• The Recovering Passive Investor

Start Here 3: How much are you making?

Now that you know your “why” in taking this journey to financial independence, it is time to figure out what your current situation is, so you can create a strategy to get yourself to financial independence. There are two steps needed to understand your current financial situation: What are you currently making and what are you currently spending. I am going to focus on the income you are making first.

In the exercise to understand your current financial situation, you must be honest with yourself with regards to how much you are making and spending. As humans, we suck at evaluating ourselves. We want to downplay our flaws or see the pretty picture of our situation which is extremely important in this journey. What I mean is that you have to be completely honest with the amount of income you are actually bringing in. With this direct look at the income, you will be able to get a clear picture of where you need to focus.

If you have some way of tracking your income, this will help you understand how much is coming in. If you haven’t already, you should have some way of tracking your income and expenses, even if it is on a notebook, spreadsheet, or software. I use Mint and Personal Capital, which are online budgeting tools to help track your finances. Each has their strengths and weaknesses, which is out of the scope of this post..

If you have a job or business, the number you need to look at is the net income, which is the income after all taxes and deductions from your paycheck. I understand some of these deductions from your paycheck include contributions to your 401K, HSA, or other tax-advantaged accounts; however, the net income is what you will be saving and focused on increasing on your journey to FI since that is what will be used unless you meet the age to tap into these retirement accounts.

What I described above is money you make from a W-2 job. Remember to add in the income you make from side hustles or hobbies.

Knowing how much you are making is half the battle. The next step is increasing the amount of that income. This is accomplished by at least one of the following methods:

  • Increasing your income

  • Reducing the deductions to your income

Hundreds of articles can be written on the above and I will discuss them in further detail in future blog posts. If you are serious about financial independence, then it is imperative you increase how much income you are making AND reduce what is deducted.

You may be thinking, “How much should I be saving?” Well, that will depend on how quickly you want financial independence? The chart below from Four Pillar Freedom can give you an idea of how long it will take you to reach financial independence based upon your current spending and how much you are currently saving every month. This chart assumes you are starting savings at zero with a seven percent annual growth rate..

One flaw of this chart is it’s assuming your expenses will be the same once you reach financial independence. For many, once they reach financial independence and leave their W-2, then their expenses actually decrease. This is why the next couple exercises to know your expenses and your financial independence number are important.

Reaching financial independence is not easy, but it is a worthy journey. I believe every person should strive at least for financial independence and whether you want to FIRE (financial independence retire early) is totally a personal choice. However, wouldn’t it be great to have that option to step away? Even for those who are in a career they enjoy, knowing that you have that choice should be extremely thrilling. Because you never know if something will happen in the future where either your career no longer is enjoyable or life circumstances change where you need to leave your career, you will be prepared because you saved for financial independence.

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