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Progress To Financial Independence

Everyone starts from vastly different places. Whether you’re in over your head in debt, or well on your way to reaching Financial Independence it’s important to understand where you’re at on your financial journey.

Over the years, you will save and your investments will grow. You’ll continue to progress through various stages. Everyone has their own journey with different incomes and expenses.

Dave Ramsey is very well known for his 7 Baby Steps. His advise is often referred to as a solid place to start. And we agree with that – mostly. 

The baby steps are a great place to gain some financial knowledge, get your debt under control and build a solid foundation. 

Save a “starter” emergency fund. Dave recommends $1,000 for this step.

We suggest at least $3,000 or one month worth of expenses, whichever is greater. 

Pay off all of your debt (except your home). Dave recommends using the Debt Snowball method, which suggests paying the smallest debts first and building up a “snowball” to pay off the next debt(s). From a mathematically standpoint, this is poor advice.

We suggest using the avalanche method, which means paying off the highest interest rate loan first.

We go over this more in Chapter 8 of our FIRE Guide.

Once you’ve tackled all of your debt in Baby Step #2, work on building up 3-6 months worth of expenses in a fully funded emergency fund. 

We go into a lot more detail and share our thoughts on this in Chapter 7 of our FIRE Guide. 

Invest 15% of your income for retirement. 

This is where some people will argue that you should be investing a lot more than 15%, and we agree. You will earn a lot more on your investments than you will “lose” compared to your mortgage rate.

Save for your Children’s College Fund

That is, if you have/are planning to have children. And this one is totally optional, because not everyone feels this is a necessity.

We started a 529 plan and we don’t even have children yet.

Pay off your Mortgage

What a weight off your shoulders, having a paid off house!

That sounds wonderful, but we’re choosing to invest more instead of pay down our mortgage because mathematically it makes more sense.

Build Wealth & Give

The “legacy” step, intended to set up your inheritances and allow you to give generously. We see this essentially as being Financially Independent.

How To Calculate Your Net Worth

Assets - Liabilities =

A very basic example of calculating net worth:

Let’s say you have 50k in retirement accounts, a house worth 150k and 25k in the bank. That means your assets total 225k.

If you have a mortgage balance remaining of 75k and an auto loan of 10k your liabilities total 85k:

225k85k = 140k Net Worth

You can also use a spreadsheet or online resources to track your net worth. We use a free online resource, Personal Capital to track our net worth.

The "FIRE" Milestones - Upgraded Baby Steps

Because the journey to FIRE can several years or for most, decades, it’s nice to be able to hit goals along the way. Joel over at FI180 has a list that he calls The Milestones of FI

Please keep in mind that if you’re just starting out, you likely aren’t at any of these milestones, and it might be several years before you are. But remember they’re just milestones to work towards!

The total amount invested in your retirement accounts would grow from interest alone, to allow you to reach FI at normal retirement age (65). This implies you wouldn’t have to contribute to them ever again, but still have a sound retirement.

*This one isn’t in Joel’s milestones, but is another term frequently thrown around the FIRE community*

We reached this milestone when we were both just 24.

If you would be able to survive for a year or two without your job, this is you!

This stage gives you the flexibility to only work at a job you enjoy. (You could quite literally say FU to a toxic work environment, if presented one)

Divide your FI number by 2 – If you have that much saved, you’re in this phase!

This phase involves being able to cover all of your necessary expenses (food, shelter, utilities, etc) indefinitely.
You’re in this phase if you’ve saved 20 X your annual expenses. You’re almost there!
You’ve reached financial independence with 25 X your annual expenses saved. Congratulations! Based on the 4% rule, the odds are in your favor for retiring and living happily ever after.
Want to keep going? At this level, you’ve achieved 30 X+ your annual expenses or more! You have the flexibility to cover all of your wants and needs. Your lower withdrawal rate gives you an excellent change for success.