The Three Principle Levers: The Simple Key to FI

First, I wanted to thank you for stopping by the website. I am pretty excited about it and can’t wait to get started creating content that helps you on your path to financial independence. Today, I am going to be laying some foundations for the blog as well as introducing the Three Principle Levers used to accelerate the timeline to FI.

What is QI2FI?

Mission Statement

QI2FI experiments with ways to accelerate the timeline to Financial Independence (FI) and document them such that the FI community can make informed decisions regarding their own path to financial independence

Basically, I want to experiment with money for your benefit. I want to try different side hustles, different savings techniques, different investment portfolios, etc. I want to see how they work, whether they’re worth the time, and analyze their effect on the timeline to FI. The goal of these experiments is not necessarily to uncover any one true strategy. It’s all about allowing you to see different strategies at play without sacrificing your own time or money.

Diving right in, let’s go over some base concepts to make sure we’re all on the same page.

Financial Independence

First off, what is Financial Independence anyways?

Financial Independence is having enough. It’s when you reach the point where you no longer have to trade your time for money. This idea is so powerful that an entire community has sprung up around it. The Financial Independence Retire Early community, affectionately known as the FIRE community is full of blogs, YouTube channels, meetups, conferences, etc. And it makes sense right? Who wouldn’t want the freedom to not work if they so choose?

A couple relaxing on the beach after reaching Financial Independence

The main issue I have with the FIRE community is the Retire Early portion of it. This gives the connotation that when you hit Financial Independence you just stop working and start sipping mojitos on the beach, never working another day in your life. While this may be true for a small percentage of people, I believe that the majority want to continue to live fulfilling, productive lives. They just want to change the definition of their work. They want something that fills them with purpose and the freedom to explore their greatest passions.

Unfortunately, Financial Independence, Purpose Now doesn’t spell out a nice word like FIRE. We’ll just leave the Retire Early off here at QI2FI and refer to it only as Financial Independence.

How do I know if I’ve Reached FI?

Now that we have an idea of what we’re aiming to achieve, how do we know when we get there? When can you walk up to your boss, put in your two weeks notice, and never look back? This is a fairly nuanced question but the most commonly cited Rule of Thumb is The 4% Rule.

A man analyzing financial data in order to determine if he is financially independent or not

This states that you can withdraw 4% of your initial portfolio annually and it will likely last your entire retirement. This means that if you have 25x your annual expenses saved up, you can be considered Financially Independent. For example, a $40k per year lifestyle would require a nest egg of $1 million to be considered FI.

I like to view this number as a benchmark to aim for, but personally would not pull the trigger until closer to 30x. This is based on my own personal risk tolerance and insight from ERN’s fantastic series on Safe Withdrawal Rates. However, for ease of discussion purposes, we will consider 25x annual expenses as the generic target for FI.

How Do I Reach FI Faster?

(Hint: it’s the Three Principle Levers)

Ok great, now we know that we’re aiming for at least 25x annual expenses in order to reach FI. That’s a lot of money though! Doesn’t it require a full working career from ages 22 to 67 to achieve? Luckily for us, the answer is no!

Many people can, and have, achieved this level of savings within much shorter periods of time. What’s actually required is closer to 10-20 years of intentional wealth accumulation for most middle class Americans depending on the personal circumstances involved. The key word here is intentional.

Too many people just spend their money as they get it, or drive themselves deeper into debt trying to keep up with the Jones’s. Fortunately, there is a simple way out. It is by following the formula below and optimizing each variable by manipulating the Three Principle Levers.

Income – Expenses = Investments

Three Principle Levers

The formula above is pretty straightforward. You earn income and from that income you pay the expenses necessary to maintain your lifestyle. Everything else is invested. While this formula is not enough on its own to push someone towards FI, if combined with the Three Principle Levers used to optimize each variable in the equation, you’ll be surprised how quickly it actually can be reached!

Beer taps being used as a physical representation of the three principle levers

Principle Lever I: Earning

The first principle lever is Earning. This lever is potentially the most powerful lever of the three as the physical cap on earning is much higher than most people ever achieve. There are many ways out there to increase earning and I aim to explore them in detail in the coming years on this blog. However, all the earning in the world is useless if you spend it all, leading us to the next principle lever.

Principle Lever II: Saving

The second principle lever is Saving. This lever is all about driving your expenses down and spending as little of your hard earned money as possible. While there is a lower limit on how much you can save and maintain a lifestyle you are happy with, savings has the double benefit of not only increasing how much you invest but decreasing your FI number too. Don’t disregard the power of frugality on your path to FI! But where do you put that newly saved money?

Principle Lever III: Investing

All of that extra money leftover now that you’ve increased your income and decreased your expenses needs to go somewhere. Throwing it into a savings account is an option, but not a very good one. Inflation will chip away at the purchasing power of that money throughout the years rendering it less valuable. Ideally, we would put it into some sort of investment vehicle that at least keeps up with inflation or better yet, can outpace it. By intelligently choosing where our money goes, we can get our savings to generate even more money, allowing us to reach FI much quicker. Compound interest truly is the 8th wonder of the world!

Additionally, the 4% rule requires that the money you are living off be invested in order to work. How else would you be able to live off of 25x years of annual expenses for more than 25 years?

Conclusion

With this article, you basically have everything you need to know to start out on your path to FI. To be able to claim Financial Independence, a good benchmark to aim for is 25x annual expenses. To get there faster, we need to focus on increasing our income by leveraging our earning potential, decreasing our expenses by saving more, and investing the difference in investments that grow with time. The key to FI is all in optimizing these three principle levers.

In the next three articles, I will be diving into each lever, how they can be optimized, and what I aim to discover about each of them throughout this blog. Feel free to reach out to us here to send any ideas you may have and join our mailing list to receive notifications when new content is out!

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