Achieving Financial Independence: A Step-by-Step Guide

Explore a step-by-step guide to achieving financial independence. Understand the core principles of the FIRE movement and strategies for early retirement.

Could you actually save enough money to leave your job?

Wake up weekday mornings choosing what you want to do rather than suffering through yet another commute?

Travel the world, hang out with your kids, or do whatever it is that sets your soul on fire?

Yes, there’s a good chance FIRE is in your future if you want it to be. Becoming financially independent isn’t complicated. In fact, it’s shockingly simple.

How to become financially independent

Reaching financial independence isn’t complex. There are no tricks, no secrets, and no need to be a personal finance pro. It’s not about making lots of money, it’s about being responsible with the money you have now. Becoming financially independent boils down to two main steps:

  1. Increasing your saving rate
  2. Investing the difference

Your saving rate

Your saving rate is the amount of money you have remaining after spending money on taxes and other life expenses. It’s a powerful metric that can give you insight into whether you’re on the fast track or the slow road to retirement.

Someone living paycheck to paycheck has a saving rate of 0%. Someone who makes $80,000 and saves $40,000 has a saving rate of 50%. The higher the savings rate, the quicker you’ll be able to reach financial independence. The lower the saving rate, the more likely it is that you’ll spend decades trying to get there.

This saving rate is the single biggest predictor of whether you’ll be able to retire early or even retire at all. And there are only two factors that influence your saving rate: how much you earn and how much you spend.

It’s well-known that Americans aren’t great savers. Our saving rate — the percentage of your income that you save each month — is so low that many of us will never be able to afford to retire, let alone retire early. The saving rate for the average American currently stands at 8%, which means it’ll take them 56 years to reach retirement.

And the harsh reality is, If it takes 56 years to retire, it’s likely you won’t have much of a retirement to enjoy.

But people who want to retire early aren’t average. They’re striving to have a saving rate of 50% or more knowing that each dollar they don’t spend is a dollar that they’re using to buy their life back.

The FIRE movement often gets a bad reputation of being a group of people who obsessively save and rob themselves of all joy, just to get to retirement. Of course, there are people who fit in that category. But many people in the FIRE community have a saving rate of 50% or more by spending intentionally and finding additional ways to increase their income.

When can you retire if you save 50% of your income? You can cut your working years down to 17 if you save 50% of your income.

  • If you save 5% of your income, you can retire in 62 years
  • If you save 10% of your income, you can retire in 51 years
  • If you save 20% of your income, you can retire in 37 years
  • If you save 50% of your income, you can retire in 17 years

Investing the difference

Once you start saving money, the next step toward financial independence is to invest. Thanks to inflation, money sitting in your savings account is going to be worth less next year than it is today. People who are striving for financial independence know this and they know that the only way to be financially free is to have their money earn more money through investing.

Investing your money creates a snowball effect. Start with a small snowball of money and let it pick up more snow as it goes. This, in effect, is the power of compounding. Small consistent actions add up over time and. Let your snowball roll down the hill long enough and you’ll end up wealthy.

Investing doesn’t need to be complicated or time-consuming. Many in the FIRE community utilize low-cost index funds — Warren Buffet’s standard investment advice. Others invest in real estate and build a portfolio of rental homes that provide income to live off of in retirement.

Investing helps you turn the money that you save into even more money. Eventually, the money that is invested will earn enough money to support you, without you needing to work. That is when you are really financially free.

That’s it. The rules are simple and straightforward, but they’re not exactly easy to follow. Achieving FIRE takes hard work and determination, but it’s possible for nearly anyone who is ready to live the life they’ve been dreaming of.

How much money do you need to be financially independent?

One of the most frequent questions people ask when approaching retirement is, “how do I know I’ll have enough?” How do you know when you have enough money to say see ‘ya to your long commute and a job that you don’t love and start your life of freedom?

As it turns out there is an easy answer here, that few people outside of the FIRE community are familiar with.

You can figure out how much you need to have saved with the 4% rule. The 4% rule is your safe withdrawal rate. That is, it’s the amount you should be able to withdraw from your investments each year once you retire, while still making your money last through retirement.

The 4% rule is based on a study from Trinity University. In the study, the professors found that:

“For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At these rates, retirees who wish to bequeath large estates to their heirs will likely be successful.”

In other words, if you withdraw 4% of your money annually in retirement, you have a 96% chance you’ll never draw down on the principal after 30 years. To look at it another way, you’ll need 25 times your annual expenses saved before you can safely retire.  

If you want to figure out how much you need to have saved for retirement, you first need to know how much you spend each year. Then you take that number and multiply it by 25. When you’ve saved that amount of money, you no longer need to work to pay for your expenses — you can live off the money earned by your investments.

