What Is Financial Independence (FI) & How Can I Achieve It?

Financial Independence Retire Early (FIRE) is a term you may have heard in some articles in the news, especially in recent times. The FIRE movement has gained a lot of popularity over the last few years, especially for people in their 20’s and 30’s. That’s about the age when the excitement of getting that dream job would have subsided and reality kicked in. Its the age when you realise that this is literally like the rat on the spinning wheel and the end is no where in sight. So naturally people of that age look for alternatives and Financial Independence Retire Early (FIRE) is a very real alternative. So what exactly is Financial Independence and how in the world can anyone apart from the super rich achieve it to Retire Early?

We talked a bit about Financial Independence in the previous blog post ‘Is Financial Independence The Enabler Of A Wealthy Life?’ but lets get more into the details of what it is and most importantly how you can become Is Financially Independent. Its essentially not trading time for money, that’s what it comes down to in a nutshell. You are essentially unchained from the financial shackles and can do what you want with you time when you are financially independent. This has to be taken with a grain of salt though of course, like most things in life. Even if you are financially free, you will still need to do something to maintain the thing that gets the money rolling in to maintain your lifestyle.

So if its some sort of investment or a sugar mama or sugar daddy, you will still need to ‘maintain’ that source of income. It wont need all your time on a weekly basis of course, leaving you with a lot more time to do what you want than you would if you had a job. The challenge with financial freedom is that you need to have the source or sources of income going for the rest of your life, so you don’t go from sipping pina coladas (or juice) on a tropical island to having to suddenly start working a 7 to 6 job (lets face it, most jobs are not the old 9 to 5). So it needs to be well thought through, implemented and maintained to be able to sustain in case you decide to live well past 100 years of age.

How Does One Achieve Financial Independence and Freedom!

There are actually several ways to achieve financial freedom. The FIRE movement mainly believes in the following:

• Earn money and save a good chunk of it (30% to even 80%) by living well within your means
• Work out and understand exactly what you spend and need to live on annually
• Save a multiple (usually 25x or 30x) of your annual spend . E.g. if you spend $40,000 a year, save $1,000,000 (which is 25 x $40,000)
• Once you have saved the total amount ($1,000,000 in the example), invest the amount (or invest as you save)
• The assumption is that the investment gives you at least a 5% return after inflation. So its an important assumption to keep in mind
• The idea is to withdraw a % of this investment every year to live off. The figure mainly talked about is 4% as a safe withdrawal rate

The Financial Independence Retire Early (FIRE) movement community are very focused on changing the way we live our lives. The lean is towards being frugal and saving as much money as you can. Naturally this tends to attract people who don’t have too many commitments (i.e. kids) and have the ability to live on little. Their preferred investment vehicle is Index Funds or ETFs, which we will explain later in more detail. But the fundamental philosophy is Earn, Live Frugally, Save & Invest.

Some of us with commitments and baggage may not be able to live the ideal frugal nomadic lifestyle but that does not mean that is the only way to achieve Financial Independence. There are several scenarios and permutations of getting to that magically Financial Freedom. It really does depend on what part of your life journey you are at. Below are some real scenarios and examples. Comment at the bottom of this post on which scenario most reflects your situation.

• Single Young Adult (Teen to 20s)
  • This is the person in their late teens & 20’s who lives a carefree, commitment less life.
  • This person often lives a nomadic dreamy travelling life, on minimal budgets.
  • In this age of the gig economy, this person may be earning money through some sort of digital venture i.e. a website, ecommerce, social media etc
  • Money spent is on the basics and the luxuries are mainly fun activities (drinking, partying, traveling). But of course all within the frugal lifestyle philosophy
• Working Single Adult (late 20’s to mid 30’s)
  • This person has been through all the education and has worked a few years in corporate or similar jobs
  • This person has figured out at some stage of their working life that its all a rat race and the end it close to the end of life
  • This adult is now looking for a better way and wants to escape the tedious corporate job lifestyle but has a degree of commitments that have to be catered for (perhaps a first home or young child)
  • The desire to break free is tempered with the need to provide for commitments, making this person quite frustrated as they are not able to see a better way
  • There are some savings but not enough to live off and quit the day job
• Working Young Couple (late 20’s to 30’s)
  • This couple has been working for a few years and have a level of commitments like rent or mortgage and maybe children
  • They earn decent money but also spend a good amount on commitments and lifestyle
  • They are busy, so don’t have time to really look at their finances, money or investments
• Middle Aged Single Adult (40’s to late 50’s)
  • This person has been working for a decade or two and is generally looking for another way of life
  • May have a decent level of savings or some investments
  • Tired of the grind and looking for a way out
• Middle Aged Couplet (40’s to late 50’s)
  • Likely to have a good level of savings and/or investments
  • Looking to slow down in terms of working life and possibly tired of the job world
  • Has been thinking of retirement but not sure what to do and how to get there
• Older Single Adult or Couple (60+)
  • Seriously working through how to retire and to slow down
  • Likely to have some savings and / or investments
  • Keen to help with kids or grandkids with some sort of legacy
  • Needs to allow for Healthcare costs

All the above scenarios are gross generalisations and all situations will definitely be unique. But it does highlight that Financial Independence will depend on which part of life’s journey you are at and when you need to go. Someone in their early 20’s will have different needs and drivers than someone in their 60’s. The strategy of how to get to Financial Independence will also depend on the situation. Someone in their 60’s will have a more challenging situation to deal with with impending retirement, especially if there has been no thought to finances through life. A 20 year old has the luxury of time to plan and save, with no urgent need to retire (although may have the desire).