The path to FI, or Financial Independence, can be long and windy with lots of pitfalls and detours along the way. Unless you inherit a bunch of money, win the lottery, or cash in big with an IPO, you’re going to have to put in some hard work and determination to reach your FI.
But I can tell you, having reached FI over three years ago, all the hard work and dedication is well worth it! Achieving FI gives you the freedom and power to live your life how you want, on your own terms. It’s an amazing feeling.
And while everyone’s path to FI is unique, we can identify a number of common milestones along the way. By recognizing these milestones and putting them into perspective, it’ll be easier for you to ultimately achieve your goal of FI.
How Do We Define FI?
After achieving FI, my wife Allison, and I have discovered a whole community of people who have also hit FI or are striving toward that goal. There are blogs, Facebook groups, Meetups, etc. all dedicated to this topic.
While various pundits have slightly different opinions about what it takes to truly reach FI, most agree on the 4% Rule. This rule states that, if you withdraw 4% (or less) of your nest egg each year for all your expenses, then you’ll almost always have enough money throughout retirement.
The flipside of this rule is the Multiply by 25 Rule, which simply states that your nest egg needs to be 25 times (or more) your yearly expenses. This number is also commonly referred to as your “FI number.” So when your nest egg hits 25x your yearly expenses, that means your FI number = 25.
NOTE: your nest egg is the total of all your liquid (cash, money market, etc) and semi-liquid assets (IRA, 401k). It does NOT include non-liquid assets like your home, car, or other property.
Where did this rule come from? It came from an influential 1998 paper by three professors from Trinity University called the Trinity Study. And while nothing in life is a guarantee, most of the FI community agree that the 4% Rule is the general standard for achieving FI.
14 Milestones on Your Path to FI
I’ve outlined 14 distinct milestones on the path to FI. Some of these milestones come from the FI community, like the terms “Lean FI” and “Fat FI.” Others are just based on how much you have saved (i.e. 3 months or 1 year of living expenses). And the final milestone is one that Allison coined: Ampli-FI.
Let’s take a look at these milestones. This table details the various levels of FI using the American average yearly expenses of $60k (or $5k monthly) as an example:
Everyone starts at the beginning “Getting Started” with $0 nest egg (or, in many cases, a negative nest egg). The first thing you’ll want to do, especially if your nest egg is negative, is to focus on paying down your high-interest debt, like credit cards and student loans.
It doesn’t make sense to start saving and investing (even if you’re earning 8% in the stock market) if you’re paying 15% or more on credit card balances. If you need some help with this first step, we have a number of resources for reducing your debt.
$3k - 3 Month Expenses:
Once you’re ready to start building your nest egg, strive to hit small goals first, like $3k, $6k, and 3 months of living expenses. I’d advise putting some of that in a high-interest online savings account. At this writing, you can find APYs of about 1.5% -- check our resource page for Saving & Investing.
6 Month - 1 Year Expenses:
After you’ve accumulated 3 months of living expenses, look to start investing in equities, stocks, bonds, mutual funds, etc. The easiest way to do this is with your company 401(k) plan if they have one (especially desirable if they do any matching). Alternatively, you can set up your own IRA account. The FI community is big on investing in Vanguard index and mutual funds, and we have the majority of our funds with Vanguard as well. They’re known for having some of the lowest expense ratios in the industry.
If you’re of a certain age, you may remember the song, “Take This Job and Shove It.” This song could be the anthem of this milestone. FU money (or F@#k You Money!) is the amount of money you need to leave your current job for a period of time -- perhaps as a sabbatical or just a short-term break. Typically you’d want at least 2 years of expenses for this stage (or up to 3 years if you're more fiscally conservative). Keep in mind, this doesn’t mean you have to take time off work, but it gives you a decent cushion if you had to (or wanted to).
It’s a pretty big jump from FU Money (8% of FI) to Quarter FI (25% of FI), so you should consider this to be a major milestone. It’ll probably take you at least 5 years of dedicated saving and investing to get to this number. But don’t be discouraged, because the power of compounding will help you get the rest of the way at a much faster pace.
You're halfway there, and the end is within sight! This is another major milestone on your way to FI, so I suggest you do something to celebrate! When Allison and I were working, we didn’t know anything about FI or the 4% Rule, so we were just plugging away with no particular end-goal in mind (other than to retire "early"). If you have a specific goal (such as your FI number), then hitting a milestone like Half FI will really help you stay focused and driven.
