Live Better

Definition of Financial Independence: The ability to work on what you want, when you want, where you want, with who you want.

Fair warning: I am going to try to put dangerous ideas into your head.

Ideas like: You don’t have to be part of the traditional workforce to get by in life.

Ideas like: You’re currently trapped in a form of voluntary servitude that I’d like to help you break out of.

I try to avoid cheesy metaphors and references, but I’ll use one now: There’s a blue-pill red-pill moment here.

You can choose what you already know. That a good education leads to solid employment, and coupled with good performance this can get you far in life. It can provide security of income, a peer group of colleagues and a comforting routine that will carry you through your employable years to a decent retirement.

There’s nothing wrong with that, and I don’t want to criticize it. It’s important I put that right up-front.

But there’s another way of looking at that outcome. An outcome where, let’s face it, you’re dependent on a job that someone else gives you. There are a number of problems with the prevailing model of employment:

  • You generate more value than you keep. This is obvious, if you think about it. The company must be getting something out of the employment contract they signed with you. If they didn’t get more out of your employment than you cost them in salary and benefits, they would have no reason to employ you in the first place. They’re not a charity, and even if they are, you’re not the target of that charity.
  • Your income is constrained by the norms and standards of your industry (which may be generous), and you will forever be comparing yourself to a peer group.
  • Your employment is precarious, determined by your performance, your employer not going bankrupt, the macroeconomic environment not destroying your industry, your company not getting bought by another and nobody in a position of influence taking a dislike to you.
  • At the higher levels of success, your technical and management skills take second place to your political acumen, and the only way to get ahead is to “play the game”.
  • As your income increases, and your quality of life increases, you will in almost every case (exceptions exist) remain dependent on your salary to maintain your lifestyle.
  • When you retire, your quality of life will – usually – take a sudden turn for the worse, as most people are extremely under-invested in their pensions. We think about people who succeed dramatically in their careers, but they are rare in the corporate world, and their disproportionate representation in the press and literature is precisely because they are rare and worthy of study, not because anyone can be like them, but because they are so uncommon.

Even if you have a full-time job that earns you a good income and provides decent promotional prospects going forward, it’s worth avoiding becoming dependent on it for your lifestyle. It’s always worth having a fall-back plan, because in this life, things happen.

Taking Back Control

The situation above exists because by relying on employment to keep the lights on and the health insurance up-to-date, we’ve delegated a number of very important responsibilities to our employers.

Those responsibilities are like passports to life. If you don’t hold them, you can’t really make choices freely. Think of the following challenges as examples!

  • I want to travel for 3 months but I can’t go without my salary and my job is based in my current city.
  • I’ve just discovered I truly love modern art and would like to learn about it and work in it for the next 3 years, but how do I risk my income, which supports my family, just to follow a dream?
  • I’d like to quit my job and try to run my own business, but I can’t be without health insurance and that comes from an employer.
  • I want to move to Japan but my company only hires native Japanese speakers to work there and won’t pay for language training.

These and a million other scenarios are problematic because our livelihood, benefits and stability comes from outside our own sphere of influence. To be truly free, we need to bring these aspects of our lives back under our direct control and take responsibility for them ourselves. You can get permission to do anything you want if you’re your own boss.

Financial Independence – An Alternative

Being financially independent means that you don’t depend on some outside authority for your income or your well-being.

Being financially independent doesn’t mean quitting your job and becoming an entrepreneur (although it could). It means having enough money stored to maintain your lifestyle for the rest of your life, without ever having to worry about making money again.

How much money do you need to be financially independent?

Just how much money is this? That’s a more involved question and you can click the banner above or the link below to go to an explanation of what it takes to be financially independent. The simplest approximation is 25 times your annual expenditures.

How much money do you need to be financially independent?

The Journey

Getting to financial independence is a journey of learning, adjustment, hustling and discipline. It can (and should) also be fun, it can be an adventure, and the growth in your savings is a measurable, motivating and exciting sign of your approaching freedom.

The definition I’m assuming here is the one adopted by the FI community, which is the ability to stop earning an income and not start again, living as you are for the rest of your life without needing to earn money. To do that you need to be able to live off the interest on your capital. Something called the 4% rule (also known as the Safe Withdrawal Rate), says that the investment you would need stored away is 25 times you expected annual living costs. This is a simplistic estimate but for a number of reasons is likely to be fairly accurate. It has been researched by smart people who have dedicated much more time to the problem than you or I ever will.

Getting there requires a number of initiatives that lead to a specific objective : putting into savings a significant proportion of your income for a number of years. The greater the proportion of your income you can put away, the sooner you’ll reach financial independence.

To do this, you focus on a number of areas:

  • Reducing your costs, living more frugally so you spend less money
  • Increasing your income through negotiation with your employer and/or finding ways to earn money on the side (known as side hustles)
  • Investing the money intelligently in a way that mitigates risk and yet earns a decent return

By far the greatest lever is reducing your costs, because it has a double effect: you save more now, but you also assume those costs will stay low going forward, so you need less to live on in the future and you can “retire” earlier.

The Destination (Retirement?)

The movement is sometimes referred to as FIRE,

If you read through my posts, you won’t find too many references to FIRE or retirement because I don’t like the word. It comes with a definition that doesn’t really reflect what I think of as financial independence.

The destination I like to think of is freedom and choice.

Once you are financially independent, the value of this new status is that you no longer need to work to keep the lights on. You know that if you were to choose to, you could stop earning an income and be perfectly fine. The true value of this is the change it brings to the way you think about work and the way you choose how to spend your time. There’s no longer a compromise between needing money and doing something you love. You no longer need to earn money, so if you don’t love what you do, you won’t stay there long.

Sure, if all you care about is golf, you can spend the rest of your life golfing, but that’s not for everyone.

Once you reach the FI threshold, you disengage from the equation that defines all our working lives. The tradeoff between what we want to do and what we have to do to earn a living.

Financially independent people don’t earn a living. They’ve earned a living.

If this journey interests you and you’d like to know more, there’s a whole community out there and I’m just one small facet of it. You can subscribe to my writing on the subject right here: