Defining Financial Independence
Imagine this.
You don’t stress about money, and you sometimes don’t even think about it. You have a job you love but really you know you don’t have to work ever again if you don’t want to. Your spouse quit their job last year and volunteers at their favorite charity. This week you only see patients two days but you are working three and a half next week. You took next month off to go on a medical mission trip that you’ve always wanted to go on and to go to the beach with your family. Generally, you have the freedom to do what you want, when you want.
That is Financial Independence
Financial Independence is when you don’t have to depend on anyone for your next dollar. You may work, but only because you want to. You have enough money saved up to support your current lifestyle for the rest of your life. Barring some highly improbable circumstances or a drastic increase in spending, you are independent from any financial constraints.
FIRE
Financial Independence is the “FI” in the acronym FIRE meaning Financial Independence, Retire Early. According to the Wall Street Journal, the FIRE movement grew out of the community around the 1992 book Your Money or Your Life. Proponents of FIRE save as much as they can as early as they can in order to retire early. For most of them, retirement is the goal. There are even sub-communities dedicated to extremely frugal living (LeanFIRE), wealthy living (FatFIRE) and working part time but in a less demanding way (BaristaFIRE).
What FIRE Misses
For many people, a big driver behind the FIRE movement is a dislike for their job. They want to save as much as they can to get away from their career as quickly as possible. They are focused on the “Retire Early” part of the equation. What if that doesn’t apply to you? What if you love your job? What if you want to work until age 65 or older? There are still massive benefits to Financial Independence even if you don’t choose to retire early (or at all!). The beauty of being independent is that you get to keep working if you want to.
Some members of the FIRE movement will make extreme sacrifices in the present in order to reach their goal faster. Some advocate for saving upwards of 60% of annual income. That level of saving often makes it difficult to enjoy life on the way to financial independence. It’s important to remember that life isn’t one big finish line. Don’t get so wrapped up in the goal that you forget about other things that are important to you.
How Much is “Enough?”
Financial Independence looks different to everyone and it largely depends on spending habits. Some people spend $300,000 per year and won’t be able to support that without saving $7.5 Million or more. Some are completely satisfied with a lifestyle that can be supported with as little as $900,000 in savings.
The Path to Financial Independence
While the concept of Financial Independence is fairly simple, all sorts of questions come into play:
How do I integrate other goals?
What kind of timeline can I expect?
I think I’m financially independent, but how do I know?
Will I run out of money?
What am I missing?
How much do I save each month?
What should I invest in?
Will this new car be a set-back?
What about a house?
How much do I actually spend?
Will that change as I age?
Here is the secret to financial independence… 1) earn more, 2) spend less and 3) save more. Most of the time it’s that simple. The discipline to make it happen is the hardest part.
A Word of Caution
Financial Independence or retirement is a financial goal that most people will have. While it is a worthy goal, it’s important to remember that Financial Independence isn’t the only financial goal that matters to most people. Some very worthy or necessary goals can directly interfere with progress towards financial independence. Family vacations or college savings divert cash that could have been saved for financial independence. Buying a new house takes money out of savings completely while at the same time creates a monthly expense. However, an appropriate financial plan will minimize the impact that these other goals have on your path towards financial independence.
Build a Plan.
Foresight Financial Planning is well equipped to help you balance your goal for Financial Independence with other financial goals and priorities. Our goal is to help you own your financial life, both today and in your ideal future.
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