5-Year Plan to Financial Freedom

What is the amount needed?

A 5-Year plan is a though schedule too accomplish financial independence. So let's break it down to what it would look like, assuming you can bring down your expenses to $25,000 ($2,083 per month).

(your expenses) * 25 = (your portfolio needed)

$25,000 * 25 = $625,000

This simplified calculation helps you find your FI/FU number (no taxes incl. for simplification). The following chart visualizes how this future income situation looks like (create your own as free member)

This example assumes a 20% long term capital gains tax on your withdrawal

As this looks feasable, the savings phase for this example is quite unrealistic to accomplish that in 5 years regardless of your current income. But first let's take a look at how that could look like for a normal household with $50,000 income, a 10% savings rate and some existing savings of approx. $10,000.

Assumptions to an unrealistic plan

• Current
  • Income: $50,000
  • Expenses: $45,000
  • Savings rate: 10%
• New Goal
  • Income: $150,000 (+ 200%)
  • Expenses: $25,000 (- 44.44%)
  • Savings rate: 83%

Even if you increase your income 2 fold and shrink your expenses by 44% it will take you 6 years to gain approximatly $777k.

But here comes the truth: Most people don't triple their income easily and can't reduce their expenses by half.

An income of $12,500 and putting away $10,417 into your portfolio each month is mathematically correct, but no one with that high of an income has achieved that.

There is one enemy that sounds easy to handle, but as you grow will get stronger and stronger. It's called Lifestyle inflation. Everyone heard it once. The issue is not about knowing the term, it's about making the right decision of inflating or deflating in the right moments of your life.

Everyone thinks he or she can offset things to a later point in time. No young person can really imagine, that the ability to work can take a hit later in life which might end up in a havok if you accrued a lot of debt or monthly expenses.

Understanding financial freedom

Ah, financial freedom - the dream where your money works harder than you do! But what's the real deal with this financial utopia? I'm not just talking about having a fat bank account, i'm diving into the nitty-gritty of what it means to be financially free. It's about living life on your terms, where your investments and passive income streams are the superheroes saving you from the daily grind. So, buckle up as we explore the true meaning of financial freedom and set the stage for your own path to economic liberation.

Assessing Your Current Financial Situation

There are plenty of books, that can help you get through the mess. What helped me was "Your money or your life" by Vicki Robin.

But here are the most important steps:

1. Know what your expenses are (and why you need them)
2. Reduce them !!!
3. Pay down debt immediately and don't take any debt from now on
4. Build an emergency fund
5. Make a real written down plan for 10 years

6. Repeat this every year

Setting Clear Financial Goals

Be realistic! Everyone wants the shortcut to FI, but that thinking will lead you to nothing. When you don't mind, make a plan for 15-20 years with steady increase in savings. This will enable you to enjoy life with your friends and family, but be frugal with that.

If you are in a fight-or-flight mindset, it might be a good idea to take a longer break. Do the vacation you have postponed for so long (if you are consumer debt free). It will help you clear your mind.

Only a clear mind can find good and practical solutions.

Write the plan down on paper. That visualization process of writing this will manifest it into your brain. Hang it on a wall that you pass every day! This will remind you subconsciously every time you see it and your brain will find solutions.

The next chapter is an example plan you can use to understand the process of being realistic and adapting each year.

Creating Your 10-Year Financial Plan

You should create a realistic plan and lay down what the goals should be for increasing income, reducing expenses and increasing the savings rate for each year.

Don't be unrealistic. You can't start with 50% savings rate, if you are just saving 10% right now. Start to increase the savings rate year by year. Also try to generate a new income stream starting from year 1. It takes time but can increase your total income by year 3. Make it a challenge to increase that by $5,000 each year after that.

The most important step is to avoid lifestyle inflation. Don't spend more, because you have more income. Be aware that there will be new increases, but keep them manageable. The goal is to increase the savings rate, not to decrease it or keep it steady.

The following plan shows a growing income plan. 10 year plans to FI are only achievable with a steady increase in income and savings rate. If you can't increase your income, you should rather create a 20 - 30 year plan. Make your own plan right here

The following sections are based on these assumptions:

• Income: $50,000
• Expenses: $45,000
• Savings Cash or Stocks: $10,000
• Savings rate: 10%

The savings must go to your portfolio (e.g. 401k, Roth IRA, brokerage account for EU citizens, ...) which should invest in broad index fonds (ETFs) like MSCI World or S&P 500.

Year 1: Layout the Foundation

Double your Savings rate. The more you can squeeze in the first year, the better the results. For most people this is the hardest part.

As you can see these spending and saving rates will need you to live for another 123.5 years to break even. Unsustainable!

Year 2: Building Momentum

You have to level up your savings rate and start working on a side hustle to increase your income in the next 2 years. Challenge yourself to reduce your spending by $5k this year to reach 30% SR.

