The Stages of Financial Independence

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I started reading this blog about five years ago, when I was literally asking myself the question “Can I Retire Yet?”. I desperately wanted to escape a career that dominated my time and left me feeling burnt out.

Approaching summit

Reading this and other blogs was incredibly educational. However, as I better understood the challenges and uncertainty that come with planning for early retirement, I became anxious, felt even more trapped, and went through one of the unhappiest times of my life.

I hear different versions of this story frequently from readers of this blog. You save and plan for years, but then have difficulty taking the leap into the unknowns of retirement.

I realized we can get stuck in a false construct, the dichotomy of working or retiring. We often don’t use the freedom and power our growing wealth enables us to create on the path to retirement. What we need is an entirely new framework that enables us to use our progressively increasing level of financial independence (FI) to live our best lives now, rather than putting things off to a future date that may never come.

Next Tuesday, October 1st, Brad Barrett, Jonathan Mendonsa and I are releasing the book Choose FI: Your Blueprint to Financial Independence. Instead of starting with the assumption that retirement is the ultimate financial goal and asking how fast can we get there, we start with an entirely different framework. We lay this out in Chapter 1: The Stages of FI, which I’ll share with you today.

The Stages of FI

“Every revolutionary idea seems to evoke three stages of reaction. They may be summed up by the phrases: 

  1. It’s completely impossible. 
  2. It’s possible, but it’s not worth doing. 
  3. I said it was a good idea all along.

–Arthur C. Clarke

We all know the reasons you cannot or do not Choose FI. You don’t have to look far to find stories about young people crushed by student debt, soaring housing costs, and stagnant wages. On top of all that, investing is complicated. Against this backdrop, how can people possibly retire securely, let alone achieve FI before age sixty-five? It’s easy to see why many people quickly become discouraged, and others never try.

Choosing FI becomes much easier if we reframe what FI means and how it empowers you. FI is often framed as a dichotomy: zero or one. You’re either FI or you’re not. You’re working or you’re retired. 

This all-or-none thinking is the exact wrong way to frame the conversation. This makes FI seem like a far off, unachievable goal. So most people never get started. Besides, it’s absurd to think that one dollar more or less in a retirement account will change everything. Yet this way of thinking traps many of us on the path to FI. Rather than recognizing the progressive freedom and power our growing wealth provides, we often get caught up in the slog. Once we realize that money is just a means to an end that allows us to live the lives we want, it’s easy to see that we are progressively gaining power and freedom along the path to FI.

JL Collins, author of The Simple Path to Wealth, has popularized the phrase “F-you money” among the FI community. He described the concept as not necessarily having enough money to retire forever, but enough to say “F-you” if needed. Having F-you money allows a degree of freedom that most don’t have. 

Brad told the story of using the power of F-you money to leave his job as an accountant to pursue a different path in life. Anyone can relate to his experience of being bound to the rules and regulations of an employer. Here’s how he described the straw that broke the camel’s back in a conversation with Jonathan on the podcast: 

“All of a sudden we had to come in at eight o’clock instead of eight thirty, and it just ticked me off to no end. It was just that absolute garbage “facetime” nonsense that is everything I hate about corporate America. It’s not the value of your work. It’s not how efficient you work. It’s just literally the number of hours that you’re chained to your desk. And it was just such a ridiculous power play . . . you can hear it in my voice. It pisses me off to this day. And honestly, that was it. Within a couple of days, I said to [my wife] Laura, ‘I can’t do this anymore. I’m out.’ And I walked in and put in my notice and got the heck out of there. That was a combination of A, having a growing business that I could really sink my heart and soul into and B, being well down the path to FI, albeit not at FI. But the conjunction of those two things just gave me the power to say, every other sucker has to deal with this.” 

But he didn’t.

Brad’s Soapbox

Leaving my safe corporate accounting job was a monumental step, and there’s no way I can honestly say I wasn’t scared I was making the wrong decision. I was so far along the path to FI that the easy decision would have just been to stick it out a few more years and be 100 percent sure and “safe.” 

But I knew I could always go back and get another accounting job, and I knew I’d always regret it if I didn’t really give my best effort to growing these online businesses. I left on January 31, 2015, and started Travel Miles 101 the very next day! TM101 led me to Choose FI as Jonathan heard me talking about rewards points on the podcast Mad Fientist and that’s what led to him reaching out to me in the first place. The rest, as they say, is history!

