What is Financial Independence anyway?

In writing this blog, the topic of Financial Independence is coming up again and again. So what exactly is it? Here's a brief intro.

In short, Financial Independence (or FI, or FIRE) is the point at which your investments provide enough income for you to live on, and you do not need to rely on a traditional job.

It sounds like an out-of-reach dream but the FI community is about using financial literacy, thinking a bit outside the box, and sharing clever ways to make it easier.

How much would I need to do that?

The rule of thumb I see most is an investment of 25 times your annual expenses (also known as the 4% Rule). It's more of a rule of thumb - and some will prefer to have more (just to be sure).

But for now let's use 25. If annual expenses are $40,000 that would imply an investment target of $1 million.

Woah. That sounds enormous.

Yes it does - at first. But it's simpler than it sounds. And it gets easier as you go.

The two key principles are

to spend less than we earn, and
to save and invest the difference.

Spending less

Obviously spending less means we save more (which means getting to the goal faster).

The bonus is that it also brings the goal closer. For instance if spending is just $30,000 per year, then our goal shrinks to $750,000. Still large, but much closer.

Of course, increasing income is another way to get there faster.

Investing the difference

Some people invest their savings in shares. Some in real estate. These can bring in an income while the original investment usually also increases in value (over the long-term).

Some start by paying off their mortgage as fast as humanly possible, to minimise the expense of interest, and to bring forward the day of having no mortgage expense.

How long does FI take?

One of the more famous FI bloggers has generated this table (which I've simplified below). Savings rate is the percentage of your income that you save. The years of working life assumes you are starting at zero money, so if you already have savings, then your progress could be even quicker.

Here in Australia we have some automatic retirement savings paid by our employer but that still makes for a very long working life. Every 5 or 10% more we can save can free up years of our life to spend as we wish.

The trick is to find the sweet spot that gives you your freedom early but doesn't detract too much from happiness now. It sometimes requires deep awareness of yourself to realise what spending is actually valuable to wellbeing and which spending could be better utilised as a saving for FI.

Benefits along the way

It's not totally about the long-term goal. As soon as you have a chunk of money saved or invested you have more options.

Want to get away from your workplace? You might want to look for work elsewhere. Or you may just want a break for further study, a travel break, or to care for a loved one in a time of need.

It might not be voluntary. It might be you having a bad health issue. Or your employer may decide to let some people go.

Either way, being part way to FI provides the ability to go for period of time without worrying about how to pay next week's bills. Full FI then extends that time indefinitely.

You can imagine why I like this concept

I started this blog about having fewer material possessions, living with more freedom, doing less paid work, and finding more meaning in life.

Clearly the concept of FI slots right into that, like that missing piece in a jigsaw puzzle.

The 'R' word

I mentioned that Financial Independence is sometimes referred to as FIRE (Financially Independent Retire Early). That 'R' word creates a barrier for some. If you think of retirement as playing bingo and watching daytime TV, I can see why the RE could be a turn-off. That's why I usually just say FI.

Of course it's perfectly possible to continue working in your job long after you reach FI. But with the added security you can leave any time you like.

However, if you see your job as the thing that is preventing you from doing all the things you'd really love to do, then perhaps an 'early retirement' is something you'd enjoy.

I think retirement has a negative connotation because we normally retire old. But if we do it young, it might mean starting our own business (without the pressure of needing to be immediately profitable) or starting a charity, or doing volunteer work, or writing a book, or starting another career. There are so many wonderful things to be done in the world that don't come in the form of a paid job.

But wait... there's less!

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