Seven Milestones to Reach Financial Independence
I’ve always been someone who accomplishes more when I have a goal to pursue.
When I think back on some of the prouder accomplishments in my life they were mostly achieved through persistent focus on a goal.
College, my first marathon, projects at work, and even renovations on my house were all achieved with an end in mind.
I suppose it’s a disposition for an analytical type like myself.
And maybe that’s why I enjoy finance so much. I mean, is there a subject that lends itself more easily to goal setting than money?
In that spirit, I’ve decided to share several goals I’ve set for myself personally that are important milestones on the path to financial independence.
I encourage you to set similar goals as you work toward your own financial independence.
1) Net Worth = $0
Hopefully, this is an early life goal for most of us.
Getting going in the world isn’t easy and for many, that means we need a little financial assistance (usually in the form of a loan or loans) starting out.
Most commonly, we take on debt to fund education.
The median net worth for Americans between the ages of 18 and 24 is $8,216.
Honestly, I’m happily surprised to see this number is above zero. It wasn’t for me.
Thankfully, I only had around $14,000 of student loan debt when I graduated college, but for many this number can rise up into 6-figure territory.
If this describes you, I’m afraid there’s little you can do about it other than put your head down, get to work, and slowly dig your way out of debt.
If you’re in your 30s or older and have significant debts, then let me encourage you all the more to get that paid off so you can begin working toward our next milestones.
If you already enjoy a positive net worth, then let’s move on to milestone number 2.
2) $1,000 In the Bank
If you have a positive net worth, then this next milestone probably won’t be that difficult to reach. In fact, I’d be a bit surprised if you have also already cleared it.
One thousand dollars is not a ton of money, but having a cash cushion of this magnitude available is worth celebrating because it’s acting as a shock absorber for the rest of your cashflow.
With a little cash in savings, you’re able to handle unforeseen expenses without being easily knocked off the track toward your other goals.
It’s also an important psychological tool that will teach you to value liquidity and the security it can provide.
Ultimately, this should result in a healthy balance of liquidity versus investment as your net worth and income increase over time.
3) Saving 15%-25%
Milestone 5 on the Next Dollar Roadmap is saving 15% to 25% of your income for retirement.
I can’t guarantee financial success based on any decision you make financially, but milestone 5 is about as close as I can come to doing so.
The reason is saving this amount of your income, when combined with the power of compounding interest, is almost certain to lead to a portfolio that builds itself faster than you can.
Reaching milestone 3 also means that you’re mastering the art of delayed gratification. This discipline is almost as critical as any other if you want to reach financial independence.
I once calculated how much one should save to build a portfolio that would replace 80% of your pre-retirement income based on the number of years until your retirement.
At an 8% annual return, a 15% savings rate will allow you to retire in 31 years, 20% will allow you to retire in 27 years, and 25% in 25 years.
As you can see, it’s only a matter of time but you have to get the clock started before you can reach your goal.
4) Your First $100k
Now we’re talking!
I have heard it said many times that the first $100,000 you save for retirement is the hardest.
Just taking a look back at the trajectory of my own retirement savings, I guess this is technically correct. It did take longer for the assets in my retirement account to reach $100,000 than any subsequent $100,000 since.
My wife and I started saving and investing 15% of our income in 2007 and reached $100k in retirement assets sometime in 2010.
But I’m hesitant to call it “hard” for a couple of reasons.
First, most of the growth was contributions.
It’s not like we made killer investment choices that got us there quicker. We just made saving a priority and pushed our way to $100k.
The other thing to factor into this is the financial crisis of 2008.
Sure, our paltry balances took quite a hit in 2008, but they also benefited from an incredible recovery in 2009 and 2010. Many of the contributions we made in this time did great, but not because of anything special we had done.
I guess what I’m trying to say is not everyone’s experience will be the same here.
With an inflation-adjusted median income of $76,500 and an annual return of 8%, it would take an average person a little over 7 years to reach their first $100,000 in retirement savings.
However, the second $100k would come only four years later and the third just three years after that.