Surprisingly, Brad’s story is a bit of an outlier in a community full of people who have accumulated F-you money. Having F-you money rarely means you’re ever going to say those words, quit your job, and walk out after with your middle fingers in the air.

Jeremy, writer of the blog Go Curry Cracker, said F-you money gave him the confidence to do a better job. This confidence made his working years enjoyable and made him more valuable and highly compensated, thus shortening the number of years he needed to work. Most people he worked with were burdened with financial obligations. If you have a mortgage, a couple car payments, a family to feed, and nothing in the bank, what choice do you have when your boss asks you to do something stupid? Most people are going to say yes. Doing otherwise could put everything you have at risk. Jeremy observed that having the confidence to say, “I don’t think that’s the best way to do it, and this is how I think we should go forward” changes an employer’s perspective of you. 

Having the freedom and confidence to not go with the flow enables you to take risks that will add value to an organization. Suddenly, instead of being another pushover, you’re seen as a go-getter. The power dynamic shifts when you’re not reliant on your employer to provide a paycheck for your survival. The worst-case scenario is you getting fired. If you don’t rely on that next paycheck to stave off disaster, the scenario is not so scary.

F-you money is a powerful concept that many in the FI community have latched on to. But it’s vague. We all quantify the exact amount we need based on our individual personalities, attitudes toward money, and risk tolerance. 

We need a better framework with which to quantify the stages and benchmarks along the path to FI as we track our progress and celebrate small wins along the way. Joel, who with his wife Alexis, writes the blog Financial 180, discussed this at length with Brad and Jonathan when they used the framework he developed to riff on the topic.

Stages of FI

Joel’s milestones are based on the FI community’s idea that you are financially independent when your investments are twenty-five times your annual expenses. This idea comes from the 4% Rule, which is based on historical data that shows you can withdraw 4% of your portfolio on the day you retire, then continue to take the same amount, adjusted for inflation, every year going forward with little chance of running out of money. We’ll examine the 4% Rule more closely later in the book. 

You can adjust milestones if you’re taking a different investment approach and argue as to whether there should be more, less, or different benchmarks. Still, it’s an interesting place to start the conversation on the way power and freedom increase as you travel the path to FI.

1) Getting to Zero

The first milestone is getting to zero net worth. Having a net worth of zero, literally being worthless, may not sound like something worth celebrating at first. But for those on the standard path through life who Choose FI, this can be a huge accomplishment. Consider that “normal” for most people means having debt, whether from credit cards, car loans, student loans, and/or other consumer debt. On top of that, the largest expense for most people is housing, with rent or mortgage payments due each month. 

For many, the next paycheck will be spent paying for past decisions. This is a restrictive way to live. You go to work to collect a paycheck just to prevent someone from coming to repossess what you already have. There is no freedom to choose the life you want going forward.

Having no net worth is not a “worthless” goal. Whether you choose to define this as being debt free, debt free excluding a mortgage or having a net worth of zero (assets minus liabilities), hitting this milestone is important because it gives you options going forward.

Jonathan’s Soapbox

I lost over a decade accumulating and then paying off debt for a degree that I’m no longer using. I didn’t appreciate the time value of money. I graduated at the age of twenty-eight with $168,000 in debt. 

It took intentionality, focus and a lot of hard work just to get back to zero. But I’ll never regret putting in the work to get there. Getting out of debt gave me the freedom to decide where my future dollars would go rather than having to use them to pay for past decisions.

2) Fully Funded Emergency Fund

A hallmark of financial advice for those on the standard path is to have an emergency fund of three to six months’ living expenses. Having an emergency fund in cash is solid advice for most people, particularly those without other financial means to deal with the inevitable adversity of life. But what does it take to save this amount of money for someone following conventional financial advice?

If you save 10 percent of your income while spending the other 90 percent as commonly advised, you would have only accumulated about one month of living expenses after a full year of saving. It would take about five years just to fund six months of living expenses. It’s no wonder many on the standard path become discouraged and wind up saving little to nothing.

Contrast this to someone who chooses FI. Developing a high savings rate requires you to lower your monthly expenses. This lowers the bar for how much you have to save to support three to six months of spending, while simultaneously freeing up the money to save. If you can save 50 percent of your income, you will have a full year of living expenses after only one year of saving. You can fully fund an emergency fund of three to six months of living expenses within three to six months. 

Quickly funding an emergency fund gives you the peace of mind that you have some cushion if something bad happens, such as an injury or your car breaking down. It also allows you to quickly start directing future savings to investments, allowing your money to start working for you.

