Let’s face it. Almost all of us at least thought about reaching a new level of financial freedom – financial independence. It’s not surprising, considering the options it provides you – including the most scarce resource in our lives – time.

While there are many resources available outlining the path to financial independence – they typically overcomplicate or oversimplify what it truly takes. Here, I spell out 5, simple – but quantifiable – steps to ensure you’re moving methodically in the right direction.

Step 1 – Expenses

The first step is to track your expenses. How much do you spend each year?

You’ll want into take into account your essential expenses such as housing, transportation and food consumption costs (which are arguably also some of the highest line-item costs on your annual list of expenses).

You’ll also want to take into account discretionary expenses such as your subscription services, vacation, and all that fun stuff that you may consider leisure.

Now – the following are fictional numbers to illustrate an example but hopefully you’ll get the idea. You may have rent, utilities and associated housing costs that that add up to $2,000 a month.

Let’s also assume you have transportation costs inclusive of car payment, gas, insurance etc at about $400 a month.

Let’s then assume we have Food expenses monthly at a very moderate $150 a month.

This brings our ESSENTIAL expenses to $2,000 each month.

However, we must also take into account our Discretionary expenses. Let’s round up everything under this bucket to about $450 a month.

The total for our current monthly expenses, accounting for both essential and discretionary expenses – now comes to $3,000 a month.

Step 2 – Calculate your Required Nest Egg

Now, we need to calculate what net worth we need to have in investible assets to effectively cover these expenses with just returns. This is when something called the Safe Withdrawal Rate (SWR) comes in handy. Check out my other article on Safe Withdrawal Rate if you’d like to learn more about what it is.

The widely adopted SWR is 4% – meaning that when you retire, it’s safe to assume that you can survive annually off the 4% returns and your invested capital will not deplete to 0 for as long as you’re alive.

Using my example in Step 1, if my monthly expenses are $3,000, that is $36,000 annualized. To calculate what networth I need to be financially independent, Divide 36,000 by 4% or .04 and I get the number 900,000. So now I know that I need $900,000 invested into assets to be financially independent at a SWR of 4%.

Step 3 – Calculate the Difference

In this step, you must calculate the difference. How much MORE assets do you need to reach that $900,000 example “FIRE Number”?

To do that, first calculate your existing net worth.

This should be all your investible assets, such as your checking and savings accounts, brokerage accounts, IRAs, 401Ks, investment properties, among any other assets where you store any type of equity.

For the sake of our example, let’s say I have $120,000 saved up already in the form of investments. Now, I know I need to make $780,000 to reach my FIRE number, since 900,000 – 120,000 is 780,000.

Step 4 – Calculate when you’ll reach FIRE

In this step, we compute how many years it will take from now to reach that FIRE Number, given our current trajectory.

We know we need 780,000 to retire in this example. But how quickly can we reach that number? Let’s we save $50,000 a year (through savings accounts as well as 401k contributions). We divide our “difference” number in the last step by our annual savings number, or 780,000 / 50,000 = 15.6 years.

Comment down below how long it will take you guys! I’m very curious to see what everyone’s horizon looks like.

Step 5 – Work Towards FIRE

Now here’s the kicker, it will actually take you much less time to retire than 15.6 years. Here’s why: you might decide to reduce your expenses now so that you can save money more quickly – especially your discretionary expenses. Additionally, your income may go up in upcoming years as you progress in your career or develop other supplemental streams of income, further enabling you to save more money. Finally, let’s not forget – if you’re putting your savings to work each year, investing it wisely, it will compound and help you grow your net worth much FASTER than initially planned. It’s really that simple…optimize your lifestyle so that your income goes up, your expenses go down and your investments compound.

Once again, this is just an example but pretty much a guaranteed way for anyone to achieve financial independence using quantifiable and very controllable measures. As with any goal in life, the first step is to quantify the what and when which we’ve done here.

I hope you found this helpful and enjoy your path to financial independence.