The chart below will give you an idea of how much you’d need to have saved for retirement using the 4% rule.

Annual Expenses | Savings Needed
$30,000 | $750,000
$40,000 | $1,000,000
$50,000 | $1,250,000
$60,000 | $1,500,000
$70,000 | $1,750,000
$80,000 | $2,000,000
$90,000 | $2,250,000
$100,000 | $2,500,000

Don’t worry, you can skip the math on when you can retire by using the retirement calculator that I’ll be sharing a little later in this article.

If you’re looking at your current bank account and thinking that there is no way you could ever save $1.5 million, know that many people have started in a worse position than you are in right now. With a willingness to experiment and try something new, you’ll be surprised at how quickly the money can start adding up. Compound interest is a hell of a drug.

Test it out: your financial independence calculator

Eventually, numbers come into the money conversation. If I’d heard about early retirement before I bought into the dream, I never would’ve turned our entire life upside down to pursue this path.

But now that we’re here, it’s time to start experimenting with numbers. This retirement calculator to help you do just that: experiment.

Approach the numbers like they’re one big experiment. Put in your numbers as they are right now and calculate your age to retirement.

If the results aren’t pleasing, don’t get discouraged. When Taylor and I first ran our numbers, we were on track to retire in our 80’s. It was dismal. Think about things you’d be willing to change and run the numbers again. You’ll be surprised how quickly small changes add up.

Before you go through it on your own, let’s walk through an example. Jessica is new to FIRE and is ready to actually see what her options are. She’s 31, makes $65,000 (after-tax) as a project manager and spends $4,500 each month between her rent, her car payment, and other activities. She’s saved pretty well for living in such a high cost of living area and has $60,000 saved for retirement so far – more than most of her friends!

With those numbers, Jessica can retire in 39 years, when she’s 70 years old.

That’s not the FIRE she was hoping for.

But she knows this is an experiment, so what else can she do?

She decides to adjust her rent number first: what if she moved out of her $2,000 apartment and moves in with a roommate or moves to a cheaper neighborhood? She thinks she could reasonably cut that down to $1,200 a month, without needing to leave LA.

That one move cuts 13 years off her retirement age! Moving just bought her back 13 years of her life.

Ditching her $350/month car payment takes another five years off her retirement age. She’s now working towards retiring by age 52.

Excited by this, she starts to look at other options. Could she leave LA and work remotely for her company? That would cut her costs even more. Or maybe she could earn more. By adding an extra 15% to her monthly income through side hustling or finding a higher paying job, she can now retire in 17 years, at age 48.

From retiring at 70 to retiring at 48 with just a few changes and a willingness to experiment with the numbers.

Now it’s your turn.

Have some fun, play with the numbers, and start dreaming about what’s possible.

Use the Playing with FIRE Retirement Calculator

Starting your FIRE journey

“The concepts are easy. The math isn’t difficult. The math is super, super simple. The part that is difficult is the psychology and the emotion behind it.” – JD Roth

Reaching financial independence is a journey. But it’s a worthy journey to help you start living the life you want, where you control money rather than having money control you.

As you’ve read, becoming financially independent hinges on how much you can save and then investing your money so that eventually your investments are earning enough for you to live off of.

But how do you actually begin your journey? How do you take the first step? As we mentioned, there are no shortcuts, but if you’ve read this far, you’ve already taken that step! Nice work! Just by contemplating your current financial situation and considering ways to improve it, you’ve got the gears grinding. That’s what it takes to create change, forward momentum.  

Know why you want to be financially independent

For most people, becoming financially independent requires a massive change to both their money and their mindset. Your journey to financial independence can last years, and there will probably be some bumps in the road.

The one thing that will keep you focused on FIRE is knowing why you want to be financially independent.

Are you doing this to spend more time with your family? To travel the world while you’re still young enough to enjoy it? To have more time for your hobbies like skiing all winter or sailing all summer? To finally say goodbye to a terrible boss, a long commute, and have say over how you spend your days?

Whatever your reason, it’s valid, but you have to be clear on your why.

When you’re ditching cable to save $100 a month, you can think about how many afternoons with your child this will buy you.

Start with happiness

One of the best first places to start your journey is to understand what makes you happy. If you can focus on what brings you the most joy, what you get the most meaning from, what else really matters?

Too often we fall into the trap of buying the things we think will make us happier. Going after the promotion and the title we think will make us feel better. Live a life where real, true happiness is just one more paycheck, one more vacation, or one more luxury car away.

We float through life never knowing what makes us truly happy. Never asking ourselves the question and getting an answer. It’s sad to think that so many people will go through life thinking that happiness is just around the corner, when, in fact, if we just start studying it today we can make a profound impact on our mental state for the rest of our life.

