Financial Independence
Financial Independence (FI) makes work optional through living intentionally and with purpose.
How do I “make work optional”?
FI is rooted in the principle that in order to be “work optional,” we must create a financial portfolio where our assets can sustain generating enough cash to pay our annual living expenses for the desired time duration. The rule of 25 allows for a simplified way to calculate the portfolio need based on forecasted expenses for an expected work optional time of ~30 years. For example, if your forecasted annual expenses are $100,000, a portfolio of $2,500,000 ($100K *25) would be a good starting goal.
How am I ever going to save millions of dollars?
The simple answer, you don’t need to! We can leverage the power of compounding interest to help close the gap between our savings and our target over longer periods of time. The rule of 72 states that you can divide the expected interest rate by 72 to forecast the time in which your investment will double. For example, the inflation adjusted average return of the S&P 500 index for the last 100 years is 7.5%. Assuming this rate continues, we could expect our money to double every 9.6 years (72/7.5) while maintaining the same buying power it has today.
How does this work in real life?
Meet Jill. Jill is 30 years old and just getting started on her FI journey. Jill has not accumulated any savings thus far, but makes a good salary at her job. If Jill were to save and invest $2,000 per month, in 30 years her portfolio would reach $2,500,000 with her only contributing $720,000. There is a reason that Einstein called compounding the eighth wonder of the world!
