Saving enough money to reach financial independence is a daunting goal. It took us about ten years to reach the goal, and we were laser-focused on reaching financial independence our entire working careers. Complete financial independence that allows a comfortable early retirement is a great goal, and it comes with many side benefits along the way that aren’t always obvious.

Let’s look at a hypothetical household yearning for financial independence. They are just starting out on their wealth building journey. From their perspective, they are at the base of a towering mountain staring up at the fog-shrouded peaks. They can’t see the snow capped summit from their lowly vantage point. The path in front of them is well worn and clearly marked, but looking up the steep slopes they notice the trail snakes around the mountain and out of sight. They know roughly where the end point is (up!) but not where the exact path will take them on their odyssey to the top.

We’ll call this hypothetical household the Smith family. They live next door to the Jones family, but the Smiths don’t really care to keep up with their spendy neighbors (the Joneses). The Smiths know what they need for financial independence – $40,000 per year to pay for their modest lifestyle plus a few extras (like hiking up mountains). They know about the “4% rule” that says they can spend 4% of their investment portfolio each year without running a significant risk of depleting their investments. Doing some quick math, the Smiths quickly determine that 4% of a million dollars will yield them $40,000 per year in early retirement. Now the Smiths have a financial independence goal. Obtain a $1,000,000 investment portfolio. Once they hit their magic number, they will be financially independent and can retire to a life of leisure (or whatever they want to do)!

Even though financial independence is wonderful goal, it takes many years to achieve. But the Smiths are in luck! They can enjoy the power and freedom of their wealth all along their journey. I’ll highlight a few stops along the route to the summit of the financial independence mountain.

$10,000 savings (1% of goal)

The Smiths enjoyed a leisurely walk along the relatively flat section of trail at the base of the mountain when they decided to stop for a snack in a flowery meadow. The views from the meadow are pretty much the same as at the trailhead, although now they can look back at where they started and see they have made some progress toward the top. After buckling down and saving $10,000, they have built up enough wealth to fund three months of living expenses if they quit working tomorrow. Living paycheck to paycheck is something that other people do (their neighbors the Joneses?). However, they still desperately need their jobs because they are very focused on reaching financial independence. Some refer to a few months of living expenses in the bank as an emergency fund. With $10,000, the Smiths can handle most emergencies that life throws in their way. But those funds are the foundation of their financial independence and are destined to do much more than bail out the Smiths in an emergency.

$50,000 savings (5% of goal)

The trail remains mostly flat but they maintain the pace and make a lot of progress on the hike to the top. Once they save $50,000, they have the financial security that most others their age don’t have. $50,000 is enough to fund over one year of their living expenses if they both lost their jobs tomorrow (as unlikely as two people simultaneously losing their jobs might be). It’s also enough money to allow the Smiths to take a year off and travel around the world (if they wanted to deplete their entire nest egg!). $50,000 could be a 20% down payment on a $250,000 house. Ease of access to the $50,000 depends on where the money was saved, with a taxable account and Roth IRA’s providing easier access than 401k’s and traditional IRA’s. In any event, with $50,000 in investments, the Smiths have a lot of control over their finances and flexibility in their lives.

$100,000 savings (10% of goal)

At this point in their journey, the Smiths are well on their way to reaching the eventual goal of a million dollars. With $100,000 saved, they can fund two and a half years of their living expenses. The trail ahead of them appears to be steeper, but the Smiths are finding each successive $10,000 saved a little bit easier. They are able to look back on the trail below them and clearly see a lot of progress on their journey so far. Even though they hit six figures in their investment portfolio, they have a lot of climbing before they reach the summit.

At this level of assets, they don’t have to worry about unexpected major medical bills or major house repairs. They can comfortably slash their insurance expenses by increasing deductibles and dropping unnecessary comprehensive and collision insurance. When they have $100,000 in the bank, repairing or replacing one of their cars isn’t a big deal in the event of a catastrophe. Though not “rich”, the Smiths are able to enjoy their wealth by having the flexibility to cover unexpected expenses without going into debt.

$250,000 savings (25% of goal)

Saving a quarter of a million dollars is no easy feat, and the Smiths are proud of their ascent to this lofty perch on the mountain of financial independence. $250,000 represents over six years of living expenses. It’s also enough to buy ten mid-size sedans or four luxury cars. But the Smiths remain happy with their modest but reliable cars and the security that a quarter million dollars brings. At this point in their journey, it is hard to imagine a scenario where they would ever suffer real financial distress. $250,000 can last a long time if one of the Smiths decides to take time off from full time work to pursue a business venture or start a family. They are only a quarter of the way to their goal, but the amount they have saved is still substantial.

$500,000 savings (50% of goal)

The Smiths are half way up the mountain. The summit is within reach, although still obscured from sight by the clouds. On most ventures up the side of a mountain, it gets increasingly harder to continue as the pitch of the trail steepens and fatigue sets in. As they continue climbing, the Smiths have to suppress their smug smiles because they are enjoying the beautiful sights along their path just a little bit too much. Who wouldn’t be happy experiencing the power and natural beauty of relentless compound returns?

At a 7% rate of return, a half million dollar portfolio will generate $35,000 per year. The portfolio will continue to grow over time. Their journey toward financial independence will get easier each year as their investment returns dwarf the new contributions to their investments. In fact, the Smiths could stop contributing to their investment portfolio completely, and the value of their investments would double in another decade (at a 7% rate of return). It’s as if the Smiths have some hard working sherpas helping them up the mountain! Or at least carrying their backpacks.

At this point in their journey, the Smiths should have no financial fears. Their biggest worry is “can I really make it to the top?” but it’s really just a matter of time. As long as they can remain healthy and alive, their journey to financial independence is no longer questionable since the compounding investment returns will push them to the goal (eventually).

$750,000 savings (75% of goal)

Three quarters of the way on their journey, the Smiths have the summit in sight. The reality of reaching the top sets in and the Smiths only remaining concerns are “should I cut back to part time now or switch to a more exciting but lower paid career?”, “what will I do all day once I’m financially independent?”, and “how do I access my retirement accounts in early retirement?”. Those are all very important questions that have to be answered before cresting the last hill to the summit.

What a spectacular view from these heights! The Smiths can barely see the meadow where they stopped for a snack when they had $10,000. The excitement they experienced when they broke into six figure territory is nothing compared to the exhilaration that comes from being so close to their financial independence goal.

Since they are almost financially independent, the Smiths now have what is known as “F-you” money. That stands for “forget you”, by the way. They can say “forget you” (or other choice phrases) to the boss if their work situation becomes unbearable. Finding another job isn’t impossible (if another job is even required!). As you near financial independence, you gain the ability to name your employment terms.

$1,000,000 savings (100% of goal)

The euphoria of reaching the summit is unbelievable. Now that they reached financial independence and they are at the peak of the mountain with their whole life ahead of them, what will they do? The story could end a million different ways. Maybe they keep the backpack on their shoulders and set off on a trip around the world. Or they might return to the hobbies that they used to enjoy before work got in the way. Perhaps they want to devote their time to starting (or growing) a family. They might step up their volunteering and community involvement. Their post-career life is a tabula rasa, a blank slate.

One thing is certain. From the top of the mountain, they can see the entire world spread out before them. Anything is possible. The Smiths have the financial resources to provide for themselves indefinitely and their futures are only constrained by their own creativity.

Where are you on the mountain? Does the climbing get easier or harder as you go up? Are you enjoying the view while on your journey?

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