314 | Achieving Financial Independence

Any lawyer who wants to have freedom and options in their life and career needs to learn about financial independence.

Learning about this concept set my husband and me on a path that has changed our lives.

In this episode, let’s explore the concept of financial independence, including my best tips for any lawyer who’s interested in getting started.

• • what financial independence is
  • how to achieve financial independence
  • calculating your financial independence number
  • the most important number for achieving financial independence
  • the relationship between spending and financial independence
  • the benefits of financial independence
  • a word of caution about financial independence

• The Simple Path to Wealth – J.L. Collins
• Playing With FIRE – Scott Rieckens
• Cashing Out – Julien and Kiersten Saunders
• Your Money or Your Life – Vicki Robin and Joe Dominguez

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back, and happy summer. I am doing something I have not done in the six years I’ve recorded this podcast, and that is taking the summer off.

In place of recording new episodes, I’m sharing webinars I’ve done, trainings from private programs, and past episodes. So, please enjoy today’s episode, and I hope you’re having a great summer.

****

In this final video, we are talking about financial independence. This is going to put together everything you’ve learned because all of the concepts we’ve talked about to this point are strategies that my husband and I have used to move ourselves closer to financial independence.

Financial independence is the point at which you no longer need to work for a paycheck to cover your living expenses because your assets can cover your living expenses indefinitely. It’s often referred to in combination with the term “retire early,” so you might hear “financial independence, retire early,” and it’s referred to as FIRE for short.

We all ideally want to achieve financial independence by the time we retire, but some people are aiming to retire earlier than traditional retirement age, as early as their 30s and 40s in some cases.

I’ve never really been big on the retire early part, so I just focus on financial independence. My husband and I aren’t interested in fully retiring right now, but we want to have the option to do so. We’re not to the point yet that we could both never work again, but we could both take an extended break if we wanted to. Another reminder that when you have money in the bank, and you don’t need your job, you have a whole lot of options.

The most common route to financial independence is investing in the stock market. And that’s what we’ll discuss here. This is what my husband and I have been doing, so it’s the strategy that I have actual knowledge on. But you can also reach financial independence by other means, such as building up streams of income from more passive sources like rental income or something like that, that could cover your living expenses.

Looking at financial independence through the investing lens, the typical rule of thumb is that you reach financial independence, once you have 25 times your annual expenses in investments. That calculation comes from a study that looked at a variety of retirement portfolios to determine the percentage of money that the retirees could withdraw without running out of money. They will withdraw this set amount each year, and they wouldn’t run out of money during the time period. The study found that 4% was a safe withdrawal rate. To determine the amount that you need so that your annual expenses are 4% of your portfolio, you multiply by 25. So that’s where that rule of thumb comes from.

Some people say that because the study was looking at traditional retirement, that we might want to have a lower withdrawal rate if you’re thinking about early retirement. So maybe it’s something like 3%. So you would multiply your living expenses by 33, rather than 25. But we’re just going to talk about the typical rule of thumb here.

When you’re working to achieve financial independence, the most important number to consider is your savings rate. Your savings rate is the amount that you save and invest in relation to your income. And this is your take home pay. So if you are bringing home $50,000 in a year, and you put away 5000, then you have a 10% savings rate. I also count money used toward extra debt payments as money saved because that money is helping to decrease your expenses, and it’s not part of the amount that you would need to cover if you were to retire. Once you pay off that debt, you could start saving and investing the money that you were using for extra debt payments.

If this concept of the savings rate sounds familiar, it’s because it is a variation or play on that simple process for building wealth that we talked about. You increase the gap between your income and expenses, and you use that money for activities that increase your net worth, like paying down debt, saving, and investing.

Your savings rate will dictate how quickly you can reach financial independence. The higher your savings rate, the more quickly you achieve that goal, both because you’re saving more money and because the total amount that you need to cover is lower. Of course, the more your lifestyle costs, the more money you need to save to achieve financial independence.

You might have seen or heard stories about financial independence in the media with people who are going to these extreme measures to cut their expenses as low as possible and reusing paper towels and all of these kinds of things so that they can reach financial independence quickly. Those are the ones that seem to get highlighted the most, but plenty of people are trying to do this or working toward financial independence, but living regular lives, myself and my husband included. There’s even a segment of people who are building their investments to support spending six figures each year, so it’s not all about scrimping and saving and living on nothing. That does not have to be your path if this is something that you’re interested in.

Alright, so now let’s talk more about how reducing your expenses fits into the financial independence equation. We talked in the cashflow videos about how a lot of people are spending way more than they think they are on things they don’t even care that much about. We also just talked about how your savings rate dictates how quickly you can achieve financial independence. So if you’re able to reduce your expenses by lowering your spending, you will reach that goal faster because you’re able to save more money now and because the total amount that you need to save is lower.

As we’ve already talked about the amount that you need to save to reach financial independence is tied to your expenses, so every $100 you cut from your monthly expenses is $30,000 less that you need to save to achieve financial independence. And that comes from looking at $100 a month times 12 months to get what that annual total is, and then multiplying that by 25, that rule of thumb that we talked about to get $30,000.

Alright, now let’s talk about the benefits of financial independence. The main benefit is that it sets you up to live your life the way that you want to, some people continue to work in the same job, but they feel more secure, knowing that they could leave if they want to. Some people change positions, and maybe go take a job that pays less, some retire, stop working altogether and go travel the world. Some get into entrepreneurship.

And you don’t have to fully reach financial independence before you start reaping the benefits. So when you start decreasing your debt, you’re decreasing your expenses, you’re increasing your savings and investments, you put yourself in a much more solid financial position. Working toward financial independence offers a lot of flexibility in the choices you make for your life.

This is where my husband and I are. As I said earlier, we haven’t fully reached financial independence. In fact, over the years, we stopped even paying attention to what our financial independence number is, and what’s the specific amount that we need to reach. We’re not interested in the early retirement aspect of things. However, because we’ve been executing the strategies that you’ve learned in this framework over the years, we have a lot more options available to us than we used to.

For example, I was able to drop down to 50% at my firm, which included a 50% pay cut, during the pandemic. I was even able to leave that firm to go full time in this business, even though my business revenue did not match my salary yet. Although my husband is still working in the same position, he feels very secure knowing he doesn’t have to be there. He could leave if he wanted to. And it’s all because we’ve set our finances up in a way that affords us to have these kinds of choices. We have the freedom to make these decisions for our lives. That’s what I want for you, too.

A word of caution. When people first learn about financial independence, they can sometimes take things overboard and forget to live life in the process. They get so focused on reaching the destination as quickly as possible. And everything is all centered around that. That’s a lot of those sensational stories about the FIRE people that come up in the media.

But your financial journey is a marathon, not a sprint. This is your life. If you were miserable the whole time trying to improve your finances, either you’re not going to stick with it or you’re just not going to have a good experience. So take time to enjoy your life as you implement the strategies that we’ve talked about because there is so much more to life than money. And as I said before, you will gradually open up more and more freedom for yourself along the way, even before you fully reach financial independence.

If you’re interested in learning more about financial independence, we have linked to a few of my favorite books in the resources space. And I’ll also put them below this video so you can check them out.

****

Alright, I hope you enjoyed today’s episode and got a lot out of it. If you have not done so already. Please subscribe to the show, leave a review, and/or share this episode with a friend or two who you think could use this information. All of that is how we get this podcast in the hands of more lawyers, and as always, I appreciate your support.

As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.