Financial independence is as much about the journey as it is the destination. And while we are still years away from arriving at our intended destination of FI, we have a financial independence plan that is about both the journey and the destination.
This post focuses heavily on the finances of our plan to reach financial independence, but that is not to suggest that the journey to financial independence is all about numbers.
This post was originally published two years ago. A lot has changed in the past two years. It feels appropriate to share an updated plan with our readers.
Many (if not all) of the core principles have stayed the same over the course of the two years. This has been remarkable to confirm. And thus, why we’ve chosen to refresh the original post, keeping most of the original content (as a comparison) and adding new elements that better describe our plan.
It also seems fitting that when we first published this post, we made the following two clarifications.
First, this plan is NOT written in stone. Let’s face it, life just isn’t that simple. We learned this lesson the hard way just months out of college and weeks after we got married.
Three weeks after we got married, Jess and I moved to Nicaragua to teach English. We intended to stay there for at least a year, only to return 6 weeks later, each of us twenty pounds lighter after three life-threatening bouts of various illnesses.
Needless to say, life did not go as planned. And we learned that the hard way.
Plus, the only thing that I know that is written in stone is a tombstone, and I’m not done living yet. Writing a master plan that wouldn’t change over time would be like writing our tombstone.
I’m not in a rush to do that, but I did have a little bit of fun with some free tools found on the internet. See below.
Second, our plan is also NOT the shortest route to financial independence. Imagine you’re planning a traveling vacation with the primary goal being to have an adventure and to see new sites. How do you go about this plan?
Do you pick the shortest route to go from site to site, or do you plan it out with stops and detours to make the most of the trip? I
think hope everyone is likely to answer the latter.
Yet somehow not everyone takes this approach when pursuing financial independence. Too often FI narratives are filled with words of endurance, often suffering at a job that they hate, only so that they can enjoy life later.
In these stories, these fioneer pretenders are so focused on getting to financial independence (as some mystical destination), that they forget about the journey to get there. These individuals not only lose sight of the lifestyle that they hope to create after reaching FI, but they run away from it.
Here’s what a common path to FI looks like:
These stories can still be inspiring. But what this typical approach fails to anticipate are the sudden life changes that are likely to come when they reach financial independence.
People who think that lifestyle changes can happen with the flip of a switch, making sudden leaps from one phase of life to another, are sorely mistaken. There are moments to make drastic life changes, but my point is that often these notable changes are filled with smaller decisions along the journey.
Our plan to reach FI is not to deprive ourselves to build up a nest egg so that we can relax later. And to be clear, our journey to financial independence is not about early retirement. We are not looking to not work or sit on a beach for 50-60 years. Instead, this journey is about lifestyle design, freedom, flexibility and security.
We plan to take very intentional actions so that we can adjust our lifestyle along the way. Here’s a detailed look at what our plan looks like.
Wow! Those two clarifications are as true today as they were two years ago. We’re excited to share with you how much we’ve learned and how much our pan has shifted.
Our Financial Independence Plan: Where We Started 2 Years ago
Before we jump into HOW we will achieve financial independence, it’s crucial to better understand WHERE we started our journey two years ago and where we are now.
Two years ago when we started this journey, we also didn’t start from zero. We had jumpstarted our pursuit of financial independence with intentional lifestyle decisions. That’s not to discourage others from doing the same thing – it just means that we had been saving a few years.
Our Original Baseline Numbers
This is where we were two years ago when we made an intentional decision to pursue financial independence:
- Age: We were both 31 years old.
- Assets: We had 4-5x our annual living expenses currently invested in the stock market, excluding equity in our home and additional cash reserves.
- Savings Rate: We saved 57% of our take-home pay. Increasing our savings rate was a major focus for us then.
- FI %: We were able to cover approximately 15-20% of our annual expenses indefinitely by using the dividends and appreciation from and without depleting our assets (using a 3.5-4% safe withdrawal rate).
Based on our savings rate and assets at the time and a few other assumptions about market performance, we calculated that we would reach financial independence in 11 years.
One part of our plan was understanding our baseline. In other words, if we made no changes to income or expenses for 11 years, we would reach financial independence by the time we were 42 years old. As we stated early on, we knew it was unlikely to make no changes, but it’s helpful for a planning standpoint. Here’s our original chart:
We were really motivated by this baseline. Reaching financial independence in our early 40s seemed like a big accomplishment.
At the same time, it was hard to wait for 11 years. When we first published our plan, we were at a critical milestone for Jess’s career. She was working in a toxic work environment and ended up taking 6 months off to overcome severe anxiety.
I remember when we realized that Jess literally could not last another week in the toxic work environment, let alone 11 years. For that reason, we mapped out multiple strategies and scenarios to both optimize our plan from a financial standpoint, while leaving room for lifestyle changes we wanted to make.
Our approach was very clearly articulated with these words:
Our Plan to Reach FI: to quicken the pace to reach financial independence while aligning our values with our spending.