Compounding interest is an awesome ally, but you’ll have to stick it out through those tough early years to get there.
To add insult to injury, this is usually when you’re also trying to buy homes, newer cars, having kids, and making larger and larger life decisions.
Hang in there. It’s worth it!
5) Net Worth = $1 million
The one-million-dollar club is not as exclusive as it once was.
There are now just under 25 million millionaires in the United States which is roughly 6% of the population or one in every seventeen households.
According to Charles Schwab’s 2024 Modern Wealth Survey, Americans feel like they need a net worth of $2.5 million to be considered wealthy.
Do you know what you need before you can reach $2.5 million? A lot of things, but you certainly can’t get there without going through $1 million first.
Yes, the value of $1 million can be somewhat subjective when viewed this way, but it is valuable nevertheless.
And I say, if you reach it, it’s a milestone worth celebrating.
Now to be clear, I am talking about a net worth of $1 million, not invested assets of $1 million though I think both are worth celebrating.
Of course, to calculate your net worth you simply add up the value of all of your assets and subtract any debt you have.
Once you reach $1,000,000 in net worth why not quickly turn your gaze to $1,000,000 in invested and liquid assets so you don’t get lazy.
By the way, using the same parameters we gave earlier about reaching your first, second, and third $100k, you’ll reach $1 million in 24 years.
6) When Your Assets Make More Than You Do
This may happen before or after milestone 5, but to me, it’s more monumental which is why I listed it at number 6.
I can happily report that this happened to me first in 2017 when the stock market had a great year and our assets made a little more than my salary for that year.
It was a pretty cool feeling knowing my portfolio was basically working as hard as I could.
Then in 2020, our portfolio made more than the income of my wife and I combined!
In a way, this was the first time I felt like I was semi-financially independent. After all, if our assets made more money than us, why would we need to work anymore?
Of course, the answer to that is that the market doesn’t always provide years like 2020.
Nevertheless, for me, this was a milestone worth celebrating because up to this point, there hadn’t been anything that made me feel like I was flirting with true financial independence.
Until 2020, it was all kind of theoretical I guess. After 2020, I knew that everything we had sacrificed for and been disciplined to build was going to pay off. It’s just a matter of time now.
This is one that also liberated me a bit in terms of how we spend and save our money.
Don’t get me wrong, we still save and invest over 15% of our income, but I’m not as laser-focused on keeping it all in tax-advantaged accounts like my 401(k) or IRAs.
Since those accounts are so well funded that they’re kind of building themselves I’ve given myself permission to save more in taxable brokerage accounts so I can use the money if I want to before I turn 59.5.
This is not always the tax-optimal decision but the relative flexibility it provides has been more valuable to me and my family.
7) Work Because You Want To
Eventually, as you keep marching through the milestones on this list, you’ll reach a point when you don’t have to work any longer.
This day will sneak up on most of you, but many of you will have it circled months or even years in advance.
Either way, I imagine this is quite a liberating feeling.
It’s also the fundamental goal of “financial independence”. You might even call it the finish line. Well, if you want to anyway.
And what a life-changing perspective it would provide. Knowing that whatever comes your way financially, you’re fully capable to withstand it on your own.
Of course, you can’t account for everything, but if you get fired, no problem.
Is your company moving to Toledo? Best wishes to them.
Get a new boss you really don’t like? Toodles.
Yep. That is freedom and it is a worthy goal to pursue.
With all of that said, I would caution you not to view stopping work as the goal. There are 168 hours in a week and even the most devout snoozers among us must find something productive to do during our waking hours.
In my experience, those who fail to plan for the transition away from meaningful work have plenty of time but not much purpose or happiness in life.
To prepare for this I would suggest that you spend at least one full year before your retirement considering what you will do with your time when you step away from your career.
Who and what matters to you? How can you be involved in those things?
What are some of the things you wish you could have taken several weeks to do while you were working, but couldn’t because you were working?
What is a skill, art form, or hobby you always wanted to learn but never had the time to devote to it before?
In a way, this goal comes with more responsibility than all the others. It turns out it’s not as simple to be wealthy as you might have thought.
