The Two Levers of Financial Independence

Simplifying Personal Finance

Ben Le Fort
May 21, 2019 · 5 min read
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Image by PIRO4D from Pixabay

Personal finance can feel complicated and intimidating. There are thousands of articles published every day, tackling different personal finance topics. From side-hustles to real estate, to investing the list seems endless. How is the average person supposed to keep track of it all?

Luckily when it comes to personal finance and reaching financial independence, all these discussions can be classified into one of two categories: the two levers of Financial Independence.

What are the two Levers of financial independence?

Why these are the two Levers of Financial Independence

You have reached “Financial Independence” when your passive income you earn from investments is enough to cover your living expenses. This is the point where you are no longer dependent upon your job to finance your lifestyle.

Thanks to Mr. Money Mustache, we can predict when we might reach financial independence. We only need to know two things.

If we know how much we make and how much we save & invest, we can calculate our savings rate, which tells us what percentage of our take-home pay we save and invest.

For example, if you cleared $5,000 per month after taxes and deductions and you were investing $500 per month, you would have a 10% savings rate.

Mr. Money Mustache developed this simple chart that will tell you how many years it will take to reach financial independence, given your current savings rate.

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Source: Mr. Money Moustache

If you have a 10% savings rate, you will reach financial independence in 51 years. If you have an 85% savings rate, you will achieve Financial Independence in four years.

(Note: The math in this chart assumes you are starting from scratch, and you can earn 5% above inflation on your investments.)

In this episode of “Millionaire In The Making,” Trish and I discuss the rules of thumb behind the FIRE movement. Click here to subscribe to the channel.

How the two Levers fit In

There are only two ways to increase your savings rate and reach financial independence sooner.

If you want to reach financial independence quicker, you will need to pull one or both levers.

Pulling the Income Lever

The more money you make, the easier it will be to reach financial independence. The higher your income, the more money you will have leftover after paying for the “big-3” living expenses: housing, transportation, and food.

Let’s say you rent an apartment that costs $1,500 per month, have a $300 per month car loan, and spend $400 per month on groceries. That’s a total of $2,200 per month spent on housing, transportation, and food.

In this example, you could reach financial independence 18 years sooner by increasing your income from $50,000 to $100,000 per year.

Ideas to make more money

Pulling the Saving/Investing Lever

While it is easier to reach financial independence making a lot of money, it is not a requirement. What I love most about the concept of financial independence is that it focuses on saving. This means that if someone is smart and willing to sacrifice, they can achieve a high savings rate and reach financial independence, even if they don’t have a high income.

Let’s return to our example where the person making $50,000 per year spent 65% of their take-home pay on the big-3 life expenses. With a frugal mindset and a willingness to make a few sacrifices, these numbers can look a lot better.

That’s a total of $1,100 per month spent on housing, transportation, and food.

The non-frugal person making $50,000 per year spends 65% of their income on the big-3 life expenses, while the frugal person making the same amount of money is only spending 32% of their take-home pay on the same costs.

In this example, you could reach financial independence 18 years sooner by cutting your expenses in half. Note that this has nearly the same impact as doubling your income does.

Ideas to Reduce your Living Expenses

Putting it all Together

Personal finance and financial independence can be a pretty simple concept if we let it be. Every action you take on your finances can be boiled down into one of two actions.

Achieving Financial Independence is all about increasing your savings rate. Being more efficient with the money you already have and increasing your take-home pay are both excellent ways to improve your savings rate and move closer to financial freedom.

Learn How the 2-Levers Of Financial Independence Fit Into Your Budget

If you want to go more in-depth on the concept of the two levers of financial independence and how pulling each lever can help you balance a budget that focuses on your savings goals, you may want to enroll in my personal finance masterclass on Skillshare, where you will learn the 6-steps to creating a budget that locks in your financial goals.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.

In the interest of full disclosure: If you use the link in this article to enroll in my personal finance masterclass and end up signing up for Skillshare, I receive a referral fee from Skillshare. It does not cost you anything and, in fact, gives you two free months to the platform, but I thought you should know.

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Ben Le Fort

Written by

Sharing money lessons I’ve learned on my journey from debt to Financial Independence.

Making of a Millionaire

Stories about money, personal finance and the path to financial independence.

Ben Le Fort

Written by

Sharing money lessons I’ve learned on my journey from debt to Financial Independence.

Making of a Millionaire

Stories about money, personal finance and the path to financial independence.

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