What Exactly is Financial Independence?
Think about a time when you saved up for a big purchase like a computer, gaming system, TV, etc that you really wanted. I'm sure you put some money aside every month, made some financial changes, maybe even cut something back here and there to help. Well, what if I told you that you could purchase your own financial freedom significantly sooner than normal? This freedom provides the opportunity to eliminate the need to trade your time for money to live your life. Would you make changes in your life to save up and purchase this freedom? This is what financial independence is all about.
The average employee works around 35 years prior to a traditional retirement. Imagine cutting that in half, or larger. What would you do with all that extra time? Enjoy time with your family? Start a new business venture? Go on that sweet vacation you haven’t had the chance to? Work your dream job? The options are limitless. The world is your oyster.
I plan to be financially independent by 40. I graduated at 22. If I chose to retire early that would be 18 years in the workforce. Almost exactly half the traditional length of employment. I’ll take it. Now, I don’t plan on living on beach getting a crisp golden tan and sipping on a fruity drink with one of those fancy umbrellas. Granted, I wouldn't be against it. (Blue margaritas are my jam!) I don't think I would necessarily retire but I do plan to pursuing my goal of starting my own real estate investing business. What would you do if you had this opportunity?
How to Reach FI
I, as I’m sure the majority of the population, was raised to get a good education in order to land a sweet job. Save 10% of my income for 35 years. Then retire in my 60s with a retirement account and a new Corvette. I personally don’t want to wait that long if I can help it and I’m not a huge fan of Corvettes.
Now you're probably asking, "ok, well how do I get there?" Yeah, I guess that's pretty important.
From what I’ve learned, there’s two basic ways to achieve FI. The first, and what I will personally focus on, is the below:
Passive Income > Your Living Expenses = Financial Independence!
Boom! Easy peasy. Now get to it.
"Woah, woah, woah. Ok, but what is Passive Income?"
Fair question, thanks for asking. Passive income is income generated with minimal to no effort to earn it. Meaning you essentially make money in your sleep! It's an income stream that requires little work by you. Yes, it will take work to first generate this income but after that the hard part's over. There are many ways to generate passive income. Personally, I plan to obtain passive income through buy and hold real estate. Over the course of this blog, I’ll document my journey in the process of obtaining various properties.
No matter how you plan to obtain passive income, as long as it equals or exceeds your living expenses, you can consider yourself financially independent and retire if you so choose. Peace out, boss!
There are many resources on the interwebs where you can figure out how to generate your own passive income and start your journey to FI alongside me (if you’re not already there or getting there. Check out BiggerPockets.com if you're interested in real estate). My goal is for this blog is to not only document my own journey, but as cliché as it sounds hopefully help at least one person figure out how to do this themselves.
So what about Living Expenses?
Now, passive income isn’t the only thing I will work on during this expedition. As a matter of fact, I believe it is second to living expenses. The lower your living expenses, the less passive income you’re required to generate. This topic requires a bit more elaboration so head on over to my post about expenses and you’ll see what I’ve done and am doing to reduce my living expenses. The main point is the higher your savings the better off you are on this path.
Now for the second method to FI and most popular (and controversial).
The 4% rule
Now if you're not big into the world of real estate, this is for you. The 4% rule is a common rule of thumb for the required net worth at retirement. 4% is what’s considered the safe withdrawal rate. Meaning that if you withdraw 4% of your funds every year they (hypothetically) won’t deplete while you're still kicking. This assumes you place your money into interest earning investments that will continue to grow over time and sustain your nest egg. Typically, the investments of choice are typical retirement funds and low cost index funds that resemble the market. The S&P 500 averaged 11 - 12% annual return over the prior 40 years. (Check that out here. Click advanced and select ignore taxes and fees) That's even with the recession from 2007 - 2009. There's a good chance that 4% will last you through your end of days despite the ups and downs of the market cycle. The 4% equation essentially looks like this:
Living expenses/.04 = Required net worth (FI Number); or
Living expenses x 25 = FI Number
There are a ton of articles and discussion on this topic. I highly recommend reading this post from one of the godfathers of financial independence, Mr. Money Mustache. If you choose to solely invest in stocks and bonds, this is the way for you. To put numbers to this, say you spend on average $40k a year. Your required net worth will need to be $1 million to retire (plus you’re a millionaire!). The higher your living expenses, the more you’ll need in those funds. See how important it is to reduce your expenses and invest?
“You lazy millennials and your smartphones.”
“You don’t want to work and have everything handed to you” yada, yada, yada. Chill grandpa. Achieving FI is actually quite the opposite of lazy. It’s going to take a ton of determination and dedication to reach. To be cliché (again), it’s a marathon and not a sprint.
I know this concept sounds foreign to many people. I was always told “save 10% and comfortably retire at 65.” Nah, I’m good.
Financial Independence didn’t make sense to me when I first started learning about it. It takes a bit to wrap your head around the concept. Especially after how we all were raised. After seeing how it’s affected so many peoples lives I couldn’t ignore it. The days of 30 - 40 years in the workforce at a job we don’t enjoy, dreaming of what we would do if we weren’t at work, are old news. It’s time to start living the life you want and how you want. Not work just to retire at 65 with sore joints and a bad back. I don’t know about you but that does not sound appealing.
Financial independence is only step one in the journey. Once your passive income or net worth meets your FI number (the necessary number to retire), everything after that, as the great Randy Moss said, is “straight cash homie!” Ok maybe don’t go crazy but just imagine the ability to treat yourself without worrying if you’ll have enough money to cover the bills or have to pull out the credit card to cover groceries.
This is what I’m striving for and what I’ll be documenting. I hope you enjoy the ride.
This site will contain information pertaining to how I'm planning on achieving Financial Independence and other nuggets. I suggest starting with the earlier posts where I break down my understanding of the basics of FI. My goal is for you find this site beneficial and we all can retire as millionaires a lot sooner than when society tells us.
Start Here: The Three Phases to the Game of FI