Imagine you make enough money through investments and savings that you can retire early. You now have time to pursue passion projects or travel full-time. To make that goal into a reality, you need to learn how to FI or achieve financial independence.

We’ll discuss how you can become financially independent to retire early through the FIRE (financial independence, retire early) method. We’ll go over how to calculate how long it’ll take to reach FI and the steps to set yourself up for financial success.

What is FI (financial independence)?

In general terms, financial independence refers to the ability to stop worrying about money because you earn enough to pay your bills.

For example, you’re able to pay off your debt, cover your expenses, and still have money for savings and fun each month.

However, you might run into the phrase written with capital letters or shortened to FI. This usually means the author is talking about the FIRE movement. FIRE stands for “Financial Independence, Retire Early.”

In this case, financial independence means more than making enough money to cover expenses. FI means building enough wealth to live on while you’re young, possibly by learning how to build wealth in your 20s or 30s.

Once you reach financial independence, you could leave your job without worrying about money.

What is FIRE?

The basic idea of the Financial Independence, Retire Early movement is that you save and invest enough money now so you can retire early and live off of your investments.

At its core, FIRE isn’t necessarily about quitting the workforce. In fact, many people who reach financial independence choose to stay in their jobs. Others go back to school or take a lower-paying job that is more in line with their passions. Still, others decide to retire and travel full-time or volunteer with causes they support.

Instead of being about getting out of a career, the FIRE movement is all about taking back your time. Those who reach FIRE have the investment income and savings they need to pursue what matters most to them—whether it’s at work or elsewhere.

The FI formula

Alright, you’re excited to become part of the FIRE movement, but where do you start?

The first step in how to reach FI is figuring out your FI number and how long it’ll take you to reach it. There are two formulas you’ll use to calculate these numbers.

1. Financial Independence Number

The whole amount of money you need in retirement.

FI Number = Average annual spending / safe withdrawal rate

Once you have your number, you use it to calculate how many years you have to keep working and saving to reach financial independence.

2. Years to FI

The number of years until you reach financial independence.

You start by figuring out your FI number:

Years to FI = (Financial independence number – existing savings) /annual savings

Feeling a little confused? Don’t worry—I’ll break down each part of the FI calculation process in detail later.

Calculating yearly spending and saving

Before you can start calculating your number, you need to figure out how much you currently spend and save on average each year. This is essential to planning your financial independence because it shows you the amount you need to live on and if you’re saving enough for early retirement.

To find your yearly spending and saving numbers, simply go through your regular financial statements for the past several years: credit cards, bank accounts, investment accounts, etc.

Start by adding up your total spending first. Then, look at your savings accounts to see how much money you saved each year.

How to FI: 5 Steps to reach financial independence

Retiring early sounds great, right? Learning how to FI is easy, but getting there often requires learning how to build discipline and making potential sacrifices to your lifestyle.

You might not currently save enough to reach your goals. Or, you might worry saving for financial independence means giving up the things you love now.

Luckily, there are several steps you can start right now to help you accomplish your goal of financial independence.

These five ideas can help you speed up your savings and increase your earnings to lower the amount of money you need and the years to financial independence.

1. Pay off debt

It’s almost impossible to save significantly for the future if you’re in debt. Before you can reach financial independence, you have to get out of debt—especially high-interest debt like credit cards.

You also have to work on staying out of debt. It does no good to work hard and pay off your mortgage early only to finance a luxury vehicle and rack up thousands in credit card bills right after.

Once you pay off major debt, it’s important to start putting your extra cash toward savings and investments.

If you’re having a difficult time getting out of debt, you’re not alone. Total credit card balances in America are currently $986 billion.

Luckily, there are a ton of strategies you can use to help reduce or pay off your debt, including:

Use cash

Switching to cash-only (or a debit card) makes it harder to spend more than you have and prevents you from taking on more credit card debt.

Pay more than the minimum

Pay off all your debt faster by paying more than the minimum required amount each month.

Debt snowball

To begin, pay off your smallest debt first, then pay the next smallest, and so on until you’re out of debt. Remember to make at least the minimum on all of your debts.

Debt avalanche

Pay off your debt that has the highest interest at the beginning, then move on to the next highest while still paying at least the minimum on all debts.

2. Save and invest aggressively

If you’re hoping to reach financial independence, having enough money saved up is essential. But just having enough, according to your calculations, doesn’t mean you should stop saving.