Some people in the FI community feel you can actually quit your job and retire early at a FI Number of 20. This is considered “Lean FI” because your nest egg is leaner than ideal. To retire at this stage you may have to reduce your yearly expenses and try to live a more barebones existence. While it’s certainly possible to live off a Lean FI nest egg, we recommend staying the course and getting to Full FI (you won't need that much more time thanks to compounding). But it’s a great feeling to know that if you really truly wanted to, you could walk away from your day-to-day job.
Congratulations - this is your ultimate goal!! This is 25x your yearly expenses with a 4% annual withdrawal rate on your nest egg. If you want to stop here, you should be fine (obviously, you should keep your eye on the market and adjust your spending as necessary), but we actually suggest you go a little further before completely quitting your day job…
You never know what pitfalls you may encounter in life, so it can’t hurt to pad your nest egg a bit more to be safe. The markets could go into a prolonged decline, tax and policy rules might change, you could lose your healthcare, or maybe you end up living much longer than anticipated. All good reasons to play it a little safe and go for 30x FI number.
If you're fortunate, like we’ve been, then you may be able to take it up even another notch. The FI community considers a 50x FI as “Obese FI.” At this level, you have an even greater chance of never having to worry about running out of money in your retirement years. We look at it as the icing on the proverbial cake.
And not to be outdone, if you can get to greater than 50x FI, then we came up with the term Ampli-FI (we considered “Morbidly Obese FI” but that sounded kinda negative). Why the name Ampli-FI? Allison, who is our Editor-in-Chief and wordsmith, came up with it. Here’s the definition:
Am·pli·fy verb "cause to become more marked or intense.”
Synonyms: magnify, intensify, increase, boost, step up, raise
It just seems to capture the essence of going far and away above the stated goal. If you can get to Ampli-FI, then more power to you!
Interactive FI Spreadsheet
To help you set up your own FI tracking spreadsheet, we created a Google Sheet that you can copy, save, and update on your own.
Go to the interactive FI Tracking sheet and follow the three steps in Column J:
- Step 1 -- save a copy of the file in your own Google Drive
- Step 2 -- enter your Monthly Expenses,
- Step 3 -- enter your current Nest Egg amount
All of the cells with blue font are calculations that will automatically update when you enter your monthly expenses and nest egg amount. This box will show you exactly how close you are to your goal of FI (25x yearly expenses):
As your nest egg grows, you can update that number and see how much closer you’re getting to FI. Watching it grow is half the fun!
Strategies to Move Up the FI Ladder
We like to look at four main areas you can focus on to help on your path to FI:
- Eliminating Debt
- Increasing Income
- Saving & Investing
- Reducing Expenses
Make sure to wipe out all your high-interest debt as soon as possible (credit cards, auto loans, student loans, etc). A mortgage is usually ok, because it’s typically a lower interest rate, you get tax breaks, and your home will hopefully appreciate over time.
To build up a nest egg, you obviously need to be bringing in enough money to cover your expenses and have extra to save and invest. If you don’t think your regular job pays enough, you may want to add a side hustle to increase your earnings. Check out our Increasing Your Income resource page for ideas.
Saving & Investing:
The biggest levers for building your nest egg are time and the power of compound interest. You have to get your money working for you by investing in the markets and reinvesting the proceeds. Sure, you’ll probably experience some downturns along the way, but in the end, it’s the best bet for growing your nest egg.
To learn more about how to invest, check out our online course Investment Hacking 101
You don’t have to live like a miser, but if you can cut back on extravagant spending, it’ll really help you get to FI faster. Remember that the 25x formula for FI takes into account your nest egg AND your yearly expenses. So if you can reduce those expenses while you’re growing your nest egg, you’ll get there even faster!
What ultimately made us realize we could quit our day jobs was moving to a lower cost of living area (a form of “geo-arbitrage”). We sold our condo in San Francisco, and moved just 11 miles right across the Bay to Oakland into a comparable condo for literally half the price! Sometimes you just have to think outside the box and be a little strategic.
We always tell people that retiring early and becoming financially independent is not rocket science. You simply need a good game plan, a solid work ethic, and some grit and determination.
If you truly want to reach FI, I have no doubt you can do it. Stick to the basics, starting with solid tracking. Download and save the FI Tracker spreadsheet as your starting point, and take it one day, one month, and one year at a time.
Good luck and enjoy the journey!