Over the years working in corporate America, I have encountered people who were self-proclaimed “trust fund babies.” They only worked to have something to do or to pave their own path in some way. I had a lot of respect for that, and at the same time, I found myself envious of their position. Why couldn’t I be so lucky? To have a choice of whether or not to work would be a dream.
Whether you feel like you’ll never be in a financial place to ever stop your day job or you’re already on the right path, financial independence is attainable. It is within reach more than you might realize. But, what is financial independence in the first place?
What does it mean to be financially independent?
When a person is financially independent, it means that they can finance living expenses without the need for a job to provide an income to pay living expenses. For financially independent people, it’s all about the ability to have choices. It’s the ability to take that extra time you want with friends or family. That extended trip you have always wanted to do. That extra time you want to spend with your kids while they are young, taking it all in. That time you wanted to take to learn a new language or play the guitar. It’s taking back the time that has been taken up by the need to earn an income to live. It all comes down to freedom to choose because you don’t need to be on anybody’s payroll.
FU Money: What is it and how do you know you hit it?
When you’ve hit your “FU” number (I did not make this up. It’s actually a thing), you have reached the point where (if you want to) you could give your boss your two weeks notice and say whatever you want to say. You know that fantasy you have about what you’d do if you hit the jackpot? For some, I think FU says it all. Doesn’t it?
But, how do you know how much is enough when it comes to FU money? It’s all about your expenses. People, many times led by ill-informed advisors, plan their amount needed according to a percentage of their current income. Some financial advisors tell people to save for 90-100% of their pre-retirement income. In reality, it’s all about understanding your projected expenses and what you need to meet them. If you make $80k/year from a job, it doesn’t mean you need $80k/year for your FU money. If you’re currently putting away say $15k/year in retirement savings and another $5k in regular savings, your FU number might be based more on a needed income of $60k/year. Oh, and since you’d no longer be on a payroll, you can say goodbye to things like social security taxes, so that’s one less expense as well. Now, let’s say you plan to work a job part time (maybe something you’re more passionate about), and you earn $30k/year. Your needed amount to cover expenses becomes more like $30k. Multiplying that number by 25 gives you your FU number. This would be an amount that could safely last you for 30 years or longer. In this case, for the person above, the FU number would be $750k. This does not factor in other income like social security, so the FU amount you need could actually be much smaller
What is FIRE? Hint: It doesn’t have a flame.
Over the past several years, there is a movement that has emerged called FIRE. FIRE stands for Financial Independence Retire Early. There are countless YouTube videos and success stories of individuals who have made it to this point and retired in their 30’s, 40s and early 50s. People are increasing the amount of money they’re saving in order to accelerate retirement from 40 years down to something more like 17. If you haven’t watched the movie Playing with Fire, I recommend watching it. It is very fascinating and motivating. You can stream it on Amazon. You may have recently heard about “the great resignation.” This is a post-pandemic phenomenon occurring where workers have been increasingly handing in their resignations in recent months. There is likely a large number who took this time during COVID to think through things and have prioritized their lives over work, calling it quits. You don’t have to dislike your job to FIRE. Many people just want to explore other interests. And some don’t want to wait until their “golden years” to do so. This is why I’ve written previously about the power of savings. A little sacrifice can go a long way. It can literally shed years off of the amount of time you have to retirement. The key things to do to get to FIRE are destroying your debt, maximizing your savings, investing and lowering your expenses.
FIRE doesn’t need to have the RE.
Just because you reach FI (financial independence) doesn’t mean you need to pull the trigger on retirement. Plenty of people have careers they’re passionate about. I, like anyone else, have my days, but overall, I’m very engaged in my work. Will I want to do what I’m doing with the same intensity until I’m in my 60s? Probably not. The point of financial independence is that you have a choice to stick with what you’re doing, or you can quickly move on to something different. When you do reach FI, your mindset changes (just like those trust fund kids I mentioned earlier). You being in the job you’re in is YOUR choice. It is not because you’re shackled down and need the next paycheck to survive.
Wrapping Things
Financial independence doesn’t need to remain a fantasy. It is attainable with the right discipline to pay down your debts, maximize your savings, invest and lower expenses as much as you can (without deteriorating your quality of life).
Until next time.