Financial Independence: What is it?

Have you ever sat down and thought hard about what the next forty to fifty years of your life will look like? It is an interesting thing to think about-we grow up, graduate high school, some of us decide to go to college while others decide to go straight into the work force-then what? Perhaps something like this comes to mind:

After high school or college, you get the most lucrative job you can manage to land. After that, you settle down somewhere, get married, and start a family. You keep working your job in order to support yourself and your family and you might even start saving a bit for retirement. You work and work until that golden, widely agreed-upon age of sixty-five or so when you can finally retire and enjoy the time you have left on Earth as well as the savings you have accumulated.

Duh. That is what everyone does. It is hard to even think of an alternative to that as it seems that is what every working-class American’s life has looked like for the last 125 years at the least. It may seem the only people whose lives do not look like this are celebrities and incredibly wealthy entrepreneurs-Elon Musk, Jeff Bezos, Bill Gates, etc. This idea of trading time for money has been something that has just been accepted by everyone as the norm. Heck, what is wrong with it anyway?

Well, something about spending 40+ of the best hours of the week, every week for the best 45+ years of my life in a cubicle doing unfulfilling busy work just in order to live a life that everyone else has been telling me I should live, instead of the life I want to live, does not sound all too compelling to me. There has to be another way.

The Alternative? Financial Independence, or FI.

Financial Independence, FI, is the idea/movement/community that has rewritten this narrative for hundreds of thousands-if, not millions of people around the world within the last couple of decades or so.

As an idea, FI can be defined as:

When one’s stream of monthly passive income is equal to or greater than their monthly expenses. Thus, trading time for money is no longer necessary.

As a movement/community, FI is composed of those who are on a quest for a more fulfilling life than what the 9-to-5 grind has to offer.

These are not people who are lazy and do not want to work. Rather, these are people who seek something deeper in life than just their job. Maybe they have dreams of traveling the world while working on a new business idea. Or maybe they want to start living a more generous life in which they are able to contribute their time and resources to founding a nonprofit aimed at the cause nearest to their heart. Regardless, FI is the key to a fuller life-one filled with personal development, mindfulness, and generosity.                                                                                       

At its core, FI can be boiled down to a simple equation:

            FI Number = yearly spending / safe withdrawal rate

This equation calculates your FI Number, the amount of accumulated, invested wealth needed in order to generate the amount you spend in a year, every year. It does this by dividing the amount you spend to fund your lifestyle every year by your safe withdrawal rate (SWR), the percentage of your invested money you would feel comfortable withdrawing from a portfolio of low-cost, broad-based index funds (a conversation for a different blog post).

In these terms, you would become financially independent as soon as you have reached your FI number. Here is an example:

John is a Software Engineer making a take-home salary of $100,000 a year. John lives within his means and decides not to finance a brand-new car or buy the most expensive house he can afford. Because of this, he is able to keep his expenses to around $40,000 a year. John does some reading and learns about the “4 percent rule” which states that 4 percent is a widely accepted conservative SWR. Using this, John determines that he will need to save $1,000,000 in order to become financially independent ($40,000 / .04 = $1,000,000).

$1,000,000 may sound like a scary number, and rightfully so. It seems like it would be difficult for John, or really anyone, to save up that much money. At the rate he is going, it will take him 16.7 years to accumulate $1,000,000 as he is saving $60,000 every year. While that may seem like a long time, consider the life that John’s friend Joe is living. Joe spends all $100,000 of his salary paying off his new Porsche, a brand new 7,000 square foot house, and other meaningless things in order to “keep up with the Joneses.” By making these decisions, Joe has sentenced himself to his 9-5 job until his sixties or seventies where he will be hoping that he saved enough money for retirement.

So how can John reach FI earlier than 17 years from now? This is the beautiful part.

John thinks about the FI equation some more and realizes that there are two major ways John can accelerate his path to FI: income, and expenses. If John could just find a way to either make more money or spend less money, he could drastically change the amount of time it takes to reach FI. John gets to work. After doing a lot of research, he finds that he can make a lateral career jump to a new company and increase his salary to $120,000. Along with this, John drastically reduces his rent bill by half by finding an apartment spacious enough for a roommate and has his good friend move in and agree to split rent. John is also able to cut spending on unnecessary items just by being more conscious about where his money goes. In the end, John is able to live off of just $25,000 a year. Since his yearly expenses have decreased, so has his FI number. John’s new FI number is $625,000 ($25,000 / .04). This, along with his new yearly savings of $95,000 will allow John to become financially independent in under 7 years ($625,000 / $95,000 = 6.58 years).

That’s right! Just by doing some career research and being more conscious about his spending, John went from being 17 years away from FI to just 7! This means that after just 7 years, John will become “work-optional.” John’s lifestyle is no longer dependent on him going to work for 8 hours a day, 5 days a week. Instead, John can do more of what matters to him.

This post is meant solely as an introduction to the idea of FI-a way to get your mind thinking differently about the traditional American Dream and how to revolutionize it. I was not able to fully delve into and explain each aspect of FI completely here. However, stay tuned and check regularly for more as I will be working hard to make sure that BuyingLifeBack.com is a hub for everything financial independence. If you have any questions, please comment them down below and I will be sure to get back to you. Always feel free to send me an email at JGeorge@BuyingLifeBack.com as I’d love to chat.

Lastly, sharing this post with friends and family would both greatly help me out as well as make for a great introduction of the path to a more fulfilling life for your loved ones.

Dream bigger,

Jaden George