Financial Independence
As the Wu Tang Clan once said, “Cash rules everything around me.” This statement is and forever will be true, not just for you and I, but for the world at large. I assume that since you’ve located this blog it means you have come to terms with the reality that money is inevitable. It is undeniable that there are small groups of people around the world that operate without the need for fiat currency, but neither you nor I are on the path to joining their ranks. But that doesn’t mean we can’t free ourselves from the bondage of money and work. And this idea is referred to as “financial independence.”
Connotations
When I mention financial independence (FI) to friends and family, I get mixed reactions. Most people have lavish thoughts of living on yachts for the winter time and vacationing long-term in Cabo for the rest. But what most people don’t understand is that FI is not only a very realistic and reachable goal, but that they may not need to adjust their lifestyles too horribly to achieve it.
Our Definition
“Financial independence is the status of having enough income or wealth sufficient to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others.” – Wikipedia
Being financially independent just means that you’ve reached a place financially where your passive income can cover your living expenses. The amount of money it takes to actually achieve this depends on how much your investments return and how you spend your money. A survey done by Forbes showed that the average American believed they would be financially secure with around $500,000.
And this number could work for you. It is said that if you want to be considered “independently wealthy” you need to have 25x your yearly budget in the bank. This number also works for FI.
Passive Income
Passive income is money that you make without actively working. It’s money you get from tenants, annuities, dividends, and other investments. Passive income is the money that allows you to be truly financially independent. If you invest $500,000 into a vehicle that returns 4% per annum, you can spend $20,000 every single year for the rest of, well… Forever. And never touch your principal balance. And what’s better is that you can achieve even higher returns consistently, using methods I will touch on in a later article. The point here is that if you have some (reasonable) amount of money, you can put it into investments that will pay for your home and food and gas and clothing, and whatever else you plan for too.
How Long Does FI Take?
FI can be achieved by some in 5 years, others in 8-10, others longer. The premise that I urge you to live your life in accordance with is that if you save money each day, each week, and put it in the right investment vehicles, you will get there. Once you start to invest money, you accrue interest. Your money will literally begin to make money for you, which only works to accelerate the process. The two main factors to consider in determining how long it may take you are
- Your expenses.
What is necessary to you? What could you live with/without? What do you buy for personal fulfillment and satisfaction, and what do you buy just because it’s there?
- Your income.
It is always possible to make more money doing the same thing, or to increase your value by learning new skills and gathering experience in your particular field. But if you can narrow down your expenses, you will be able to decide what you can cut out of your life to increase the money you put away. This is the money that leads you towards FI. Obviously, the more you make, the faster you will get there. But there are also people making 3 or 4 times what I make that will never achieve FI, simply because they do not care to evaluate their lives and work towards their goals.
Stay With Me!
This introduction to FI should just serve to wet your whistle. Next time I will show you how to calculate your true expenses, and how much it really costs you to work at your current job. We’ll also explore how to increase your income and decrease the costs associated with your job.