In a previous blog we focused on how to calculate our financial independence number and escape from the “rat race.” Now that we know the amount we need to fund our dream lifestyle, we will shift our focus in this article to how long it will take to reach this dream amount. This dream number is a big achievement and should be big enough that it scares you, but not too big that it's unattainable for your resources. One of my favourite quotes from Henry Thoreau is:” If one advances confidently in the direction of his dreams and endeavours to live the life which he has imagined, he will meet with unexpected success in common hours.”

Now, who's ready to chase their dreams? 

Understanding that Financial Independence is relative 

One of the wonders of financial independence is that it is relative to your lifestyle and expenses. The person earning R100 000 pm will have to save the same percentage of his earnings as a person earning R30 000 pm if they want to be free at the same time. Sure, their investment amount will be different, but both will live a lifestyle they are accustomed to.  

Let's look at an example of two families to show that financial independence is relative. 

Family 1 has a monthly after-tax income of R20 000, they save R5000 pm (25% savings rate) and their expenses are R10 000 pm (50% of after-tax income)

Family 2 has a monthly after-tax income of R100 000; they save R25 000 pm (25% savings rate) and their expenses are R50 000 pm (50% of after-tax income)

At a growth rate of 12%, both families will take 14.5 years to reach financial independence. The amounts they need will differ vastly, as family 1 will only need R3 million and family 2 will require R15 million, but as their expenses are the same percentage, both parties will take the same amount of time to reach financial independence. 

Either family can choose to increase their savings rate or decrease their expenses to dramatically decrease their time to reach financial independence.

Elements impacting your financial independence

Monthly after-tax income: The bigger your monthly after-tax income, the more you can save each month. Starting a side hustle or investing in multiple sources of income will help you increase your monthly income. 

Savings rate: Your savings rate is an effective tool to utilise to decrease your time to financial independence. As can be seen in the graph below, this family can decrease their time to financial independence by increasing their savings rate.

Monthly expenses: Your expenses will increase the amount you need in your investment account using the 4% rule, as the 4% rule takes your annual expenses and multiplies them by 25. 

Market returns: As can be seen from the graph above, the higher your market returns, the sooner you will reach your financial independence number. This is noticeable as there are more green shades as market returns increase.

Using multiple sources of income to reach financial independence

By combining multiple sources of income, you can offset them against your financial independence number to reduce the amount needed in your investment account according to the 4% rule. We will show an example below. 

Here is an example: (The 4% rule logic can be applied worldwide.) 

You calculate your expenses, and it comes to R20 000 per month, which equates to R240 000 per year. This would be your annual expense. R6 000 000 is the result of multiplying these expenses by 25. Using the 4% rule, we can see that R6 000 000 times 4% equals R240 000, which is your annual expense number. This is where the link is between the magic number 25 and the 4% rule.

This rule is only focused on an investment portfolio and drawing income from that portfolio once you reach financial independence. Your expenses can be funded from a variety of passive income sources. The three main passive income sources are:

1.     Property Investing (Hybrid)

2.     Business income (Active income)

3.     Stock market investments income (Passive income)

Continuing our example, As you can see in the image below, taken from the FI Number tool, the R20 000 expenses required equal R6 million needed in an investment account. This person has two properties earning R7000 net monthly and a passive side-line business earning R2000 per month. After inserting these amounts, this person only requires R11 000 per month funded from their investment account, and using the 4% rule, this is R3,3 million, which is a lot less than the initial R6 million initially required. 

Summary

Now we know that financial independence is relative to our scenarios and that we are running our race. We know the elements to fastrack our time to financial independence, and we know that multiple sources of income will diversify your income streams and create less reliance on your investment account. Now, freedom chaser, go chase your dream.  

At Finsights, we want you, the everyday hero, to take control of your finances, become aware of financial independence, grow your knowledge, and let us be your financial independence partner. 

Onward to Financial Independence