For some reason I always find myself wanting to start off articles or speeches with a disclaimer, so here’s a quick one, since I can’t help myself: This is an article I’ve meant to write for a while, but have mainly held off because most of my readers are already familiar with the topic. Nevertheless, I think it’s foundational for this blog and worth exploring. FI enthusiasts may not find anything new and exciting, though. So read on, or don’t, as you please.
What’s Financial Independence?
Financial Independence or FI, as we like to call it (because ain’t nobody got time for all those syllables), is a topic that I’m pretty crazy about. In fact, despite it taking me some 7 months to actually define it here, FI is the reason this website exists in the first place. So let’s start with a quick, general definition:
FI is having enough income producing assets to allow you to live off them indefinitely.
Okay, let’s break that down…
I use the phrase “income producing assets” because there’s no one-size-fits-all path to FI. For me, it’ll probably be mainly owning stocks. For others, it could be real estate or owning some sort of business. Generally, being FI would mean the income is produced largely without any effort on your behalf (as in the case of dividends received from stocks you own), but opinions differ on this and I’m not too interested in having the debate…
Then, I use the phrase “live off them indefinitely” because there’s some disagreement there as well. Essentially, this means that the amount you spend in a year (expenses) can be matched or exceeded by what your assets are producing (income).
When it comes to rental properties, for example, this would mean your rental profits exceed your cost of living each year.
With stocks, the most common understanding is the 4% rule of thumb. This suggests you can take out 4% of an investment portfolio each year to live off of without running out. Put another way, you’d need 25 times your annual expenses in investments to be FI and live off those investments for the rest of your life.
This is because in the long term the investment value is going to increase by enough to offset the amount that you’re selling to live off of. There’s a whole lot more detail I could go into, but other people have done a better job than I have of that and I’m really trying my darnedest to not be overly verbose.
Why am I all about it?
Suffice it to say, being FI is a pretty magical situation because it removes all of the regular worries about money that plague our society.
You’ll always be able to cover your cost of living (as long as you don’t let your expenses climb too much) and can go on to worry about more important things, like happiness and your purpose in life. In fact, since your money is taken care of, all employment becomes totally optional and you can work on only the things that you find meaningful, even if they pay little or nothing.
Being FI is all about freedom. Once you’ve taken care of that pesky problem of paying for stuff, your life becomes immensely more free. You don’t need to stay in a job you don’t like, you don’t need to sacrifice your time for dollars, and you can go out and do what really matters to you.
I haven’t yet really found the one (or many) thing(s) that I want to do with my time, but I’m fairly certain that a 40+ year career as an office worker is not what I want out of life. I want the freedom to try and fail any number of endeavors without ever worrying about putting food on the table. I want to be able to wake up in the morning and go to sleep at night and spend all of the hours in between in the way that I choose.
“Yeah, but that’s not really possible, right?”
“Quit dreaming, Aardvark,” you might say. “That sort of life is only for people that were born rich or win the lottery or something.”
I can understand the skepticism. The whole thing sounds pretty preposterous, especially in light of how everyone we know and hear about lives their lives. If you look around at most of society, it’s easy to assume that life is a slog from one paycheck to the next and sometimes you get to take a vacation for a week.
Fortunately, becoming FI is actually just a matter of math, and math is everyone’s friend. There’s really no chance of me explaining this any better than in this classic post by Mr. Money Mustache, so please go check it out. He explains how the time it takes to reach FI (and retire early if you choose) is almost entirely just a factor of your savings rate. The higher the portion of your income you save, the sooner you’ll get there.
This is why the idea seems so crazy- The vast majority of Americans/Westerners save 10% or less of their income. This means they won’t be FI for many decades. I’m also not trying to make light of the people here that are really struggling, such as those below the poverty line. Instead, I’m talking about the hundreds of millions of other adults that could reach FI within a decade or two if they made adjustments to their spending. The people making plenty of money, but also spending all of it.
While it may not seem like it, there are actually lots of people pursuing FI… they just happen to still be in the minority on a societal scale.
- Check out the Rockstar directory for hundreds of people writing about personal finance, many of whom are actively pursuing FI.
- The Choose FI Facebook Group, currently with over 10,000 members, is full of people that have latched onto this alternative path.
- Then there are all the people attending events and meetups to mingle and strategize on getting to FI as soon as possible. I talked about one such event in my last article.
“Yeah, but saving money means depriving yourself…”
This is a pretty common refrain and I think it’s because of how uber-consumerist our society is. The incessant messaging (from ads, friends, family, etc.) is that money should be used to buy things and experiences to improve your life. That doesn’t sound unreasonable until you rephrase it: “money buys happiness.” That one is universally agreed upon as false, and yet here we are trying to buy happiness anyway…
While money can’t buy happiness, it can buy independence.
So, the way I look at spending is thus: It’s inevitable that daily life is going to cost money, especially in first world countries with relatively high costs of living. At a minimum, you need somewhere to live, things to eat, ways to get around, and to maintain your health.
That said, capitalism provides a spectrum of options in basically every category of spending from free/crazy cheap all the way to stratospherically expensive. By being strategic in how I pay for these categories, and spending mainly on needs instead of wants, the % of my income spent will drop way down.
Going further, I think a better way to look at this is not as saving vs spending, but as if it’s all spending. Instead of spending almost all of my income on stuff right now, I’m choosing to spend as much as possible on acquiring the little green employees that are going to pay me indefinitely.
When framed this way, every purchase is a choice: Do I want this thing (that will probably eventually break down and end up in a landfill) or do I want more employees so I can be at FI sooner? There are still going to be things that I opt to buy, but often it’s a pretty easy choice one way or the other.
Also, for some great thoughts about why frugality is a superpower, check out The Frugalwoods.
Other answers for “Why FI?”
At this point, you hopefully understand why I’m crazy about the idea of achieving FI. Here are a few other great blog posts and podcast episodes talking about why other people are on this path:
- The FI Introvert talks about how pursuing FI can actually add meaning and satisfaction to your job
- Even doctors can benefit from FI! Physician on FIRE gives his top 5 reasons to achieve FI
- Here’s an Air Force officer’s perspective on why she wants FI and early retirement, and her journey
- Greg is focused not just on his own finances, but on spreading financial literacy throughout Australia and the world.
- Brad and Jonathan host a foundational podcast episode on “The Why of FI”
- Joel tells how a car accident awakened him and his wife to the value of FI
- The Mad FIentist tells the story of his journey
- The first Countdown to FI podcast episode explains their situation
- Jason shares how an unexpected layoff helped him realize that FI would reduce stress and increase happiness
I could go on and on with this list (and please let me know if you have a link to add) but I’ll stop it here in the hopes that maybe you’ll actually give them all a look or listen.
While the concepts of Financial Independence and Early Retirement still may not be mainstream, they’re definitely spreading more rapidly every year (there’s even going to be a documentary!). I truly believe that it’s a path that can benefit millions and help them live more intentional lives, spending their time on what they value the most.