Our Original Financial Independence Plan
Our original plan to get to financial independence, from a financial perspective, was focused primarily on:
- Decreasing our expenses
- Increasing our income
Decreasing Our Expenses
New to the pursuit of financial independence, we wanted to optimize our spending. We were spending money in many areas of convenience and for items that did not align with our values. We understood this and prioritized this early on in our journey.
Two years ago we set a goal of decreasing our expenses by $10,000 per year.
Decreasing our expenses helps us two-fold. First, it allows us to save (and invest) more money, which will contribute towards our other goal of wealth accumulation, but more importantly, it lowers the amount we need to save to reach financial independence.
I’m going to say that again because this is critical to our success.
By learning to live on less, we will not only have more money to build up our nest egg, but we will require a smaller balance to consider ourselves financially independent. The nest egg will have to fund a less-expensive lifestyle.
Here’s a visual that helped articulate how our goal to decrease our annual expenses by $10,000 would impact our journey to financial independence. We estimated that by decreasing our annual expenses by even $10,000, not only will our assets grow at a faster pace to allow us to hit our original target 1 year earlier than our baseline, but the target decreases so that we hit our updated FI target another year earlier, in year 9.
Our plan to decrease our expenses included the following strategies:
- Lower our groceries bill by $500 per month and eating out less often
- Use credit card reward points to minimize travel or vacation expenses
- Buying less stuff and curbing emotional spending
Our intentional shifts over the past two years have worked. In comparing our spending from this year to two years ago, we are spending approximately $12,000 less per year. This even includes a large purchase earlier this year to replace our kitchen appliances (when our fridge broke and our oven was on its last leg). Everyone has different spending triggers, but focusing on food, not paying for convenience, and using travel hacking really did make that big of a difference for us.
Increasing Our Income
The other side of our plan was increasing our revenue. While this won’t have the same dollar for time impact on our path to FI, this was also part of our plan because of the limitless potential.
While we can only decrease our expenses so much, there are theoretically no limits on how much money we can make.
Once you remove the mental barriers and stigma for earning more money, you’ll be amazed at what you can do. Increasing our income has been a big part of our recent success.
Our goal two years ago was to find a way to increase our income by $20,000 per year in the next two years. If we were able to accomplish that, here’s what it would do to our timeline to financial independence.
While it may look like the FI Target and Updated FI Target decreased from the previous scenario, this is not the case. The dollar amounts represented with each of these lines stayed the same.
The yellow bars, representing our wealth accumulation grow at a faster pace. This is intuitive. The more money you earn and can save, the faster you can build wealth.
There were three primary ways we planned to increase our income on our journey to financial independence:
- Increase our W2 Income
- Build up a side business
- Increase our Real Estate Income (originally planned for 2019)
We have yet to start real estate investing. Originally planned for 2019 got pushed to 2020 because of other competing priorities. Then COVID-19 happened, and I am feeling less certain about investing in real estate in the short term.
Growing our income has been successful, but not how we originally planned. I was able to increase my W2 income, and we have just started making money from our side hustles.
What we didn’t plan for at the time was Jess returning to work part-time. Shortly after first publishing this plan, we found ourselves at a crossroads. Return to working full-time and risk Jess’ health taking a turn for the worse, or extend our timeline to FI and enjoy the journey.
Given our emphasis on the journey and priority to Jess’ health, it was really an easy decision.
This decision was made easier knowing that with increasing my income and decreasing our expenses, it would only extend our timeline by a couple of years, or so we thought. This was the lifestyle change that in large part inspired Slow FI.
Our (Updated) Financial Independence Plan: Where We are Now
It’s been really enjoyable to compare where we thought we would be and where we are now (2 years later), on our path to financial independence.
Our Current Numbers
Here’s a look at our updated numbers.
- Age: We were both 33 years old. (Shocker, I know)
- Assets: We have 7x our annual living expenses currently invested in the stock market, excluding equity in our home and additional cash reserves.
- Savings Rate: This year we are saving 58% of our take-home pay.
- FI %: We are now able to cover approximately 30-40% of our annual expenses indefinitely by using the dividends and appreciation from and without depleting our assets (using a 3.5-4% safe withdrawal rate).
Based on our current savings rate and assets now and a few other assumptions about market performance, we calculate that we will reach financial independence in 8 years.
I know, I was a bit shocked too. Especially considering the decision to have Jess work part-time.
In the past two years, we’ve managed to shorten our timeline to financial independence by one (extra) year. This is a result of three things:
- The stock market had a strong year last year (well above our estimated 5% inflation-adjusted estimate)
- We have decreased our expenses significantly
- We have started to make more money on the side
Here’s a visual of our updated timeline to achieve financial independence. Again, this assumes that everything will stay the same for the next 8 years (which we know is unlikely).
Our (Updated) Financial Independence Plan
Our strategy for reaching financial independence has also changed. We are no longer looking to quicken the pace to reach financial independence. Instead, our priority is to design our ideal life while continuing to pursue financial independence. If we can maintain the pace while making incremental lifestyle changes, even better. But, we don’t need to.
As I mentioned earlier, one of the strategies for gaining financial freedom and reaching financial independence that we have been considering is real estate investing. This was one of the reasons we decided to do a cash-out refinance earlier this year.
