What would you do if money were no object? That’s the existential questions that excites some people and terrifies others. It’s also the question at the core of the concept of FI (financial independence).
So, what is FI?
Being financially independent means having enough money invested to meet all of your living expenses, so that you no longer need to work. You no longer need to trade time for money. You can do whatever you want.
For some, that means retirement. For others (especially those that become financially independent early in life) it can mean a career change. Possibly pursuing a passion or calling that earns less than the previous career. For others it’s volunteering, taking care of loved ones, or being insanely generous with the surplus.
Sounds pretty great, huh?
Even better, it’s really pretty simple. According to the Trinity Study, all you need to do is take your annual living expenses, multiply it by 25* and Voila! You get your FI number.
Here’s an example:
- Say, I need $65,000 a year to meet all my living expenses
- Next, I multiply $65,000 x 25 = $1,625,000.00. That’s my FI number.
- That means, once I have $1,625,000.00 in investments, I can withdraw $65,000 (4% of your FI number) each year and be reasonably sure that it will last the rest of my life!
Ex. The image above shows that if you have 75% of your FI number invested in stocks. You can withdraw 4% of your FI number and still have money left after 50 years ~80% of the time. For more details check out this article from thepoorswiss.com
Whoa….
If you’re like me, the first time I read that was a watershed moment. I thought, “I can totally do that!” It completely demystified the whole idea of saving for “retirement”. In addition to the clarity it brings, there are three things I really like about the concept of FI.
Three Things I Love About FI
- FI gets people thinking about a plan for their money. For the longest time, I had no concrete objective for my savings. And without an objective it’s easy to wander off-track. For example, buying more house than you need, racking up debt, buying new cars (even though the current ones work just fine). That sound familiar? With a clear objective you can start mastering your money, not being mastered by it.
- FI makes you really assess what level of living you can be content with. For example, if you do all the maths and figure out that if you can be FI in 10 years with an annual budget of $65,000.00 but 7 years with an annual budget of $50,000.00, I bet you’ll start looking around for ways to cut $1250.00 a month. Can you be happy with a little less house, driving older cars, fewer dinners out…..no Netflix? This awesome article by Mr. Money Mustache perfectly illustrates how some of these seemingly insignificant expenses can seriously delay your time to FI. I love this aspect of FI because there is just such a strong inertia in our culture telling us that we should have more, that success=more. But that’s not true. You get to choose.
Do you want more stuff or more time. There is a tradeoff.
Poof, you’ve been awakened!
3. FI gets people thinking about what is truly important. Supposing you said, “I want more time!”, What will you do with that time? This question is scary because often, we don’t have a very good answer…..or no answer. If you were suddenly free from work for the rest of your life, what will you fill your days with? Otherwise said, what is the goal of my life?
That got heavy.
But that’s the point. It’s so super easy to get crazy busy with work and family and everything that sometimes we forget to ask the only question that really matters.
Three Things I Do Not Love About FI
Now for the other side of the coin. There are three things about the FI movement that I’m not crazy about. Don’t get me wrong, I am definitely #teamFI. However, please keep the following things in mind as you start your own journey to FI.
- Don’t delay your life until FI. That is to say, don’t put off your happiness, ignore your family and friends, deprive yourself of everyday blessings until you reach FI. If you think to find yourself thinking, “Once I reach FI, I’ll be able to relax and finally enjoy my life.” Heed these words
“Life is a journey not a destination.” – Ralph Waldo Emerson
The parable about the rich old fool is also pretty applicable here.
2. Don’t make attaining FI the main objective of your life. Having a singular focus on reaching FI is fundamentally missing the point. FI is about figuring out what is most important in life and aligning your finances to support your pursuit of those most important things. So, when reaching a financial milestone is what you’re pouring your life out for, you’re mistaking the means for the end. If you’re going to live for money, may I recommend hedonistic materialism as an alternative to scrupulous savings and planning..….it’s way more fun.
3. We are wired to “do”. For those whose objective to shut it down hard. Full-blown, mai tais on the beach, golf every day retired at 40. At some point, you may discover, that people are wired to “do”. We want to work, to contribute, to build, to create, above all for our lives to have significance. I think that if 2020 taught me anything, it’s that there’s only so much “kickin it” I can do. After one month I was sufficiently relaxed. I needed to do something productive. Not because I’m incapable of relaxing, but because I’m capable of doing and I have a deep desire to lead a life that matters. We all do.
Phew, now that’s settled let me clearly state. You should build an FI plan.
First, you should ask yourself, “If money were no object, what would I do?” and once you have an answer, you should create an FI plan that supports you getting there. If you haven’t already built one here is a step-by-step guide, and a tool I built that walks you through the process.
Happy Planning!
