of saving a large portion of it.
There is a whole FI community out there for you to learn from. A few of my favorite resources are ChooseFI and Mr. Money Mustache. If you’re anything like me, once you start to learn and understand what FI means, be prepared to go down the rabbit hole. I’ll see you on the other side.
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