You can’t know for sure what your future will look like. The more you can save—even past your initial savings goals—the better. Having more savings will allow you to navigate unforeseen expenses after retiring.

An easy way to guarantee you’re saving each month is to pay yourself first. Set up automatic transfers to go to your savings account for the day your paycheck comes in. This takes the money from your account before you have a chance to spend it instead of saving it.

Investing for financial independence

Additionally, putting your money to work will help you grow your retirement savings and reach FI sooner. In FIRE retirement or post-career environments, your portfolio income is often your main source of money.

You’ll need to invest the money if you plan to retire early—often aggressively. Also think of your risk tolerance when picking investments for your portfolio.

If you have a longer number of years of financial independence, it might make sense to invest in higher-risk investments with higher potential rewards.

Those with significant savings or who are close to retiring early may want to lower their investment risk by investing in low-risk investments. You’ll have less potential for significant earnings, but you also lower your chances of losing money on the market.

3. Increase your income

To maximize your savings, you first have to maximize your income. The more money you make, the easier it is to save and reach financial independence.

Many people in the FIRE movement find the best way to add to their income is to simply work hard at their jobs or careers. If you’re in a field with a lot of room for upward growth, it may be that hard work is key to success for your FIRE goals.

Getting promotions isn’t your only option to maximize your income, however. Doing things outside of work can help you earn more to put into savings.

Increase your income from non-career sources in the following ways:

Use passive income to save for financial independence

Understanding active vs passive income streams can be very helpful for your journey toward financial freedom. Passive income refers to money you make without active involvement. Of course, almost all the best passive income ideas require effort to start (and some more than others!).

Once your stream is established, however, you might only have small maintenance tasks to keep your stream on track.

Let’s say you want to sell eBooks to make some extra cash for retirement. You’ll probably spend a lot of time actually writing, editing, and formatting the book. Then you’ll have to put in the effort to market the book, such as using social media ads.

But once your book is written and published, you’ll earn money for each sale without having to do any extra work.

Start a side hustle to increase earnings

Side hustles and the gig economy are all the rage right now. Even with 35% of US workers being part of the on-demand gig industry, there’s plenty of room for you to join in with gig work or start your own business.

Gig work jobs usually involve being an independent contractor through on-demand service platforms. Think Uber and Lyft for ride sharing or DoorDash for food delivery.

A side hustle, on the other hand, usually means you’re starting your own business. Unique side hustles include:

• Freelancing—as a writer, graphic designer, or other creative
• Virtual Assistant
• Affiliate blogging or vlogging
• Bookkeeping
• Pet walking or sitting
• Flipping furniture

The greatest thing about starting your own business to earn extra money is you can pick what interests you most! If you like to write, freelance writing might be for you. If you love restoring antiques, reselling used furniture could be a good fit.

4. Lower expenses where possible

Many people can prepare for retirement at a traditional age by saving alone. For those looking to learn how to FI or who want to reach retirement early, saving might not be enough.

You’ll likely also need to reduce your expenses to help you reach your savings goals. Lowering your expenses with a bare-bones budget frees up extra money that you can put into savings and investments.

As a bonus, learning to live on less now could potentially help you after retiring early. You’ll already know how to keep your costs low, so you won’t be as worried about overspending after quitting your job.

What expenses should you cut?

When looking to cut expenses, it’s best to start with the big ones like housing costs or insurance expenses. Then work your way down to smaller expenses like spending less on eating out or grabbing coffee. Your major expenses give you the most room to see significant savings over smaller expenses.

For instance, your monthly rent is $2,000, but you have a small second bedroom that’s not in use. You could sublease the room to a roommate to lower your housing costs.

Another expense to think about is the cost of insurance, such as car insurance. It could surprise you how much you could save per year by shopping around for a new policy for different types of insurance. Your current car insurance provider may even lower your rate if you ask about discounts.

Shaving a few hundred dollars a month off of your expenses will add up a lot over time.

Let’s say you manage to cut $200 of expenses per month. That’s an extra $2,400 to add to savings—money you can invest to grow over time.

5. Don’t be afraid of adjustments

Reaching financial independence isn’t an easy task. You need discipline, but it’s also important to remain flexible.

Things won’t always go your way. You might have times of higher expenses, like an unexpected medical emergency or home expense. The stock market might drop—along with your investments.

