“So what’s your number? I had heard this many times before, only this time it wasn’t an invitation to get to know me better or take me out on a date. Instead, it came from a YouTube video I was watching one restless night when sleep had me all wrapped up in a game of hide and seek.
I was first introduced to the concept of financial independence while listening to Wendy Williams during her radio days, which she then referred to as “F.U. money.” Years later, this concept continued to linger in the back of my mind, as I wondered just how much longer I would be able to cheat on my side hustle with my corporate gig. It wasn’t until I saw that video that I realized there was a tangible way out.
So what exactly is financial independence and more importantly, how do you know you’ve arrived at this seemingly elusive destination?
It depends on who you ask. I’ve come to realize that the concept of financial freedom is as individualized as our taste in shoes and often changes as we age. In my twenties, I could dance the night away in 3-inch stilettos until 5 a.m., but now that I have reached the 40-year-old mark, I’m more likely to opt for a pair of ballet flats.
For some, becoming financially independent means not having to work a 9-to-5, while for others it means not having to ever worry about money again. Defining what financial independence means to you based on the lifestyle you want to lead is one of the most important steps you can take on your financial journey as it will help you determine how much revenue you need to generate and your time frame for doing so.
How to calculate your F.I. number
If you browse the Internet, you’ll find that the most common formula for determining your financial independence number or F.I. number is by calculating your yearly spending and dividing that number by your safe withdrawal rate, otherwise known as the amount you can withdraw from your savings each year without depleting your funds. According to the Trinity Study, the recommended rate is 4% for 30-year retirements. Once you’ve established your F.I. number, you can then take that number, subtract it from your current savings and divide it by your yearly spending.
Sounds easy enough. Right? Just populate a magic number and all your financial troubles cease to exist.
The reality is this: Many of us can save relentlessly, contribute to our 401k and still not attain financial freedom, particularly when you only have one person’s salary to depend on. Furthermore, this approach doesn’t account for navigating unforeseen life circumstances, such as medical bills or having to take on the responsibility of being a caregiver.
Despite the fact that women are earning more money now than ever before, buying more homes, and outpace men in higher education attainment, we still lag when it comes to retirement and financial independence. According to the National Institute on Retirement Security, women are 80 percent more likely than men to experience poverty by age 65 and require 20 percent more than men to cover their medical expenses.
The key, therefore, to not only achieving financial independence but also maintaining it is to have post-retirement income streams in place such as real estate and stock or mutual fund investments.
When billionaire Andrew Carnegie said that 90 percent of millionaires have acquired their wealth by owning real estate, he was on to something. I’ve witnessed this first hand. Since I was 10 years old, I have witnessed my parents build up multiple revenue streams. In addition to owning a brick and mortar business, they also rented out apartments and invested heavily in mutual funds. When they decided to retire, they moved to a cheaper location and bought a number of real estate properties to rent out so they could use that income to fund their retirement.
You may be thinking that buying a rental property or investing in the stock market may seem like a pipe dream when you can barely make ends meet or have just enough to pay the bills. In that case, I invite you to try the following exercise.
Grab a notebook and map out all the revenue streams you can develop. For example, if you like to bake or make jewelry, you may want to consider selling your creations. Have a passion for planning parties? Offer your services to your coworkers and friends. Take something that you already do for fun or in your routine and see how you can derive a profit from it. The point is not to just earn more income but to put your money to work for you by investing your coins.
While the path to financial independence can often feel like you’re walking a tightrope in stilettos, the trick is to go beyond setting your financial target and focus on building up revenue streams that will last you well into your golden years.