3) Hitting Six Figures

The third milestone is achieving a six-figure investment portfolio. Up to this point, you won’t have had enough assets for investment returns to make a big difference on your wealth building, so you have to work hard to earn and save your way to this milestone. You should celebrate the fact that now that you’ve accumulated substantial wealth, it will be easier to see your money working for you, even though you still have to work for money.

According to the most recent US Census data, a six-figure net worth puts you in the top 50 percent of American households. If you subtract home equity, the median household net worth is under $50,000. While relatively rare for those on the standard path, people with a decent income and a high savings rate can achieve a six-figure portfolio quickly. A couple maxing out 401(k) contributions (limit $19,000 per person in 2019) would hit this milestone in under three years without any investment growth or employer match. Maxing out a single 401(k) gets you there in a little over five years.

If you combine a six-figure net worth with an efficient lifestyle, this is a milestone where you may have enough wealth to support two to four years of living expenses. This provides a cushion, giving you the confidence to start using F-you money without short term consequences if it backfires.

4) Half FI

The fourth milestone is reaching Half FI. This is when your assets reach twelve and a half times your annual spending. While this is half the amount that the 4% Rule suggests you need to be FI, your journey to FI is likely more than half done. If you start with debt, it takes time just to get to zero. Then you have to save to have enough to start experiencing the noticeable benefits of compounding investment returns.

Once you’ve built a sizable portfolio, your money produces substantial investment returns, which amplify the results of the efforts from you working, earning, and saving. At some point around this milestone, you will reach a crossover point. You’ll begin to notice that when your investments have a good month or year, they will passively contribute more to your net worth gains than your active contributions. Passive income is what makes FI possible—this is definitely something to celebrate.

5) Getting Close

The next two milestones may occur in either order. The order will depend on the amount of discretionary spending you have in your budget. Depending on the lifestyle you desire, either may give you the confidence to start transitioning from a traditional job to a different way of life.

The first of these milestones occur when your portfolio reaches twenty-five times the annual spending required to cover all your essential expenses like housing, food, utilities, and health insurance. Tracking your expenses (discussed in Chapters 4 and 5) allows you to easily see how much of your spending goes to the essentials. At this point, you couldn’t maintain your current lifestyle without working, but you could stop working without having to worry about going hungry or keeping a roof over your head. You could cover the basics with investment income, needing to earn only enough to cover any luxuries you desire.

The other milestone is achieved when your portfolio reaches twenty times your total annual spending. You could cover your total cost of living by drawing down 5 percent of your portfolio annually. While less safe than using a 4 percent withdrawal rate, this gives you a greater than 80 percent chance of maintaining your spending without running out of money based on historical data. It’s conceivable you could leave your job at this point, with the stipulation that you’re willing to be flexible with spending and/or earning if your investments don’t perform well early in retirement.

6) FI

The next milestone is when your portfolio reaches twenty-five times your entire annual spending, which most people in the FI community use to define “financial independence.” This is based on the 4% Rule. As we’ll discuss later in the book, this doesn’t guarantee success. But considering all historical scenarios, it holds true more than 90 percent of the time. With some flexibility in spending or willingness to work to earn some income from time to time, you can now declare yourself fully financially independent. This assumes you’re content maintaining the lifestyle established at your current level of spending.

7) FI with Cushion

Achieving an investment value at least thirty-three times your annual spending would equate to a 3 percent annual withdrawal rate. This has never failed in any historical setting. Building an investment portfolio to this size or greater gives you security and room to increase your spending over time if desired or needed. Achieving FI with cushion allows for a feeling of abundance rather than scarcity that turns some off from the idea of FI.

Progressive Freedom

You may want to create more milestones along the way. Incremental milestones have two benefits: they give you short and intermediate goals and benchmarks to keep you motivated, and they keep the growing power and freedom you have along the path to FI in the forefront of your mind. Your growing power opens more possibilities to design unique and interesting lifestyles with progressively less risk. 

Seeing the power of the wealth you’ve accumulated can give you the confidence to abandon your “normal” job and start pursuing a different way of life. This is demonstrated repeatedly in the FI community.

Action Steps

  1. Define what F-you money means to you. How much money do you need to feel secure to take more risks in your career, cut back work, or try something completely different?
  2. Determine where you are on the stages of FI. Does it make sense to continue on your current path to FI as quickly as possible? Why or why not? Explore the options available to you.

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Valuable Resources

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  • Our Books

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to Financial planning inquiries can be sent to]

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