Earlier this year I came across a totally new way of looking at life and finances – via the growing ‘Financial Independence’ (FI) movement. Since then, I’ve spent most of my time down every conceivable rabbit hole reading blogs, books, and listening to podcasts. Specifically on what and how I should be spending my money. I became rather evangelical about the solution – so evangelical I wondered if I’d joined a cult. But I’m sure it is not a cult. Pretty sure.
Cults aside – for now – I know what you’re thinking. What on earth could be interesting enough to drag me away from a spreadsheet?
Financial independence or FI is a simple concept. It means having enough income from your assets to cover your expenses – so that you never have to work for money again.
This is nothing new – most people call it retirement and aim to get there on their 65th birthday.
But what if you could get to a point where you could be FI in your 50s, or 40s, or even earlier? Perhaps before most of your life had passed you by. Retire when you’re 40? Yes, I know that you hate daytime TV. Why on earth would you change your life to watch more Judge Judy? But who said that not having to work for money = more daytime TV. For me, FI is not about more money or less work, it’s about a better life.
Getting to FI would allow me to design the life I want and spend my time exactly the way I want to. It’s like winning the time lottery. If you want to stay in a job you love, you can. If you want to spend more time with your family or travel or on a hobby… You can. If you want to work for a charity or a cause that can’t afford to pay you – You.Can. FI is not about what you can’t. It’s about what YOU CAN.
So now you’re thinking that ‘you can’ sounds kind of cool, but the money bit seems impossible. And you’re right, it is impossible… if you live like everyone else.
But what if a few changes, when aggregated, could make enough of a difference so that you reach FI much earlier in life.
The math/money bit is easy in principle but challenging in practice.
First the easy bit. If you can save 25 times your annual living expenses, there is a strong historical precedent that if you invest the funds wisely, you have enough saved to never have to work for money again – unless of course you want to.
But saving 25 times your annual living expenses seems impossible. If you upgrade your home and car every few years and allow lifestyle inflation to consume all of your income, then it is impossible.
If you want to retire at 65 and maintain your lifestyle post retirement, you’ll need to save 15% of your income. However, if you start early and save 30% of your income, you’ll be financially independent around your 50th birthday. If you can get that savings rate to 50%, then you’ll be FI by 40.
You can increase your saving rate by either increasing your income or decreasing your expenses. Cutting costs is easier as it’s within your immediate control. It has the added benefit of reducing the amount you need before becoming FI – ie. if you cut your annual costs by $1,000, then that is $25,000 LESS that you need to save.
For example, if your annual living expenses are …
$30,000 you need $750,000 invested to never have to work again unless you want to. If you earn the current US median household income of $61,000, and you can live on $30,000, then you are well on your way
And if you want to/can live off…
$15,000 well then, you only need $375,000 invested
For us, FI is not about deprivation. It’s not about living on beans and rice for the next couple of decades. In my mind, there is no point in living a life of extreme frugality that neither you or your family enjoy. Life is about the journey, and committing to 20 years of misery doesn’t sound like a great journey. A three-hour car trip with our kids is bad enough. Just imagine 20 years. No thanks.
But, I’m willing to bet that you spend significant sums on things like cars without spending much time considering the long term impact. For example, would you rather have a new car every two years, or accept driving an unattractive, economical car into the ground in exchange for flexibility to finish working five or ten years earlier? Neither answer is right – you just need to decide which of these is in line with your values. For the record, if you have any intention of reducing your spend, whatsoever, you need to start tracking it. TODAY.
I know you think I’m nuts. Trust me – you aren’t the first. I’ve spoken to a few friends about FI, and of our plans to be more intentional about our personal finances in the coming years. The reaction of most is to a mixture of pity and concern. My sister-in-law asked me if I had joined a cult. And this is before I told her that I was going to a FI conference for a week in October (they did want my money for that…). Even my wife was skeptical, at first. Now, she is a die-hard convert. It. Is. Not. A. Cult.
And just in case you need convincing, a cult requires you to lose your independence financially not gain it! I definitely still get to make my own decisions. I think.
For us, regardless of when we get there, FI does not mean giving up work. It means more time with our kids. It means meaningful work that makes a difference in the world, regardless of whether we get paid well or at all for it. It means living a life that is consistent with our values, and where we do not have to compromise what is second best for our family, just because we need to work for money.
One final point. FI is not an all or nothing concept. Building up your investments gives you flexibility to change paths during the journey. Perhaps that’s switching to a less stressful or part-time job so that you can spend more time with your family. Or it could be taking an extended break with your family to travel the world.
The alternative is living pay check to pay check. Knowing that you’ll be working until you are 65 or beyond just so that you can keep up with the Jones’. Having to unquestionably follow orders at work because you can’t afford to lose the job. Hang on, now THAT sounds like a cult…
On the off-chance that you want to hear a little more to make up your own mind, I’ve set out a few resources below that you may find helpful. There is so much excellent content in this space, that there’s not much point repeating what others can say more eloquently or comprehensively.