Financial independence; also known as FI. You may or may not have heard this term. It’s become really popular in the personal finance community over the past few years. But what does it mean and why should you care?
What is FI?
Financial independence is the concept of no longer having to work for money. This is not to be confused with not working and having no money. The fact of the matter is that it costs money to live in modern society. How much money is required is completely dependent on your circumstances and lifestyle. When you can afford to pay for all your needs and you are living a lifestyle you are happy with AND you don’t have to work, then you are financially independent. In other words, if you’ve successfully eliminated all your debt and/or you’ve set yourself up with enough passive income to support your lifestyle, then you can consider yourself FI. On the other hand, if you aren’t working and you’re struggling to pay for housing, food, clothing, riddled with debt, or simply not living your best life, then you aren’t FI. You’re just unemployed. Huge difference.
Why is FI such a big deal?
Let’s start with another question. If you already had enough money in the bank to support your current lifestyle, would you keep your same job? Would you choose to wake up early, fight traffic, and deal with the politics of your day job? If you answered yes, then either you’ve got an awesome job or low expectations. Congratulations on the former if that’s the case. However, most of us would answer no. Many don’t know this, but there’s an actual threshold that can be reached where the money you’ve saved, along with what’s being returned from your investments, is enough to cover all of your expenses. At this point, you now have a choice as to whether you want to keep your job. Maybe you want to stop working and spend more time with your family. Maybe you want to work on a passion project. Maybe you love your job and want to stay there full-time. Maybe you love your job, but only want to work part-time. Or maybe you don’t want to work at all! The point is, you now have these choices. So back to the question, why is FI such a big deal? Because FI gives you choice and choice is freedom.
How to Achieve FI
The next question you likely have now is how to achieve FI. First let’s talk about why the vast majority of us aren’t FI. Most people, financially speaking, get stuck in the cycle of what I call correlative earning and spending (or CES). You might also hear this referred to as lifestyle inflation, lifestyle creep, or keeping up with the Jones’. Basically, people earn more so then they tend to spend more. Think about how much money you make now. 10 years ago, you probably thought that if you could make as much money as you make now, you’d be set for life. Well, now you’re here and you’re making that much. Are you set for life? If not, keep reading. Like most of us, as you’ve made more money, you’ve likely upgraded some things in life in the past 10 years. You probably drive a nicer car. You probably have nicer furniture and more expensive clothes. You probably take nicer vacations and have upgraded to premium liquors. Nothing is wrong with treating yourself to things. After all, you’ve earned it, right?
Well, here’s one relatively simple way to reach FI. What if, instead of using that raise or that bonus to upgrade your life immediately, you invested that money in interest bearing retirement and/or brokerage accounts and maintained a similar lifestyle? Then when you get your next raise or bonus, you invest that, too, and continue to live a similar lifestyle. Repeat this cycle until you’ve got 25 times your annual spending saved/invested. And then guess what? You’re financially independent! This is based on the 4% rule, which you can read about here. In summary, it says you’ve reached a point where your investment principle is earning enough interest for you to be able to afford to withdraw up to 4% of your investment annually for the rest of your life. This is just one example path, but the principle is always the same. Save/invest way more than you spend and you’ll eventually reach a point where you no longer need to work. And yes, this can happen a lot earlier than age 65. There are a growing number of 30 and 40-something “retirees”.
Unless you have some type of major cash windfall, financial independence isn’t something that happens overnight. For the vast majority of us, including me, it’s a journey. And like any journey, there isn’t just one way to get there. This blog follows my journey. I talk not only about my successes, but my bumps in the road on my personal journey to FI. My hope is that my story and the stories of others you’ll meet along the way inspire you on your journey.
Also, like other journeys, it’s usually much easier and more enjoyable if you’ve got some good company. I’ll be keeping you updated via this blog and my other social media platforms. I hope you’ll ride shotgun and I’d love it if you’d connect with me and share your thoughts, feedback, and stories.
