What does financial independence mean to you? Is it a number? A time frame? What is financially independent? What does it look like? These are questions I never really asked myself before until recently.

Early this year I reached out to a friend whose advice I value about some financial choices I was weighing at the time. One of the suggestions I was given was to listen to a podcast called Choose FI. Until that moment, I had no idea what FI meant.

After listening to this particular podcast, which was about saving and investments, specifically interest rates, I was intrigued. I started researching FI, reading all the books I could find on the subject, listening to podcasts, visiting websites, and reading blogs.

Last year, I took Dave Ramsey’s Financial Peace University, and had begun working on my own debt free goals, but the thought of becoming a millionaire honestly seemed so out of reach for me. Achieving that goal when you begin the journey in your 40’s is possible, but for me would look like years of high intensity dedication that just isn’t sustainable for that length of time.

But after learning what being financially independent really means, and how it is very different for everyone, gave me hope that this was a possibility. This was something I could manage without sacrificing years of my life.

Financial independence is the ability to support yourself on passive income without having to work. That doesn’t mean you don’t work, it means you only work if you choose to, and do it because it’s something you love, not because you need the money.

What is a passive income?

This is simply income generated regularly from a source that requires little or no labor to earn or maintain.

Some examples are the interest and/or dividends earned from holding money in a high yield savings account, CD’s, bonds, and investments. The money invested in these tools is the principle balance, but the interest and dividends they earn are passive income. Essentially, your money is making money all by itself.

If you have enough invested in items like this, you can eliminate the need to work at all, doing so only if you choose.

How much do you need?

That’s totally dependent on your lifestyle. Before I learned about financial independence, I thought in order to be able to “retire”, I had to have enough to completely replace my income. That might be true if I needed every penny I make to survive. But if that were the case, I’d have nothing to save and it would be hopeless.

Add up your monthly expenses minus what you are saving and you will find the number that represents your standard of living. This is the number that will help you figure out how much you need to be financially independent.

Whatever number you come up with for your monthly expenses, multiply it by 12. This is your annual expenses. Then multiply the annual expenses by 25. This is your FI number. This is how much you need to become financially independent. Here’s an example.

Monthly Expenses	Annual Expenses	FI Calculation
$2,300	$27,600	$690,000

If we base the calculation on the amount of current income, the number is quite different. Let’s say in this example, this person makes $40,000 per year. If we use that as a basis, 25 times that amount is $1,000,000. In this case, they actually would need to become a millionaire.

But a huge factor in budgeting is learning to live below your means. Most people have the ability to live on less than what they make. That doesn’t mean they don’t spend everything they make, but the don’t necessarily need every penny.

Also, keep in mind that if you have enough money saved to cover 25 years of expenses, you no longer have the need to continue saving, thus we eliminate that budget item when determining the amount.

$690,000 seems like a much easier goal to reach than $1,000,000 in this example. And your FI goal could be even less if you find ways to cut back on some of your expenses. If you need some ideas, go back to some of the previous posts in the Cutting Expenses series.

How long will it last?

If you maintain your lifestyle habits and keep your expenses low, you can most likely bank on the FI money lasting for the rest of your life.

There are a number of ways you can make this work but one of the most common methods is the 4% rule. This means that once you reach your FI number, keep your withdrawal rate at 4% of the balance, increasing for inflation each year.

There are a lot of factors that will affect the amount you need and the safe withdrawal rate. Some of these are your age at “retirement”, your life expectancy, your health at the time, where you are keeping the money, and other things that could affect your financial needs. It would be well worth your while to do some research and educate yourself on your options.

The point, though…

You may not need as much as you think to reach financial independence. Do the math. Make changes in your budget if need be. Seek information on the subject. Listen to the experience of others who are on the same path or have reached their goals. Be open to new ideas and suggestions.

The road to financial independence may not be as far away as you might think. It may not be as difficult as you imagined. Remember, where there’s a will, there’s a way and you are capable of finding it.