It provided access to cash that we could use to purchase a rental property. Our main reason for doing this is that the mortgage on our primary home would be at a better rate than financing a rental property.
We’ve been thinking about buying a rental property for several years. In addition to the refinance, we have been saving for this goal for a few years. This means we currently have a large amount of cash sitting in a high-interest savings account.
AND, this balance is not included in the earlier calculation of our timeline to financial independence.
The intent of that cash is to help us reach FI. But we could do it in one of two (or more) ways. We could continue with our plan to buy a rental property. Or, we could take that balance and invest it in the stock market tomorrow. Both options help us and warrant consideration.
Scenario 1: Investing the Cash in the Market
If we were to invest the balance in our taxable brokerage account, we would decrease our timeline to financial independence by one year. Instead of 8 years to financial independence, it would take us 7 years.
The benefit is that it would immediately increase our investment balance. With a larger investment balance, we would see more growth over time and reach financial independence earlier than if we just kept it in savings forever.
Here’s a visual of what our timeline to FI would look like. Again, the FI Target isn’t changing, but the rate at which we approach that value is changing.
You could argue that our current timeline to FI is 7 years, but we’ve yet to make this decision.
Scenario 2: Investing the Cash in Real Estate
Alternatively, we could continue with the original intent to buy a rental property. Instead of increasing the balance of our investment accounts, it would give us another asset that produces passive income each year.
A rental property would generate more income that would allow us to invest more money each year in the future. It would also remove the dependence on having a portfolio that generates enough sustainable income to cover our full expenses. In other words, the target balance decreases.
According to my estimates, this would decrease our timeline by almost two years. Instead of 8 years to financial independence, it would take us a little over 6 years.
Here’s a visual of what our timeline to FI would look like with real estate instead of increasing our investment balance. The key difference is that the FI Target is changing since the passive income from the real estate would reduce the amount we would need to have in our investments. The reason for this is that we would need to withdraw less from our portfolio (to cover our expenses).
While real estate investments would decrease our time to financial independence more than adding this capital to our brokerage account, it does come with a larger time commitment. Combined with the uncertainty of the local rental market due to COVID-19, I’m not sure where we will land.
Either way, both options help us and we’ll figure out what we want to do in the next year.
Our Destination: How Pursuing Slow FI and Lifestyle Design May Extend Our Financial Independence Timeline
While both investment options will shorten our timeline to financial independence, we are no longer prioritizing reaching FI in the shortest timeline possible. In fact, we’re also talking about using our financial freedom to fund more lifestyle changes that could extend our timeline.
Some may confuse wealth accumulation as the end goal or the destination. Many early fioneers target having 25-28.5 times their annual expenses as the goal, some even using charts or graphs to represent their progress toward that goal.
While we have embraced this metric as a financial definition of financial independence, this is not the end goal for us.
The next big lifestyle change that we are exploring is a great example of this. Within the next couple of years, we’re exploring the option for Jess to quit her part-time job to devote more time to the blog and lifestyle design coaching. In the short-term, this would likely mean a reduction in income and our savings rate.
It’s also possible that this could increase our income in the long term, which could end up quickening our pace to reach financial independence. It’s too difficult to predict right now, so we’re using conservative estimates in our projections. We’re assuming that we would not save as much as we are saving now. It’s possible that we could drop our savings rate to 25% or even lower.
One of our lifestyle design goals is to become location independent. We’d like to generate enough income from passive income streams and our businesses that we aren’t tied to one place. While I enjoy my job, I want the flexibility to leave when I want. We want the flexibility to do slow travel (COVID-19 permitting of course), while also having a home base here in Boston.
There are a lot of unknowns when it comes to looking to the future. We can’t know for certain the timing of each lifestyle change and income levels at each step in this scenario, but we have modeled out what this could do to our path to financial independence.
With conservative assumptions around revenue for our business, our timeline to FI could extend out to 12-13 years. This means that we would still reach financial independence by the time we are 45 years old.
At the same time, we don’t want to focus too much on the number. This could cause us to miss the entire purpose of financial independence.
Here’s a look at two scenarios, depending on our earlier decision of additional investments vs real estate.
These two charts help illustrate that our destination of financial independence is more about lifestyle design than it is reaching a particular number. While we are embracing some of the financial independence frameworks (25-28.5x annual expenses) as a target, there’s still a lot of uncertainty around what our life will look like years from now.
Most people pursuing FI wouldn’t consider slowing down. But our mantra to enjoy the journey to financial independence makes this a priority for us. We’re happy to extend our journey if it means we have more freedom earlier. Why wait another 6-8 years to do what we want, when we can make incremental shifts to achieve that sooner.
This is why we think financial independence is both a journey and a destination. Figuring our ideal lifestyle is our frontier – both the journey of optimizing parts of our lives while buying our freedom.
And that continues to be exciting and motivating all at the same time.
While we may have a better sense of what will make us happy than we did two years ago, there’s still a lot to figure out. We’re going to do a lot of experimenting and testing lifestyles to see what works for us. We will continue to share both our financial and lifestyle design progress with you along the way.