Some people are readers. Others are visual learners. Here I’ve put together a Financial Independence Flowchart that I follow to assess my own status around financial freedom.
- 1 The Financial Independence Flowchart
- 2 How to use the Financial Independence Flowchart
- 3 What is Financial Independence?
- 4 Why doesn’t the Financial Indepenendec flowchart mention retiring early?
- 5 How do I calculate my FI Formula target
- 6 How do I Calculate my Saving Rate?
- 7 How do I calculate my time to reaching Financial Independence?
- 8 How do I reduce my spending?
- 9 How do I increase my income?
- 10 How do I improve my investment returns?
- 11 How do I refine my Safe Withdrawal Rate?
- 12 What’s next?
The Financial Independence Flowchart
How to use the Financial Independence Flowchart
The flowchart infographic is intended to be super-easy to use. Simply start at Start Here and answer the questions. Follow the arrows until you have your answers.
Whatever the outcome, be sure to make sure you are enjoying your life.
What is Financial Independence?
To be financially independent (“FI”) you have sufficient assets invested to cover all of your annual expenses for the rest of your life.
The financial independence flowchart walks you through the steps to determine whether you are FI yet, how long it will take you, and actions you can take if you are not yet meeting the definition of FI.
The closer you are to Financial Independence, the more secure your financial position you will be and the more options are available to you
Why doesn’t the Financial Indepenendec flowchart mention retiring early?
For all the financial independence retire early supporters, aka FIRE, you will notice that there is no mention on the flowchart about retiring early.
This is deliberate.
There is no requirement or assumption that you will retire after reaching financial independence. That’s entirely a choice for you to make. Instead, I simply say Enjoy Your Life. For some, this will be giving up their jobs. Others will double down at work, knowing they have a safety net if circumstances change. Others will change the course of their careers.
Financial Independence gives you choices. Not answers.
How do I calculate my FI Formula target
The basic formula is really straight-forward. Simply take your annual expenses and multiply by 25.
Here’s a tool if you want to refine your calculation. If you’re unsure, just leave the safe withdrawal rate at 4%.
If you need more help on calculating your financial independence formula, there’s more information by following the link.
How do I Calculate my Saving Rate?
The calculation for saving rate is simple – take the amount you save and divide by your gross income.
Your saving rate is the headline amount you are able to save. It also tell you how much you are spending! Improving your saving rate means increasing your income or decreasing your spending.
If you need more help, use this calculator:
If you need more help, there’s more details on calculating your savings rate here.
How do I calculate my time to reaching Financial Independence?
For this, you really need a calculator as the formula is a little complicated to take account of compound interest. Your savings rate really matters. Without this knowledge, it’s difficult to follow the financial independence flowchart.
The calculator above allows you to do the time to FI calculation using your saving rate.
How do I reduce my spending?
For most people on a financial independence journey, knowing how to control their spending is absolutely critical. Even if you want to be financially independent with a small fortune in the bank like Financial Samurai, you still need to understand what that you are spending on and be happy with that.
To learn more about how to spend less, follow the link.
How do I increase my income?
Accelerating your path to financial independence is not just about cutting costs and frugality. In fact, there is no requirement to this. But that’s provided you have sufficient income instead. If you aren’t earning enough for your desired financial independence moment, you should look for options to increase and diversify your income.
To discover how to earn more, follow the link.
How do I improve my investment returns?
Even masters of cost cutting, and people earning vast pots of cash still can’t be call financially independent if they have invested poorly. Your assets must make a great return over time if you are ever going to be able to live on them.
To understand more about improving your total returns, follow the link.
How do I refine my Safe Withdrawal Rate?
Your Safe Withdrawal Rate (“SWR”) is the amount you can spend each year and safely not run out of money.
The SWR is a prediction of the future. It is dependent on the total return you would expect from your investments, based on your asset allocation.
Learn more about optimising and improving your Safe Withdrawal Rate here.
Now you’ve used the financial independence flowchart to trace your FI path, you probably want to know reasons why people get their Financial Independence calculation wrong.
Let me know in the comments if there’s ways to improve the flowchart, or where you are at in the journey. I hope you’re enjoying your life!