We’ve all heard the term “Financial Independence” before. I feel very confident you have as well since you’re here right now. It has a fantastic ring to it right? Well, it has a fantastic meaning as well
We can define financial independence as being financially independent of any outside source of income such as a paycheck that comes from a job you don’t want to do or assistance from family. The aspect of “want to do” is important. I would guess that most of us, myself included, do a job on a daily basis that we don’t really enjoy doing. This is almost certainly because the jobs that aren’t enjoyable tend to pay a lot, and money is sorta necessary.
The old-school way of thinking of this is to save a hunk of money in investments big enough to live off of. You may have heard of the 4% rule, which says that you can live off of 4% of your investments annually without diminishing it. This is based on the assumption that your investments grow enough to account for both your withdrawal and inflation.
Financial independence doesn’t have to mean you have a pile of cash though. Let’s say your investments can fund 50% of your expenses. At this point, your income only needs to generate 50% as much as before. For example, you could quit the $100,000 / year office job, and move to a $50,000 / year teaching job helping people. Or, say start blogging… The world is your oyster when you drastically reduce how much you need to be making to survive.
What Does Financial Independence Look Like for You?
Financial independence looks different for everyone. Not only because different people have drastically different living expenses. But some people may want to continue working on a passion, while others may want to travel 24/7.
To develop a better map for yourself, consider these few points:
- Do I want to work at all?
- If yes, how many hours a week?
- What are my living expenses?
- Add up your monthly housing, food, medicine, travel, transportation, and discretionary costs. Multiply this by 12 for the annual cost. Then I recommend multiplying this by 1.5 to get a healthy cushion. This is the total cost of your annual expenses.
- When would I want to become financially independent?
- Don’t say right now. I know you were thinking it. I agree though.
- What would change about your life?
These would be my answers to these questions:
- Yes. I know that I would get bored as I need to have skills to work on to feel fulfilled.
- Rent: $1300, Food: $400, Medical: $100, Travel: $100, Transportation: $100, Discretionary: $400, Total: $2400 x 12 x 1.5 = $43,200
- 15 years. I would be 39, young enough to still enjoy traveling and physical activities.
- I would be focusing on what I want to do and working max 20 hours/week remotely to focus on periodic travel time and spending time with family.
So for me this helps solidify a few things about my path to financial independence:
- I don’t need to have a huge stack of money to achieve my goal, as I will still be working in some capacity. Though possibly for less doing something I enjoy.
- After taxes, I need to have a combined income of $41,400 between my income and investments.
- I want to reach this earlier than most, so I need to focus on saving and investing more than most.
- I need to build work flexibility into whatever “job” I end up in to allow for the flexibility I need.
This is of course just my example using my goals. Feel free to go through these questions for yourself and discuss your answers down below in the comments. Or, if you want to discuss your situation a bit more, feel free to contact me at email@example.com
If you are stuck on the “Do I want to work at all?” question, think about a hypothetical scenario. If you were to win $1 billion tomorrow, and never have to worry about money again, what would you do? What would bring joy to your life without the necessity to earn a paycheck from it? If nothing other than relaxing and spending time with family comes to mind, then you may want to have a goal to not work. Virtually any other answer you could give could link to a potential part-time gig. An especially useful way to figure it out is to teach whatever it is you would be doing. Love tennis? Coach it. Cooking? Teach it. Painting? Teach it or sell your paintings. Of course, there are nonteaching-related options, but they generally require more proficiency to succeed professionally in some capacity. Video games? Stream or compete. Tech? Review it. Writing? Blog or publish.
If you want some in-depth calculations using debt to accessible net worth, check out Ben La Fort’s post on financial independence.
Why Become Financially Independent?
It is certainly a lot of work to lead a life where you don’t need a traditional day job. Saving all of the necessary money for investments, and building a side hustle to generate income. So what’s in it for you?
Financially independent people are known for finally pursuing their dreams once they can finally quit the 9-5 they were forced to do. You may decide to paint, play music, or spend 10 hours/week working part-time and spend the rest of your time doing what you want. Financial independence makes previously unrealistic pursuits realistic.
