Do you constantly worry about credit card debt, that you aren’t putting away enough money for retirement, that you won’t be able to pay the bills, that you could lose your job, that the car might need repairs or that you won’t be able to afford health insurance? Financial stress is common and endemic.
“Success is having to worry about every damn thing in the world, except money”Johnny Cash
What if I told you there was a solution? That there was a way to address money worries, throw off the shackles of debt and eliminate the routine and pressure of a job you don’t like. A way to not only eliminate financial stress, but also have the time and freedom to pursue your passions and ambitions.
Discovering Financial Independence: A moment of disbelief and hope
That Aha! moment when you discover the FIRE (Financial Independence Retire Early) movement for the first time is memorable. For some, it’s stumbling across Mr Money Mustache’s blog, for others it might be the result of asking what is next after following Dave Ramsey’s get out of debt advice. For me it took place in April 2019 when I discovered FIRE and a new sense of optimism about the future.
Put simply, Financial Independence is having enough income to pay your living expenses for the rest of your life, without needing a job or the financial support of others. You can live the life you want without the week-on-week burden of paid work. Money worries no longer exist. You have more time and freedom, and less cares in the world. The Retire Early part of the FIRE acronym is entirely optional.
At first this sounds nice but unobtainable. The concept and idea that people can be FI, and at a relatively young age, sounds unbelievable. In reality, the maths is pretty simple and there are numerous reports and studies validating that building assets 25 times your annual expenses should be enough to live on indefinitely. So how do you get there? Again the answer is disarming in it’s simplicity – spend less than you earn and invest the difference.
I have links in my Resources page to some recommended books and blogs where you can deep dive into the mechanics of financial independence further.
The best analogy I can think of for those who have seen the movie The Matrix, is that discovering FI is like taking the red pill, where you begin to see “reality” differently. What is possible fundamentally changes; what you know as a truisms no longer feel as solid as they once did. I don’t need to work until 65, maybe I don’t need a big house and two cars, perhaps I don’t need the latest gadgets or fashionable clothes. A realisation that outward appearances of wealth don’t mean a person is actually wealthy. The idea that I could spend my time how I like and do what I want without being part of the rat race.
To say that discovering Financial Independence is life-changing sounds like hyperbole, but for many of us it is that light-bulb moment that causes a siesmic shift in financial and lifestyle habits of a lifetime. The dreaming begins……
Executing YOUR Financial Independence plan: It’s personal
The appeal of an alternative way, a path to freedom – one outside the matrix and societal norms – is undoubtedly appealing. It’s also slightly unbelievable at first, until you validate the core fundamentals underpinning the FIRE movement. I admit that the FIRE movement can also sometimes seem a little cultish, with thousands of evangelists running around saying that they have seen the light….and that light is Financial Independence. You’ll also come across the somewhat sensationalist news articles of 28 year olds “retiring”, or the extreme frugality stories which are fascinating, but for me at least, are pretty off-putting and not representative.
Most of us have a more balanced perspective to the pursuit of FI. Think about behaving a bit more like your grandparents might have lived – more thrift, less wrapped up in consumerism, less comfortable with debt and putting money away for a rainy day. It’s common sense that the best way to build sustainable wealth is to spend less than you earn. The FI dream can become reality for anyone.
What methods you employ and how quickly you reach financial independence will depend on you. This is personal finance. Your income level, savings ability, preferences, unique circumstances and risk tolerance will determine your unique path and journey towards FI.
Common approaches include
- Aiming for a savings rate in excess of 40-50%. The higher you make this number, the quicker you will accelerate towards your goal. Most people barely save anything, hence their need to work indefinitely. Your savings rate is the foundation to generate money to invest.
- Lower day to day expenses. Again, this will let you save more, but also means you need less to live on now and in the future. Establish better systems to save and avoid temptation.
- Eliminate debt. This is a chain that needs to be unshackled before you can be free and financially independent
- Optimize the big ticket expenses. To dramatically reduce or eliminate housing costs, some people choose house hacking ideas like downsizing, sharing accommodation, living in a duplex while renting out the other half etc. Some people choose geoarbitrage, relocating to a town or another country with lower living costs.
- Invest any excess funds. This can can take many diverse forms. Some people invest in property, some in individual stocks. For many people the safest and easiest option is Index Funds. JL Collins has an excellent and highly recommended book, The Simple Path to Wealth, which demystifies investing and gives clear, pragmatic advice.
The ways to get to FI are numerous. What is clear though is that you need to save more, spend less and invest the rest. No magic and no gimmicks.
Be prepared to embrace the grind: Sacrifice now for future gain
Depending on your ability to increase your income and maximize your savings rate and investement returns, the FI journey will realistically take years.
Given this, you can’t rely on willpower. You’ll need to develop systems and habits around your finances. Automate savings and investments, remove temptations, reward yourself occcasionally and surround yourself with like-minded people. Be conscious of lifestyle inflation.
Recognize that roadblocks and bumps in the road will be inevitable. Some things in life are out of your control. Consider building an emergency fund and taking out adequate insurance. Don’t let temporary setbacks divert you from the long term goal.
Once you have the systems in place, the FI journey can get pretty boring. You’ve done the research, changed you habits and established positive processes. Apart from the occasional realignment of your spending habits or investing approach, things should be largely on autopilot. The money will build slowly at first but then accelerate. Embrace the grind, stick to the plan and wait. Simple as that.
Also remember that life shouldn’t be put on hold. The pursuit of FI takes too many years to hit the pause button on fun, growth, travel and socializing. Don’t postpone everything, miss unique experiences or ruin relationships. Enjoy the journey. Yes it will be hard, but it doesn’t have to be a jail sentence. As your wealth builds you’ll have more options and choices.
The impossible to lose bet
What if this Financial Independence idea is a big con? I’ll have wasted years of my life pursuing a pipe dream. What if I run out of money and markets crash?
“Everything will be okay in the end. If it’s not okay, it’s not the end.”John Lennon
As noted by Joel in his blog Financial 180, the worse case scenario for people pursuing Financial Independence, is everybody else’s everyday scenario. You can always go back to work. This is the norm for most people. In reality you will probably still be far better off than most and even if you you need to return to the work force you can probably avoid high stress roles and do something, maybe lower paid but more enjoyable instead.
If going back to work is the worst case scenario, isn’t that a bet worth placing? For many of us the answer is increasingly a big YES, especially given that the pursuit of FI encourages a healthier, more sustainable and more intentional lifestyle anyway.
Freedom is attainable
For me the money side of financial independence is a motivator but not the only goal. The ultimate ambition is about freedom and choice. This is attainable with discipline, perseverance and time.
The impact of your small and large decisions will accumulate over time and the aggregation of those marginal gains will eventually enable you to lead and pursue the lifestyle of your dreams without money concerns.
Thanks for reading
Mr Simple Life