It’s been awhile since I’ve written extensively about financial independence so I thought I’d post a quick refresher on what it is, why I’m after it and how I plan to get it.
What is financial independence?
It’s that beautiful moment that we know only vicariously through those who’ve achieved it. It’s the moment when you have enough money to sustain your lifestyle indefinitely. And it’s the moment when you can finally do the work you want for yourself and nobody else. No boss or paycheck to tie you to your desk and the freedom to work from wherever you want.
Why I’m after financial independence.
Financial independence isn’t right for everyone but it’s particularly right for someone like me – someone who would trade a high income, sedentary lifestyle and office politics for the freedom to work, travel and relax on my own time. And most of all, financial independence is right for someone who values family over career.
How I plan to achieve financial independence.
In my view, achieving financial independence is about control. Increase the money coming in (inflow), limit the money going out (outflow) and you have full control over your finances, which in turn leads to financial independence and control over your life.
To increase the inflow of money means to push for a better career and higher income. For me this means looking for a new job every couple of years, at the very least to see what’s out there, and to take on a side hustle or two. It’s easy to grow complacent and think you’ll work somewhere for the long haul. But this can lead to both stagnant income and boredom. Keeping an eye out for new opportunities (and side hustling) can lead to a higher salary and more fulfilling experiences.
In addition to earning income, getting rid of stuff that you no longer need can increase inflow as well. For instance, I sell my old video games, books, toys and computer equipment on Craigslist and Amazon. By doing so, not only do I bring in more money, my old stuff goes to someone who puts them to better use.
To limit the outflow of money means cutting costs. In some ways this is easier than increasing income. For example, I’ve always been an advocate of finding adequate substitutes. Does the store brand cola taste just as good as Coke? Can I watch the same shows on Netflix that I normally watch on cable TV? Does that used Toyota run just as well as a new Mercedes? If the answer is yes then I’ll go with the cheaper option. If the answer is no, then forget it.
I’m also an advocate of cutting out things that I don’t need. For instance, do I really need both a smartphone and a tablet? Is it necessary to have ten pairs of jeans when I’ll only really wear two or three? Do I need an annual gym membership when I already jog outside and have weights at home? You get the idea.
But it doesn’t stop there. Once inflow exceeds outflow, it’s time to invest the difference. It’s only by investing that one can live off of a limited sum of money indefinitely.
How does that work you ask?
Let’s say you’ve saved $500,000 and invested it into an overall stock market index like the S&P 500. Since the S&P 500 has historically returned an average of around 9% a year (and assuming that it will continue to do so) you could expect to get on average $45,000 per year off that investment. That’s $45,000 per year for doing nothing.
If $45,000 is enough to sustain your lifestyle then congrats, you’re financially independent. Go ahead and quit that boring office job and start doing what you enjoy. If it’s not enough then you can raise your target savings until you’ve reached that sweet spot where you’re covered for life.
Of course you don’t have to invest only in the stock market. Investing in real estate would yield a similar result. For example let’s say you have $500,000 saved and pay $1,400 a month for rent. By buying a house for $200,000, you’ll save $16,800 a year in rent payments – an annual return of 8.4%. Invest the remaining $300,000 into the S&P 500 and you’ll get on average $27,000 per year. So your total return is $43,800 ($27,000 + $16,800).
Or you can invest the remaining $300,000 into another house and collect rent payments on it at $25,200 a year ($300,000 x 8.4%). Then your total return becomes $42,000 ($25,200 + $16,800). Of course these numbers are oversimplified and for illustration purposes only, but you get the picture.
Financial independence isn’t for everyone. If you appreciate a steady income, free health insurance and a structured work environment, then full time employment may be for you. If you’d rather have the freedom to do your own thing without worrying about putting food on the table, then financial independence is the way to go.