Saturday, July 8, 2017

When Should One Begin a FI Lifestyle

I'm really just now beginning my path to FI. But If I could go back ten years and give my earlier self some well-needed lifestyle advice, I would. Sadly, we have no time machines to make this possible. But who am I kidding, if I could go back, I'd probably just instruct past me, to buy shares of Amazon stock. And today I'd be worth millions. Sadly life isn't that easy. 

However, building a portfolio worth a million dollars really isn't rocket science, and in fact just about anyone can do it, with just a little bit of research and couple of changes in their lifestyle. 

The short answer is saving your money. And I'm not talking about throwing one or two hundred dollars from each paycheck into your savings account. Actually, this is what I myself have been doing until now. Then I end up having to put this savings toward my undergraduate degree, getting a new home, or just recently an engagement ring. (Yes, I'm getting married!)

 All of these things are great and an essential part of life. I also count myself blessed to have been able to pay myself almost completely through college without a cent of student debt. 

But saving a few hundred dollars a month isn't going to let you retire early. Unless you are able to survive without food. Assuming that you do in fact eat and that you plan on having a roof over your head and generally plan on living an average life, you're going to need to be a little more aggressive with your savings. I'll run through a possible scenario to give you a little perspective. 

Let's assume I make $50,000 per year and assume I pay no taxes. 

My total annual Expenses: $25,000
Total Annual Savings: $25,000
Savings Rate: 50%
Annual Investment Return: 8%
Withdrawal Rate: 4% 
It would be just over 14 years before I would be considered Financial Independent, the point where my portfolio allows me to withdraw 4% to meet my annual expenses. In this case, $625,000 would be the value of my portfolio at the time that I meet FI. 

Obviously, this is just a rough example and there are other factors at play such as taxes. But this helps in offering a convincing argument on reaching FI early. 

If you're like me, you've been pleased with saving 10-20% of your income up to this point. Knowing what I know now, I'm no longer satisfied with this savings rate. I'm planning on getting my saving rate up to at least 50% of my income within a year from now. Why because it's my goal to be FI by 35. 
I'd love to hear your thoughts on this and what steps you are taking to increase your own savings and becoming FI. 

- 2nd Gen FI

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