Studies show that some things that make people happy include prioritizing more time over more money, spending on experiences rather than things, exercising, and spending time in nature each day.

These studies can give us clues, but it’s time to figure out what makes you happiest.

What makes you happy?

Your first activity on this journey is to make a list of the top five to 10 things that make you happy on a weekly basis. Sit down, spend 10-20 minutes thinking of the things you love to spend time on. Things that make you excited to get out of bed in the morning or would be a part of your perfect Saturday.

If you have a partner, have them make a list as well.

This is simple. So simple you might think, “oh, I’ll do this later. Let me just finish reading this and I’ll come back to the exercise.”

Stop. Don’t breeze over this. Pause right now, take out a piece of paper or your phone… and start making your list.

Once you have your list, take a look through it and highlight anything that costs money. Then take notice of how many things are free.

Now, in a column next to each item, ask yourself if that item is more or less important to you than the prospect of financial independence. Whether it’s more or less important than waking up each day and getting to decide how you’ll spend your time.

Why are you spending on anything else?

Now that you know what makes you happy, you can look at the rest of your spending with a critical eye. Not a judgemental eye, a critical eye.

Why do you think you’re spending on those other things? Again, our spending was totally out of line with the things that made us happy. The amount we spent on rent, dinners out, and coffee was nuts and it didn’t line up to our values at all.

So why do we do this? A few reasons:

  1. Conspicuous consumption (aka, keeping up with the Joneses): while you were once happy living in a studio apartment, driving an old car, and having friends over for a simple spaghetti dinner, things changed. Your friends suddenly started buying homes with multiple bedrooms. Their clothes are made by expensive designers. And that old car? They traded up for something flashier. You, in turn, do the same. Whether consciously or not, you don’t want to be left behind so you keep up. And suddenly your spending doesn’t reflect your priorities, it reflects someone else’s.
  2. Social pressure: this is a cousin to conspicuous consumption. Your friends invite you to a nice dinner out and you realize that the restaurant they picked will run $75…per person. Your other friends plan a ski weekend and after tallying up how much driving, meals, and a rental house will cost, you’re spending more on a three day weekend than you do on your rent. But you go along with the plans because do you really want to be the person to say “I can’t do that, it’s out of my budget?”
  3. Convenience: life is busy. We constantly feel pulled in different directions and if we find something that can save us 15-20 minutes on a hectic weeknight, we decide it’s a great idea to pay for it. While it’s true, spending money to get your time back can bring you happiness, it’s easy to go overboard. Spending money on takeout on a Wednesday night because you don’t have anything to eat at home isn’t spending money to save you time, it’s spending money because you didn’t plan. If you could see how much I spent on ATM fees because I didn’t want to go out of my way to use my bank’s ATM, you’d be shocked.

Take the next step

These articles give you a solid start on your road to financial independence. But what jump-started my journey was completely immersing myself in education and stories from other people who have reached FIRE. I created the Playing With Fire Documentary and Book to share the ins and outs of my journey as well as advice from experts within the FIRE community. Read the book or watch the movie (or both) and start your journey to financial independence.

What should I do next?

Check out our Retirement Calculator to calculate your time horizon to financial independence. To begin shortening that time horizon, we strongly encourage you to start tracking your money. We believe that Personal Capital is the most comprehensive free financial tool you can find online to manage your finances and track towards your FI date.

We love the free features Personal Capital offers, including the ability to:

  • Track and manage your income and expenses
  • Track your net worth
  • Analyze your investment portfolios for excessive fees (this is especially important early on in your FI journey)
  • Analyze your investment portfolios for proper asset allocation
  • Run various retirement planning calculations with their amazing retirement calculators

Our favorite financial management tool is free to use and take less than a minute to sign up. Though you must create Personal Capital login credentials to use them, you don't need to enroll in Personal Capital's advisory service. As you may know, we always try to avoid fees whenever possible. We also strongly recommend fee-only financial advisors, so you know how much you're paying up front and avoid advice with conflicts of interest. By signing up with Personal Capital for free and aggregating all your accounts in one place, you'll be well on your way toward financial independence.

Start Tracking your Net Worth with Personal Capital

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Understanding the 4% Rule

Retirement withdrawal strategies are anything but one-size-fits-all. For many FIRE fans, determining how much to withdraw each year requires a balance between ensuring your savings last and meeting your current financial needs.

The Importance of Savings Rate in FIRE

Explore the essential role of savings rate in the FIRE movement for achieving financial independence and early retirement. Learn how to balance frugality, investment strategies, and lifestyle to accelerate your journey towards financial freedom.

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A perfect follow up on the film to dive deeper into the philosophies and "how-tos of the FIRE movement"
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watch playing with fire

A documentary about the FIRE movement and one family's quest to achieve financial independence and retire early. Available on the following: