5 SHOCKINGLY SIMPLE Ways to Achieve Financial Independence

there are many strategies for achieving financial independence just like there are many investing strategies many budgeting strategies and many debt payoff strategies today we're going to be talking about five of the most common ones and examining the pros and cons of each let's get started but before we get going be sure to like this video if you haven't already as it really does help out the channel a lot and subscribe with notifications on for more money related videos like this one every single week and if you want to further support this channel you can check out some of the links I've left in the description below which includes a link to the investing platform m1 finance get started investing for free today so before we get into the five strategies let's first discuss why more than one strategy exists alternative strategies and finance exist to achieve one of two things they either aim to work very well for a certain person or situation or they aim to achieve one of the many sub goals of these often much larger goals like financial independence very well for instance look at the debt snowball and debt avalanche one has you pay off all your debts from smallest to largest balance while the other has you pay off all your debts from highest to lowest interest rate if followed both strategies will achieve the larger goal of getting you out of debt but they each have advantages over the other in some of the sub goals of becoming debt free obviously the debt avalanche if followed will allow you to get out of debt as quickly as possible while paying the least amount of interest did that snowball won't always get you out of debt quite as fast or with as little interest payments but many studies do suggest that it increases the chances of someone finishing the job and getting completely out of debt and if true that could mean that the debt snowball despite its interest related downsides could still be the objectively right answer for the right person after all if using the debt Avalanche would be too much of a grind for someone to see it all the way through to the end whereas the debt snowball would give them that momentum they need to get to the finish line then only one of the strategies is going to achieve the goal of becoming debt free for that specific person I believe that a similar thing happens with financial independence except it might be even more important to consider the differences here than the differences between debt strategies or budgeting formats because financial independence is a universal goal we all have barring the possibility of dying young pretty much all of us will we need to have created enough passive income through businesses side hustles Real Estate's investments or some other source to support us when we can no longer support ourselves so just like the ultimate goal of every debt payoff strategy is to become debt free the ultimate goal of every savings investing in passive income strategy is eventually to achieve financial independence with that in mind let's get into the five strategies the first strategy is traditional financial independence and traditional financial independence is a way for you to determine whether or not you could reasonably expect your investments and other assets to cover your expenses regardless of whether or not you continued to work it's most commonly measured using the 4% rule which basically states that if your investments are worth at least 25 times your annual expenses you are financially independent some have said that in today's environment a 3% rule should be used instead of the more traditional 4% rule and the three percent rule is essentially the same as the 4% rule except that you're considered financially independent when your investments are valued at at least 33 times your annual expenses this is the most generic way to achieve financial independence it doesn't necessarily do anything particularly well or poorly it basically just gives you an idea where you need to get to and allows you to decide when you want to get there and therefore tells you how much you're going to need to save in order to reach your goals one thing that's often thrown into traditional financial independence is the idea of retiring early this is where the fire acronym comes from which stands for financially independent retired early well not a requirement of financial independence it is brought up enough to warrant its own examination and when it comes to traditional financial independence and early retirement people usually fall into one of two camps lean fire and fat fire lean fire is when someone becomes financially independent and retires early on a lifestyle where they spend no more than $40,000 a year and some live on quite a bit less than that the biggest Pro to lean fire is the time required to achieve it for example let's take John and Jane they're both 50 years old and haven't saved a dime for retirement they need to kick their savings into gear and they need to do it fast thankfully if they make good money taking home $100,000 a year they decide to both max out their 401ks both max out their IRAs as well as an HSA between the two of them since their fifty years old they're capable of contributing $26,000 to each of their 401ks $7000 to each of their IRAs and currently $7,100 to their HSA once they turn 55 they'll actually be able to increase that contribution to the HSA to $8,100 thanks to the catch-up contribution rules so that's a total of 73 thousand one hundred dollars per year today and it'll increase to 74 thousand one hundred a few years from now but hypothetically this would mean that they're living on just twenty six thousand nine hundred dollars a year and would need six hundred and seventy two thousand five hundred dollars to be considered financially independent assuming an eight percent return on their investments John and Jane would reach financial independence on their current lifestyle in just six years and 11 months if they wanted to live on the maximum of 40 thousand dollars a year allowed by the lien fire strategy they would need to work and invest for about nine years and three months the biggest con or potential con to the lien fire strategy is that it can lead to being overly stingy with money if you're not careful but I'll come back to that idea a little later in the video for now let's move on fat fire is similar to the lean fire method in the sense that it focuses on getting you to retire early but instead of living on no more than $40,000 a year it aims to allow you to live on an upper-middle class income in retirement the amount that constitutes an upper middle class income is going to vary depending on where you are of course but the generic ballpark assumption that I see most often is an income of about $100,000 a year this would mean that you would need investments valued at no less than two and a half million dollars based on the 4% rule to be financially independent if we look back at John and Janes example from before this would mean that they would need to work and invest for at least sixteen years and six months to reach financial independence so obviously fat fire doesn't allow you to reach financial independence quite as quickly as lean fire does but it does have the added benefit of giving you a pretty healthy income once you do reach retirement its main potential con is the same as lien fires if you're not careful it can be tempting to become overly stingy with your money and neglect the things and the people that bring joy into your life which brings me to slow financial independence slow financial independence could be viewed as a response to the lean and fat fire movements which of course have gained a lot of traction over the past several years because as I just said one of the potential downsides of both lean and fat fire is in order to achieve them you may find yourself cutting out quite a lot of your lifestyle this is especially true if your income isn't at least above average