My hope with financial independence is to enjoy things that most people miss out on until they retire at 65 or later. Things like spending genuine time with family, traveling to see friends whenever they are free, traveling, and more deeply pursuing hobbies like music and cooking. Having been stuck in a 9-5 myself for just over a year now, I already feel the fatigue of the 9-5 grind. I want to escape that kind of situation as soon as possible.
History of Financial Independence
Nowadays, there is the FIRE movement (Financially Independent Retire Early). This is focused on exactly what we have talked about and I have a goal. This general movement is quite recent, founded in 1992
I would venture to guess that your parents weren’t financially independent, nor were their parents. Most people aimed to retire at 65, having just enough saved to live for 30 years without working. Sadly, many people don’t even get to retire then, working well into their 70s.
This speaks to the previous societal pressures to be loyal to your company and focus on your day job, kids, etc. This leads to lower pay, as switching jobs every 1-3 years tends to optimize your pay (along with other benefits). Plus, focusing on your day job and having kids earlier limits your ability to diversify your income. An extra $500 / month from a side hustle makes a massive difference over the long term. That adds up to $274,571.79 assuming an average 10% return from the stock market over 20 years.
It’s also true that financially independent people have existed before, even if not as commonly. Even in today’s society, it is considered out of the ordinary to be financially independent.
How to Achieve Financial Independence
There is no straight answer to this question. But now that we’ve set up the foundation of what financial independence is, I guess it’s time to start carving out our path there. Keep in mind those questions we answered before as those will be important.
There are a few primary options here depending on your current situation:
- Lean FIRE
- Achieve financial independence by cutting down your expenses as much as possible
- Fat FIRE
- Financial independence where you still spend a lot of money to live a decently luxurious lifestyle
- Barista FIRE
- Become financially independent while using a side job, such as a barista, as supplementary income
If your goal is Lean FIRE, you may need to focus on reducing your expenses. Those figures you got for your living expenses, may need to reduce if they are greater than a low-end salary in your area. If you want some tips on saving money and what to do with those savings in my previous post on Building Wealth in Just 3 Steps.
If you want to show us all up and achieve Fat FIRE, you’re gonna need to be very disciplined. Or, earn a ton of money. If you want to achieve FIRE while sipping cocktails on beaches all across the world, you’re gonna need to combine the saving from the above step with additional income. This additional income would most likely be a side hustle or business of some sort. Preferably something with a high-income ceiling. Be prepared to work overtime for your Fat FIRE dream.
Finally, and arguably the most realistic, Barista FIRE allows more flexibility. You don’t need to trim your expenses to zero like Lean FIRE, and you don’t necessarily need to maximize your income as much as Fat FIRE. You can focus on getting to a point where your investments cover nearly all of your expenses. The rest can be covered by a $20,000 / year part-time job. If this job is remote, even better. Take your FIRE vacations while checking into work for a few hours a week. If this sounds ideal to you, the 4-Hour Workweek may be a fantastic book for you.
When attempting to achieve any goal in life, it is always useful to develop a roadmap of sorts. Think of them as bowling bumpers, gently nudging you back on your desired path. If you hope to achieve Fat FIRE, but stick to a low-paying job, your guideline will nudge you towards a higher-paying job or a side hustle.
To get more information on steps to financial freedom, read this post.
Tangible Next Step
Ok, all of this 10,000-foot thinking is great, but what use is it if you don’t know what you need to do now? This sort of depends on where you currently need to improve. I have a post going over the 3 Steps to Building Wealth. This will definitely give you a good overview.
In relation to building towards financial independence specifically, the next step I think is most useful for anyone is starting a side hustle. Now I do not mean “hustle” in the traditional sense. I do not mean grinding all day every day to maximize every second of your life. I just mean spending an extra hour or two a day towards something that can earn some extra money. Preferably this can even be something you would like to end up doing during FIRE.
A side hustle of any kind will help you achieve any goal from Lean FIRE to Fat FIRE. The extra income will help get you there faster, build a personal brand of sorts, and diversify your income. I would also recommend this side hustle be virtual. Of course, do what works best for you, but a remote side hustle means you can do it anywhere anytime. A spare few hours on the weekend or even dead time during your 9-5 work-at-home job? Put that time into a side hustle and see it grow over time.
For more information on achieving financial freedom, read this post.
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