Financial Independence is for Everyone

Financial Independence is for Everyone
Photo by Raimond Klavins / Unsplash

Introduction

Imagine a humble janitor and gas station attendant who quietly amassed an $8 million fortune through smart investing. Ronald Read, who passed away in 2014, achieved this remarkable feat by living frugally and consistently investing in stocks over decades. His story is a powerful testament to the idea that anyone can build significant wealth, regardless of their income level or financial background.

Financial Independence: How It's Based on Lifestyle and Spending

Everyone dreams of having enough wealth to feel safe and secure. Financial independence is the concept of having enough money accumulated to not need to work for a living.

You may have heard of FIRE—a recent and popular movement dedicated to achieving Financial Independence and Retiring Early. Retiring early is nice a choice to have.

Financial freedom is different for everyone. Some people would love to live and spend extravagantly. Others may be homebodies with simpler hobbies. There is no one-size fits all.

Finding Your Number

What is this magic number that will set you free from the obligation to work for a living? It's actually quite simple. Let's use the Rule of 25. Take your yearly expenses and multiply by 25.

Lets use an example with Jane. She spends $3,333 a month or $40,000 a year. Jane’s financial independence number is $40,000 x 25, which amounts to $1,000,000.

The Rule of 25 states that you need to save up 25 times your yearly expenses to achieve financial independence.

Another important concept is the 4% Rule. This rule suggests that you can comfortably live on your retirement savings if you withdraw 4% of your balance at retirement each year, adjusted for inflation. There is a 99% chance you will still have money left over after 30 years.

By combining these two rules, you understand that you need to save 25 times your annual expenses, allowing you to safely withdraw 4% of your savings every year. In Jane’s case, she would need to save $1,000,000, enabling her to withdraw $40,000 annually for the next 30+ years.

Many people have successfully retired early based on these principles, and so can you. So, how can you start building your retirement savings?

The Simple Path to Wealth

There are many ways to build your wealth, but none are as straightforward as J.L. Collins’ "Simple Path to Wealth," which focuses on:

  • Achieving financial independence through disciplined investing
  • Simplicity in investing
  • A long-term perspective

Disciplined and consistent investing is a skill everyone should develop. One simple way to integrate this is to invest in your 401k every paycheck. If you don't have access to one, you can put money in an IRA or stock brokerage. Many banks let you automate moving money into these accounts whenever you get a paycheck, take advantage of it.

When it comes to investing, it doesn’t get simpler than investing in an index fund. J.L. Collins advocates for buying index funds like VTSAX. Similar alternatives include VTI, FSKAX, and SWTSX. With any of these choices, you own a piece of the entire stock market. Statistically, picking individual stocks performs worse than buying into a total market index fund. Keep it simple and invest in a total market index fund.

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.” - Albert Einstein is alleged to have said this.

Ronald Read combined compound growth and long-term investing to grow his wealth to $8 million. If we give our investments enough time, they will eventually create more wealth than your job on an annual basis.

Putting Everything Together

Let’s figure out how Jane can reach her financial independence number of one million dollars. It’s easier than you might think.

If Jane invests $500 every month consistently for 35 years, she would have $1,033,900, assuming an annual growth of 8%.

Why 8%? The average stock market growth of the S&P 500 (the 500 biggest companies on the stock market) is about 10%. The US Federal Reserve estimates the average rate of inflation at 2%. Subtracting the inflation rate from the market growth rate gives us 8%.

To highlight the power of compound interest again, what if Jane continues investing for 40 years? She would have a whopping $1,554,339.11. Compound interest is truly powerful.

Conclusion

You now understand how Ronald Read, a gas station attendant and janitor, could amass over $8 million over his lifetime.

You don’t need wealthy parents, a high-paying job, or to win the lottery. By following the core principles behind the "Simple Path to Wealth," you too can achieve financial independence.

Use this calculator to find your financial independence number.

Rule of 25 and 4% Rule Calculator

Rule of 25 and 4% Rule Calculator

Next, play around with the compound interest calculator to see how you can reach financial independence.

Compound Interest Calculator
Compound Interest Calculator Principal amount: Annual interest rate (%): Number of years: Monthly contribution: Compounded: Annually Semi-annually Quarterly Monthly Calculate