Financial Independence

see the Financial Independence & Investing Series of articles Here

Financial independence is something many of us dream about from the first day we start working. I should say at the outset that I love work. Many people do. It can be very rewarding and enjoyable, especially if you’re able to find a career where you can contribute your best talents, grow both personally and professionally and get compensated for it.

Striving for financial independence doesn’t have to mean you hate your job or working in general. It means you want to have the freedom to do the kind of work that interests you, not because you need the money. You won’t be tempted or forced to take a high-paying job just for the money.

This is lovingly referred to as having “F-you money.” I’ve found that having other employment options and money in the bank makes me a much better employee, business partner or entrepreneur. Why? Because I can focus on other things besides money. Not having money makes us myopic. That’s all we can see until we’re able to reach a level where we aren’t clawing at survival. Like drowning in the ocean and all we look for is a life raft.

At a time when only 39% have enough in their savings accounts to cover a $1,000 emergency, it’s obvious there’s something wrong with how our society treats money.¹.

If you enjoy your work so much you never want to stop, that’s great! My dad loves being an attorney and works full-time and he’s in his 80’s. My grandpa did the same thing. So if you’re like that, the idea of being financial independent should still be appealing because it’s about freedom.

He has the freedom to take time off any time he’d like. He never misses a soccer game or ballet recital of any of his kids or grand kids. We might say that kind of freedom is priceless, but you can actually put a price on it (more on that below).

The FIRe Movement

In recent years a new movement has grown up around the idea that those who are willing to plan and sacrifice don’t need to wait until their 60’s to retire. Many in this movement have retired in their late 20’s and 30’s.  It’s called the FIRE movement.

FIRE stands for Financial Independence / Retire Early. Early retirement doesn’t mean you work hard for years so you can sit on a beach and stare at the ocean as soon as possible. Just like financial independence, it mean you give yourself options to do what you want.

It also doesn’t mean you live on cat food in a van down by the river. The naysayers (and there are a lot) see the movement as being all about frugality. Living on nothing so you can “retire” and continue to live on nothing for the rest of your life. That is an incorrect view of early retirement and financial independence.

These people don’t buy what’s being sold to all of us. That is, that we need to get student loans, go to college, get a job, buy a house and spend lots of money to buy things that will make us happy and impress our neighbors. Every time we get a raise, we spend more. When we have some money saved up, we move up to a bigger house. We’re taught to stay on this treadmill until we’re “allowed” to get off at 65, which is the magical retirement age.

Screw that!

We buy things we don't need with money we don't have to impress people we don't like. - Dave Ramsey (quote originated with Walter Slezak) Click To Tweet

Why you should strive for financial independence

If it’s not obvious why you should strive to be financially independent, let me illustrate with a story from early in my career. I graduated with an Honors B.S. in Finance. Like a lot in the finance field, I wanted to work on Wall Street. It took me a year to land a job, but I finally did. They are very competitive. It didn’t take long to find out it’s a brutal world. Long hours of grunt work for very little pay (at least in the first few years).

I worked at the largest European investment bank at their New York office. It was interesting work, but I soon found that I didn’t want to be there the rest of my career. If you can tolerate the long, thankless hours long enough you’ll gradually get promoted. As one Managing Director put it:

Put in your 80-90 hour weeks and after 10 years you'll be making millions a year, but have an ex-wife who hates you and kids who don't know you. Click To Tweet

Does that sound like the kind of career you want? I had no life. I left the house at 6 or 7am, worked all day and got back at 8pm. That was a normal day. If anyone in the office left before 5pm, other office workers would (kindof) joke and ask them, “so you’re working a half day today?”

I wanted out

One particular day it all became clear to me what working in that environment meant for my freedom. I had been a fan of David Letterman since Jr. High. I had been watching him for over 20 years. Since I was living in New York City, I thought it’d be a lot of fun to go to a live taping. The problem was, at the time he was hugely popular so there was a 9 month waiting list to see his show. I put my name on the list and waited. A long time.

My time finally came. I was notified by the show that I could come see it in 2 weeks from Thursday at 5pm. The wait was over! I was going to see the set of the show I had been watching on TV for 20 years. It was also a really fun date to take my girlfriend on.

There was only one problem. I’d have to leave work at 4pm! Or what in the normal world is considered leaving work an hour early.

The next morning I asked my boss for the permission to leave work at 4 pm. I asked 2 weeks in advance. I thought it was a reasonable request. My boss said “no.” He needed me for the vital busy work I was doing for the company. After all, the multi-billion dollar global investment banking powerhouse was paying me $30,000 a year!² I had to earn it.

I had to beg my boss to take off just 1 hour early! I had to tell him how I’d been watching the show for so long, explain what it meant to me. Finally, he relented as long as I came in early to make up for it.

It was demeaning. Some F-you money would have come in handy that day!

Your Why

From then on I had a “why.” A reason to drive me. I wanted out of that life, whether it was in New York City or anywhere else. I wanted to be like my dad and never have to miss a kids’ soccer game because my boss wouldn’t let me leave.

All I needed were the steps.

Let’s talk about what you need to become financially independent. If you’re not there yet or not on the path, I hope this prompts you to makes some lists and spreadsheets and get yourself on a plan to get there in the next 10 years.

Financial Independence within 10 years

Being financially independent means having enough money that you don’t have to work unless you want to. It comes down to having money invested so you can live off the interest for the rest of your life. So how is that done?