which makes having a side hustle incredibly important mind you to getting the most out of lean and fat fire but that's a whole nother kitten caboodle now if you're saving that much money in a frugal way where you're only completely cutting things that don't really add much value to your life while finding ways to enjoy the rest of your spending just in a much more financially efficient manner then that's one thing but if you're finding yourself becoming incredibly stingy with your money to get your savings rate where you want it to be then you might find yourself regretting some of those decisions after you reach financial independence there's a few reasons for this first there's more to a well lived life than just an endless accumulation of dollars second especially in this day and age with all the technology we have at our fingertips you can have a surprising amount of freedom even without being totally financially independent third in most cases achieving financial independence on such a strict budget probably isn't going to make you all that much happier or healthier than you were before you achieve financial independence that doesn't mean that financial independence isn't a goal worth pursuing because it absolutely is it just means that perhaps we should work on finding a balance between prioritizing the time it takes to reach financial independence and the amount of enjoyment we get out of the process of becoming financially independent slow financial independence aims to strike that balance in John and Jane's case that may mean they save and invest enough to max out each of their 401 k's each year but live on and enjoy the rest of their income this would mean that they invest about $52,000 a year and spend the other forty eight thousand given these numbers we know that they would need about 1.2 million dollars in their nest egg to be considered financially independent and that would take them about 13 years and five months or so using our previous assumptions it's definitely a little longer than it took to achieve financial independence using the lean fire strategy and a bit shorter than it took for the fat fire strategy which makes sense given that their income in retirement would be somewhere in between those two strategies but the main pro to this strategy is the focus on enjoying the journey as much as possible instead of just the destination and the con of course is it does take longer than some of the other strategies to reach financial independence the next way to achieve financial independence is coasting financial independence this is sometimes known as barista financial independence but the basic idea is that you spend the next handful of years saving as aggressively as you can similar to what we saw with the lean and fat fire strategies but then you pull your foot off the gas pedal for the rest of your working career while your investments grow to the point where they can cover your expenses by the time you decide to retire so let's go back to John and Jane to see how this works let's say that John and Jane want to retire at 70 years old so they have 20 years to accumulate the savings they need to support themselves in retirement they want to be able to live on $50,000 a year once they reach retirement this means that in 20 years John and Jane need 1.25 million dollars in their nest egg assuming they maxed out all their tax advantaged accounts like they did in the lien fire example and managed an 8% average annualized rate of return they would need to save aggressively for about four years and four months to reach their goal by the age of 70 this strategy can be particularly effective for those who are still fairly young for example to have 1.25 million dollars in your nest egg when you turn 70 an 18 year old would only need to save about $400 a month until they turn 20 for assuming an 8% return during their working career now there are a few things that are incredibly important to keep in mind if you're using coasting financial independence the first is inflation since you're saving aggressively for a handful of years and then letting your investments grow on their own possibly even for decades it's important to make sure that your $50,000 a year income actually feels like a $50,000 a year income once you start withdrawing it for instance if we assume that inflation is 3% per year when that 18 year old turns 70 and retires that $50,000 a your income that he's withdrawing might only buy him the equivalent of what ten thousand seven hundred and fifty dollars would buy him when he was 18 you can plan for this by using what's known as a real rate of return when making your assumptions the real rate of return is just the stated rate of return minus inflation or you can continue saving a little bit each year after your aggressive savings period is over and done with just to give yourself a little extra cushion for instance as of this writing since 1980 vanguards S&P 500 index fund has earned about ten and a half percent per year assuming you reinvested the dividends inflation since nineteen eighty at least as measured by the CPI has been a little bit under three percent per year so the real rate of return of the index fund has been about seven and a half percent per year obviously past returns do not indicate future returns so it may not be a bad idea to give yourself that little extra cushion that I was mentioning in your estimates but that's how coasting financial independence works the biggest Pro to this strategy is that it allows you to change careers possibly much earlier than any of the other strategies which can be particularly attractive if you're in a high paying but highly stressful job and don't mind working for a while at some other job another pro to this strategy is that it is hands-down the most financially efficient way to achieve financial independence in the examples we just used with John and Jane they needed to save about three hundred and sixteen thousand seven hundred and fifty dollars to achieve coasting financial independence but they would have needed to save about five hundred and five thousand dollars to reach lean fire on a twenty six thousand nine hundred dollar a year lifestyle or six hundred and seventy six thousand dollars to achieve lean fire on the $40,000 a year lifestyle 1.2 million dollars to reach fat fire and almost seven hundred thousand dollars to reach slow financial independence in the hypothetical case of the eighteen year olds example they technically would have only needed to invest about twenty seven thousand three hundred dollars of their own money to achieve coasting financial independence thanks to the fact that they have so much time to let the money compound and that's quite a big difference in terms of how much of your own money is being used to fund your future the con to this strategy for financial independence is of course that it takes quite a while to achieve full financial independence since your only aggressively saving for a short period of time so which strategy do you think would work best for you do you have any other strategies that you think I missed let me know in the comment section below but that'll do it for me today once again if you enjoyed this video be sure to smash that like button if you haven't already subscribe and hit that bell next my name's you'll be notified of all my future uploads I generally upload every single Monday and if you have a friend that would be interested in this kind of content be sure to share it with them let's really get this information out there and start our own financial revolution

Channel: Next Level Life

Views: 178,015

Keywords: financial education, money, next level life, personal finance, investing, debt, financial freedom, financial independence, budgeting, retirement, early retirement, retire early, ryan scribner, financial diet, finance, stock market, stocks, graham stephan, 5 SHOCKINGLY SIMPLE Ways to Achieve Financial Independence

Id: s1ShJTJnYCo

Length: 13min 52sec (832 seconds)

Published: Mon Apr 20 2020