The needle is moving. 72 years until retirement 😒

Year 3: Accelerate Growth

The goal is to hit a savings rate of at least 50%! Also try to increase your income from work or take advantage of another income stream from the side project you started. From now on your goal should be to increase that income every year by $5,000.

Acceleration is what you see here. Saving 50% is the turbo you need to get to your first $100k in year 4.

Year 4: Optimizing Your Finances

Another $5,000 increase in income should be doable. Also don't let lifestyle inflation hit you. Increase the savings rate by 5%.

At the end of this your you have reached your first $100,000. Celebrate this! Every year after that is getting easier as long as you stay true to your new self and keep the expenses in check.

Now it is only 24 years until FI.

Year 5: Learn to Enjoy the Journey

Plan to generate another $5,000. And don't forget to increase the savings rate.

Your yearly returns have now surpassed your monthly income. You are halfway through your journey. The monthly debt payments should be nearing $0 by now or latest next year. Only 18 years to FI now 🥳

Year 6: Adapt, Enjoy & Stay Focused

Another $5,000 another 5% SWR increase.

You must have noticed, that staying your plan after year 5 is reducing retirement date by 5 years each year you stick to the plan.

13 years to FI 🫣

Year 7: Same same

You know the game by now: $5k every year.

Year 8: Same same

You should hit 70% savings rate by now. If you can't reduce expenses, seek that increase by planning to make more income.

Squeezing spending below 30% is not fun anymore at this point. If you need to increase spending it should come from increase in income.Remember lifestyle inflation ? Don't fall for it, althought you are doing great so far! Hold the 30%.

Only 8 years left, at that level.

Year 9: Same same

Just keep doing the same things.

By now you see that the portfolio gains are in parity with you yearly costs!

You are at the sweet spot! Look at the FU money returns which are roughly the same as your expenses. That's the turning point

Year 10: Almost ready

You are almost there. More income for saving and spending.

WAIT A MINUTE Why is there another year?

Well, basically because of taxes and it is meaningless to grow by $100 after bearly breaking even. You end this year with $0.5 million in your portfolio.

Year 11: Achieving Financial Freedom

Congratulation ! Have have achieved your number and can start reducing or stopping work.

Now you are in your keep and accumulate wealth phase. You have ~$900 left over each month after you spend on your expenses.

Now you have FU money 🎉🥳🎉

If you work another full year you can plan to increase spending if needed.

If you want to stop working from here on, fine! Take a break.

Every year from now on, as long as you keep spending the same, your passive income covers your expenses. You can do what you want. If you want to spent more, add more into your portfolio with the money you make from a side hustle you love.

Tips for Staying on Track

1. Set Clear Goals: Define what "living off investments" looks like for you. Is it early retirement, funding a passion project, or just financial security? Having a clear vision helps keep motivation high.
2. Automate Everything: Set up automatic investments. If you don't see the money, you won't miss it. Plus, it ensures you're always contributing, no matter how busy life gets.
3. Regular Reviews: Schedule quarterly or bi-annual reviews of your portfolio. It's like a financial check-up. Adjust your strategy if needed, but don't panic with every market hiccup.
4. Embrace the Boring: The best investment plans are often the least exciting. Stick to diversified, low-cost index funds. They might not make headlines, but they're proven to grow wealth over time.
5. Celebrate Milestones: Hit a savings goal? Invested a certain amount? Celebrate these milestones. Positive reinforcement can keep your spirits up.
6. Educate Yourself Continuously: The more you understand about investing, the less scary market fluctuations seem. Read books!
7. Ignore the Noise: Financial news can be sensationalist. Stick to your long-term plan. Remember, the stock market isn't a casino; it's a marathon.
8. Find a Buddy: Share your goals with a friend or family member who's also on a financial journey. Accountability partners can keep you motivated.
9. Emergency Fund: Ensure you have a safety net. Knowing you have an emergency fund can prevent you from dipping into your investments during tough times.
10. Visualize Your Future: Keep a vision board or a journal. Visualizing your financial freedom can be incredibly motivating.
11. Stay Disciplined, Not Deprived: Enjoy life while saving. If you feel too restricted, you might rebel against your own plan. Find a balance.
12. Professional Guidance: If you're unsure, consult with a financial advisor. Sometimes, an outside perspective can provide clarity and reassurance.

Remember, the path to financial freedom through investments is a marathon, not a sprint. Keep your eyes on the prize, adjust your pace as needed, but never lose sight of the finish line.

Conclusion

As you can see with planning things out, you get a pretty good picture how each year could look like, to achieve a goal you've set yourself.

Start writing down the goal. Start tracking your expenses and ask yourself if you really need that expense and that you want to spend the amount of extra work you need to tackle that cost.

Come join our FU Money Club to plan and share your journey

Additional Resources

• Try "The Wall"
• Become a member to our community
• Why 'The Wall' is Not a Budgeting Tool