Exponential FI

Your spending is an important factor in your financial independence journey. It effects the rate at which you can save and invest while in the accumulation phase and is also a critical factor in calculating your Target FI Number. When accumulating wealth, the amount you can save and invest is a simple calculation: what you make minus what you spend.  Like many of the levers we talk about, your spending has a non-liner effect on your FI journey.  Spending slightly less also means saving slightly more and both of those quantities are found in the formula for Stash Rate , leading to a multiplied effect. $$ Stash Rate = {Annual\ Savings \over Annual\ Expenses} $$ As we saw in the Stash Rate article, decreasing expenses leads to an exponentially increasing rate of wealth building. On the other side of financial independence, the level of spending in your drawdown phase directly determines your Target FI Number. $$ Target\ ...

Financial Independence, simply defined, is when your passively produced income is enough to pay for your life’s expenses.  But how do you get there?  When at the beginning of the path, it can seem daunting.  Even imaging enough wealth to generate that kind of passive income is a challenge.  However, the good news, and the real point of this blog, is that the decisions we make along this path drive non-linear results. A mathematician would tell you that a linear function is defined by the output being directly proportional to the input.  Your elementary school teacher would say they make a straight line on a graph.  Fortunately, on the quest for Financial Independence, we leverage the power of non-linear mathematics.  Maybe the most powerful, the exponential effect of compound interest when investing, we will get to later.  However, it starts with the disproportional effect of saving versus spending.  Let’s ex...