The key to overcoming these downturns is to stay focused and be ready to adjust your strategy as needed. You may have to reduce your savings amount and recalculate your FI amount. But don’t give up trying to become financially independent.

Likewise, taking advantage of the good times will help you weather the bad times and reach your goal faster.

Perhaps you’ll get a promotion at work, and it comes with a much higher raise than you anticipated. You now have more income to invest in your future.

Expert tip

Learning how to FI and becoming financially independent requires some time, dedication, and strategies for paying off debt and saving. To stay motivated, keep focused on the amount of cash you need and what you will do when you achieve your dream.

Understanding your financial independence number

The amount of money you need is a combination of how much you need to live on each year (your average spending) divided by the amount you can withdraw annually in retirement.

You should already have your average monthly expenses and annual expenses added up. That’s the first half of the equation.

Next, you’ll need to find your safe withdrawal rate (SWR). A safe withdrawal rate is the exact percentage of your savings you can safely take out each year without running out of your money in your lifetime.

As you can probably guess, figuring out your SWR isn’t exactly easy. One, you don’t know what the market will do over the years before you retire (or after!). Two, how do you calculate what a “safe” withdrawal rate is?

The usual go-to safe withdrawal rate uses the 4% rule. This rule works by assuming you can safely withdraw 4% of your savings in your beginning year of retirement. Each year afterward, you adjust your withdrawal rate based on inflation.

Is the 4% rule the best safe withdrawal rate?

The 4% rule assumes the average person will retire with around 30 years of life ahead of them. It may work well for people who plan to work most of their lives and retire in their mid-to-late 60s.

However, there’s some debate about how well the 4% rule works in the current economic climate.

Additionally, people looking to retire early usually plan to live a lot longer than 30 years after retirement. If you have over 50 years ahead of you after leaving your job, taking out 4% of your retirement portfolio each year could be too much (or too little if prices trend downward).

Should you ditch the 4% rule entirely if you’re looking to FIRE?

Not necessarily. The rule still works as a good starting point to estimate your FI number.

You’ll need to consider your unique situation when choosing a SWR. Many FIRE movement followers may want to use a lower SWR percentage than 4% when calculating their savings needs.

Remember, it’s probably better to save more than you need than less.

It’s also essential not to focus too much on the rate of withdrawals but rather on what you can do to lower your investment risk.

For example, diversifying your investment portfolio with a mix of dividend-earning stocks, mutual funds, bonds, and other investment vehicles can help lower your risk of losing money in down markets.

FI number example

Let’s say you need an average of $50,000 per year to live on and want to use the 4% rule for your FI number calculation.

Your financial independence number is $1,250,000. This is how much you’ll need to have in your savings and investment accounts to safely retire.

The equation looks like this:

$50,000 / 4% (0.04) = $1,250,000

Determining your years to FI

Your years to FI are simply the number of years it’ll take you to reach financial independence. After calculating your number, or how much you need in retirement, you divide it by your average annual savings. Simple, right?

But you probably already have some money saved for retirement. If so, you can subtract your existing savings from your needed amount of money. That’s because you’ve already saved a portion of the money you need.

Let’s look at an example where you don’t have any money saved up, you need to retire with 500k and plan to save $25,000 per year. You have 20 years to FI.

• $500,000 / $25,000 = 20 years

Now let’s say you already have $100,000 in your retirement accounts and savings. This shortens your years to FI to 16.

• ($500,000 – $100,000) / $25,000 = 16 years

How many years until reaching your goal?

The years needed will be different for everyone, based on income and how much money you want to save. You just need to subtract your financial independence number from the savings you already have and divide that by your annual savings to see how many years it will take.

Is it possible to reach financial independence quickly?

Yes, after you calculate how much money you need, you can reach it quickly. This may require that you make a higher income, save more, and spend less, though.

Do I need a million dollars to reach FI?

You may need to be a millionaire, or perhaps not, depending on what your needed savings amount is. This comes down to how much you plan to spend in retirement and how much income you want to have. Though it wouldn’t hurt to learn the secrets of self made millionaires!

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Keep working toward financial independence

Whether you get to retire early or not, knowing how to FI and reaching financial independence is a great goal to have. When you’re financially independent, you open yourself up to more chances to do the things you love most.

Start the steps to financial independence today to see where you can end up.

It’s also a possibility that you already have what you need to achieve financial freedom. Find out, “Can I retire yet? and more about financial goals and how to set them.