Financial Independence and the Journey

Hi Pocketchangers – welcome back to our journey toward financial independence! If you’re new and are joining us for the first time, check out our Getting Started post. If you missed them, the past few posts have been about our trip to Maine and Mrs. Pocketchange wrote an excellent piece about how we were able to only spend $347! That brings us to today and I thought we’d give you some general life and financial updates!

The FIRE is Spreading

I was shocked on Monday when I logged into Personal Capital (an excellent free financial tracking app) and saw that our Net Worth was at our first goal of $25K!

Yes!!

But wait…  this would have been a couple months early according to my calculations. Then I realized the credit card payments we submitted hadn’t posted yet. Bummer! But, it was a glimmer of hope that things are moving in the right direction. It rekindled our desire to push towards our first financial goal ($25K net worth) and the overall goal of reaching Financial Independence. Let’s review our financial goals real quick:

Financial Goal 1: Reach $25K net worth across all accounts (401K and investment accounts, savings, home value, etc.)

Financial Goal 2: Reach our FIRE goal.

Yes, just two financial goals for now but this will undoubtedly change. Instead of creating several right off the bat, we’re starting small so it’s not overwhelming. Once we hit our first goal (scheduled for the end of December) we’ll review and determine our next plan of attack. This will help us stay on target with the bigger picture and less on the smaller things. Ultimately though, goals are extremely important because those will help fuel our drive to continue on this path. A person generally needs both large and small goals to keep progressing well.

You may be wondering, what is our FIRE goal specifically? Great question!

What’s Your Number?

In the FIRE community, there are several numbers thrown around. From Savings Rate to the FIRE number itself, it’s easy to get lost in the math. Before we take a look at our numbers, there are a few things we need to ‘lay on the table,’ so to speak. Financial Independence, Retire Early (FIRE) relies on a few key pieces of information (and assumptions) that are different for each person. Those things can be as follows:

  • Annual Expenses: How much are you spending now? How much do you anticipate needing to spend in the future?
  • Annual Income: How much are you making now? How much do you anticipate this to grow?
  • Annual Savings: How much are you saving now? How much are you investing? What are your investment returns?

NOTE: These numbers are super easy to figure out if you’re working from a budget or using an app like Personal Capital or Mint!

Once you have these numbers, you can figure out what is referred to as a “savings rate.” Check out our post on Savings Rate for more specifics. After you determine your savings rate (ours is currently around 33%), you can then figure out your FIRE number.

Or, if you like pretty pictures and are more of a visual person, you can use this amazing calculator over at Engaging Data. Here’s a snapshot of our numbers:

finances-fire-calculator

Let’s talk about each of the sections used to calculate the image above, starting on the top left. This way you can easily plug in your own numbers and get an equally cool picture.

  • Age: How old are you now? Pretty simple, but some of you may need to check your calendar for reference!
  • Investments: What is your current investment balance? Aggregate all cash and investment accounts (savings, 401K, brokerage, etc.)
  • Income: How much after taxes do you make annually?
  • Current Spending: How much do you spend each year?
  • Annual Savings: This number is automatically calculated. In essence, income – expenses = savings.
  • Income Growth: If you are guaranteed a raise each year (I’m not, I just left it at 1%) then enter that here.
  • Retirement Spend: How much do you hope/plan to spend in retirement? This is a hard question to answer. In our situation, we currently don’t want to spend more than we currently are so we’re using the same amount for current expenses, $30,000.
  • Target WR%: This is another one of those numbers that is for math folks, but it’s also the crux of this journey. It refers to the percentage of retirement funds you plan to sell/liquidate and spend each year, once you hit FIRE. 4% is a generally safe rule to work with, and it also provides the necessary calculations for our FIRE number.
  • FIRE Target Amt: This is THE number. Our ultimate financial goal at this time is to have $750,000. Once we hit this number we can, in theory, stop working because the earnings from our investments would carry us from year to year.

So, per the graph in the screenshot above, given our current financial picture, we are scheduled to reach our FIRE number at age 48. Assuming nothing changes (which it WILL), we’ll reach our second goal with some time to spare. Considering current retirement age is 65, that’s 17 years early!

What Next?

Perhaps you’re wondering, “What’s next?” or “How can I begin this journey too?”

Great, I’m glad you asked! If you have never done a budget or a financial inventory before, I strongly recommend setting aside a few minutes to do both. Below you’ll find a couple worksheets we’ve put together, a Budget and a Financial Inventory worksheet. Simply fill each of these out and quickly gain an understanding of your current financial situation. 

Once you’ve got a grasp on your financial situation using the budget worksheet and financial inventory worksheet, you can look for ways to reclaim your hard earned money!

Budget Worksheet

Click the icon above to download and print the budget worksheet!

Financial Inventory

Click the icon above to download and print the Financial Inventory worksheet!

Cut Bills

Look for bills in your budget such as cable or cell phone service and shop around for better deals. Take charge over your finances. Put your already-earned money back to work by reclaiming it.

Start a Side Hustle

Look for ways you can make extra money to boost your income! Sell some of your non-used items laying around the house, create and sell art, upcycle used goods, or get a second job!

Personal Development

Develop talents or skills you enjoy, and then find a way to monetize it. Do you like writing? Start a blog! Do you like graphic design? Do some freelance work! Invest in yourself and boost your value output!

Stay on Track

It's surprisingly easy to get lost in the day-to-day and have no idea what's going on in your financial life. Sign up for a Mint or Personal Capital account, then identify areas of struggle and look for ways to change your spending habits!

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