Saving For Financial Independence

Saving money can be overwhelming, especially if you are saving for financial independence (FI).  If you are looking to escape the rat race, then you know that saving your money is key to achieving your goal. 

Just how much you should be saving will vary depending on you and your financial situation.  We'll get into that more later.

For now, saving itself seems to be a lost art.  A thing of the past.  People nowadays are way more interested in keeping up with the Kardashians than in saving their money.  And no, it is not the Millenial's fault.

Saving: Is it a Lost Art?

For the past 20 decades Americans have been saving on average 5.9% each year.  Almost 3 times lower than the oft suggested 15% savings rate and almost a fourth of the 20% savings rate suggestion of the 50/30/20 proponents.

As it stands, with the little money that is being saved, most people will not be prepared for retirement.  What's worse, the future of Social Security is not looking so bright.   In just 15 years our Social Security funds are going to run out and most likely, from then forth payments are going to be reduced.

So, not only will people not have enough saved themselves, but the government will not have the money to pay as much as they had before. Not a very winning proposition.  The good thing is it's never too late to beef up your savings.  But just how much should you be saving? We'll go over that next.

Saving Your Money for FI

When you are saving for financial independence, it is a whole 'nother story than just saving for retirement.  This is because many people think of saving for retirement as just opening up a 401k or an IRA, throwing some money in it, and hoping for the best.  

Not many actually think about how much money they will actually need in retirement.  Let alone how much they should be putting into their accounts every month.  Saving for financial independence, however, requires specific goals and check points.

With the FIRE (Financial Independence, Retire Early) movement still going strong, financial independence is no longer just for the elderly.  And if you think about it, why should it be?  Financial independence is for everyone.  Yes.  Even You.

The Factors that Affect Your FI Number

Your financial independence number is quite personal to you and you alone.  What will work for you and your family may not work for others. Here are some factors that you need to consider before determining your FI number.

Now that we've seen some of the factors that will influence your FI number lets take a look at some calculations.

The Calculations

Your Financial Independence Number

Now's the time to figure out your financial independence number.  To do this, determine the yearly amount you are going to need in retirement.  Use the factors above when deciding your number.  Then write down the number of years you have until retirement.  

Next, using an inflation rate of 3% (actual may be higher or lower), calculate how much money you will actually need during retirement accounting for inflation.  Multiply this number by 25 and voila! you have your financial independence number!

~ For my FIRE peeps, you may want use 33 just to be on the safe side as you will have a longer time in 'retirement' than usual. ~

Your Monthly Payments

As most people will choose to invest in the stock market, your monthly payments will depend on the anticipated growth of your portfolio.  Historically, it has been safe to assume a growth of 7%, adjusting for inflation.  However, with the way things are now it seems that growth may be even lower.

For now, let's just use 5%.  So take this percentage, your FI number, your years to retirement, and the amount you already have saved and headover to calculator.net.  They have an easy to use calculator that will let you know just how much you need to save per month to reach your goal. 

Now that you have your monthly number you are halfway there, so to speak.  Knowing what your goal is  and what you have to do to achieve it is half the battle.  The next half is actually doing it.  If you're thinking - there's no way I can save that much every month, you are not alone.  We could all use a little help with boosting our savings rate.

Mindful Spending

A good way to boost your savings rate and ditch bad spending habits is through a little something called Mindful Spending.  As with most things in life, just by shining a little light of awareness on a problem the solution can become clear.  The same goes for your spending habit. 

Your Life or Your Money authors, Vicki Robin and Joe Dominguez, suggest carrying around a notepad and writing down everything you buy.  They suggest writing the amounts down to the last penny.

Even if it is something as small as a 10 cent pack of gum, write it down. Do this for at least 2, preferably, 3 months and you will begin to notice a pattern.  The days you spend the most money, when you spend the most money, and on what.

Simply keeping track of your spending provides great insights into what you are spending your money on and why.  Many people began to notice things like, spending exorbitant amounts on afternoon pick-me-ups because they hate their jobs. Or just how much running in to the market "real quick" is costing them.

So go on.  Grab an old notepad and give it a try for a few months.  See what insights you derive and how you can use it to boost your savings.

All in All

Saving for financial independence isn't difficult once you know your financial independence number and your monthly payments.  Just having that knowledge and a concrete number to work towards can help push you towards your goal.

All that's left now is to take action.  Start stashing that cash in your investment accounts and watch it grow.  And if you want to reach FI earlier, cut those expenses, pick up an extra side gig, and boost your savings rate.  With a little dedication and discipline, you're sure to reach your goal.