25% Rule, Explained: What Counts… and What Doesn’t

Achieving a 25% savings rate for financial independence is crucial, requiring strategic allocation to liquid investment vehicles and delaying 'abundance goals' until foundational financial steps are complete.

• Aim for a 25% savings rate, prioritizing liquid investments for future financial independence.

• Utilize taxable brokerage accounts for flexibility and tax-advantaged growth, especially for early access.

• Prioritize foundational savings before pursuing 'abundance goals' or making significant lifestyle changes, and seek professional guidance when financial decisions become complex.

Financial independence hinges on a 25% savings rate, specifically directed towards liquid investment portfolios for future access. This includes employer-sponsored plans, IRAs, HSAs (if invested), and taxable brokerage accounts, which offer flexibility and tax advantages. It's important to prioritize these foundational savings before pursuing 'abundance goals' like funding children's education or lifestyle enhancements, ensuring long-term financial security.

What Counts in 25% Savings

• 00:01:02 The 25% savings rate for future financial independence includes contributions to employer-sponsored plans (401ks, 457s, 403Bs), IRAs, and Health Savings Accounts (HSAs) if actively invested. It also encompasses pension contributions for educators, employer matches for lower-income individuals, and investments in ESOPs or employee stock purchase plans. After-tax savings for financial independence, particularly in taxable brokerage accounts, also contribute to this goal, emphasizing a focus on liquid assets for future financial independence.

What Doesn't Count

• 00:01:43 Certain financial activities do not count towards the 25% savings rate, including prepaying a mortgage, principal payments on a mortgage, or investments in real estate and rental properties. These are considered separate from the goal of building a liquid portfolio for future financial independence. The focus remains on accessible investments that contribute directly to a financially independent future, not illiquid assets or debt reduction in this specific calculation.

Taxable Brokerage Accounts

• 00:02:01 Taxable brokerage accounts are highly recommended for their flexibility, allowing access to funds without penalties before traditional retirement ages, which is beneficial for movements like FIRE. These accounts offer significant tax advantages, including lower capital gains and dividend tax rates, and potentially 0% capital gains rates for incomes below specific thresholds ($48,350 for single individuals, $96,700 for married filing jointly in 2025). This allows for strategic tax manipulation during retirement transitions, making them a powerful tool for financial planning and de-risking one's financial life.

Abundance Goals and Professional Help

• 00:04:02 After achieving the 25% savings rate and solidifying financial foundations, individuals can then focus on 'abundance goals' at step eight of the financial order of operations. This includes funding children's education (e.g., 529s, custodial Roth IRAs), saving for large purchases like cars or homes, or increasing lifestyle. Deciding to pay off low-interest debt like a mortgage is acceptable at this stage, especially if older than 45, as the wealth multiplier is lower. Additionally, revisiting charitable giving strategies and considering professional financial guidance becomes crucial as financial decisions grow in complexity and impact, ensuring continued optimization and alignment with personal goals.