Are You Moving Closer to or Further From Financial Independence?

Some people feel you should focus solely on your income, particularly if you’re a high-income professional.

Dr. Jim Dahle looks at the flip side and the double impact of increasing or decreasing your annual spending as it relates to the amount of money you actually need to call yourself financially independent. 

A financially independent doctor may still continue to work, but would be able to live and support her family for the rest of their lives off of savings and completely passive income sources.

Are You Moving Closer to or Further From Financial Independence?

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The formula for financial independence is relatively simple. You take how much you spend on a yearly basis, subtract the amount of guaranteed income you have, and then multiply the rest by about 25.

Financial Independence = 25 X (Annual Spending – Annual Guaranteed Income)

If your portfolio is larger than 25 times the difference between your spending and your guaranteed income, congratulations, you are financially independent!

Financial Independence = 25 X (Annual Spending – Annual Guaranteed Income)

The usual direction of our financial lives is to move gradually toward financial independence. However, there are three situations where we may find ourselves moving away from financial independence.

3 Situations that Move Us Away From Financial Independence

The first is rather obvious – when the size of our portfolio falls. This may be due to spending a bunch of it, but may also be due to market losses, divorce, inflation, confiscation (government or a creditor), or devastation.

1. Portfolio Loss

Income sources that you thought were guaranteed but really aren’t, like real estate rents, can also fluctuate significantly. Like with a decrease in portfolio size, this situation is also generally readily apparent.

2. Loss of Income

However, the third situation in which we become less financially independent is far more insidious. This occurs when our spending goes up due to lifestyle creep.

3. Increase in Spending

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