Pay off debts

This is step #0 because you can’t do anything unless you get rid of debt.  Debt is an emergency! I don’t want you to formulate a 10 year plan to gradually pay off your debt by foregoing your morning Starbucks. As long as you have any debt (with the exception of your mortgage), you’re going to have unnecessary drag.

Attack it with all you’ve got and get rid of as soon as possible. In no less that 2 years.

The best way to eliminate your debt is using what Dave Ramsey refers to as the debt snowball.

It took me nearly 2 years to pay all of my debt, which included a student loan, money borrowed from family and friends (the worst!), a credit card, medical bills. You name it. I had a bit of it. If I have 2 degrees in Finance, how did I end up with debt?

It’s my fault. I listened to the gurus and society that said debt can be good. They said you need to build your credit. You can grow your business faster by borrowing money. Or you can get a student loan for your MBA.

I never wasted money on a nice car or fancy stuff to fill my house. You may say I was penny wise and pound foolish. Taking advice from mentors, I borrowed big to fund businesses, which didn’t always pan out.

Now that I’m out of debt entirely, I will never go back! I feel much more free knowing I don’t owe anyone.

Debt should be treated like an emergency, so a casual plan to pay off debt over the next decade isn’t going to get you anywhere.

Savings rate

Once your debt is taken care of, not only can you breathe easier knowing you don’t owe anyone anything, you can start to build wealth. Start with your savings rate. The financial media advises that you save 10% of your income. ³What a joke. At that rate it’ll take about 50  years to retire on $1 Million. So you’ll be good to go in your 70’s, at the soonest. You may earn more or start earlier enough to speed that up a bit, but the one thing you have control over now is your savings rate.

Those in the FIRE community who have retired early put away 50-75% of their savings every month! That may sound like a lot to do all at once and it is. I suggest working up to it. Increase your savings by 1% each month. More on how to make that easy below.

Investments

A lot of people are scared of investing. Mostly they’re scared because they don’t understand it. They’ve heard horror stories of friends who have “invested” in a new, hot stock and lost it all.  That’s not real investing. That’s gambling.

The truth is you don’t need to be an expert in the stock market to invest your money. There are a few principles that you should must follow:

1. Pay yourself first
2. Do it every pay check
3. Never stop

Put as much money as you can, a set amount every time you get paid, into a low fee investment fund that you can’t easily access. Have it taken out before it even hits your bank account, if possible, using direct deposit. If you can’t do that through an employee, have it auto-drafted from your bank account the day after you get paid.

The issue is most of us have is we don’t prioritize ourselves and our financial future first. We pay all our bills and spend on the necessities (and the not necessaries) and then if we have any money left over, we put that in savings. The problem is, at the end of the month we usually don’t have anything left.

Paying yourself first is an easy way to stick to a budget and ensure it gets done. You will adjust your lifestyle based on what’s in your bank account, so put less in your bank account. As I said above, do it gradually to give yourself time to adjust.

Extra money

Anything extra you can put in the investment account can contribute to toward the 50% – 75% you’re shooting for. A side job, an online company, baby sitting, dog walking, whatever. Side money all goes into your investment account toward your future freedom. The more you put in there, the faster that day comes.

Time

The sooner you start, the better off you’ll be. Einstein allegedly said, ““Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

Compound interest needs time to compound, so starting as soon as possible (like today), will give you more time to compound.  What if you’re not 20 anymore? To that I refer you to this famous Chinese proverb:

The best time to plant a tree was 20 years ago. The second best time is now. Click To Tweet

Living on the 4% rule

What should your savings target be? The general rule is to save enough so you can live off 4% of the investments. In other words, 25 times your annual income. So if you make $50,000 now and would like to live on the same amount after retirement, you should accumulate $1,250,000. The 4% figure is a conservative number that’s been backtested and has been found to hold up in nearly every situation, except instances when a country went to war and lost.⁴,⁵ If you lived in Japan or Germany and retired in 1945, your withdrawal rate could only be around 1%, but for us 4% is a good rule.

Don’t get discouraged

If spending the next 10-15 years saving and investing sounds daunting and impossible, think of all the times you wanted to do something like go to see David Letterman or your kid’s soccer game and you couldn’t because you didn’t have the financial independence to control your own calendar. Use that to motivate you to take action today and start down the road to building wealth that will give you true freedom.

What are your goals? What are you struggling with or what has worked well for you?  Please comment below.

Note to non-U.S. readers:  the numbers quoted above are all relative to your economy. The average salary in the U.S. is a bit over $50,000, so I used that to make calculations. If you live in an economy with a higher or lower average salary, you’ll need to adjust. However, keep in mind that the cost of living will be different as well. If the average salary in your country is much less, then the cost of living is likely to be much less as well, so the 4% rule, savings rates and other guidelines generally hold up, although you should adjust as you see fit for your situation.

The Financial Independence and Investing Series

The debt albatross
Investing for beginners
There’s only one Warren Buffett (and it ain’t you) – why it’s difficult for private investors to make money.
Investment advice from Warren Buffett
What to do when the stock market plunges
The 4% rule and other magic numbers to never run out of money
5 Common purchases making you poor
The employee every business owner needs now
Should you use a financial planner?
VTSAX conquers all. The case for investing in low-cost index funds
Death and Taxes: Not so certain anymore
How much money is enough to be happy?
Make your spouse rich when you die
We are rich. We just don’t believe it
20 Ideas to Earn Extra Money Fast
How to retire early with no money
Where to live for under $1,000 monthly

Incomes that are tax free

Footnotes