I’m currently working toward financial independence. For the last decade or so, I’ve said that one of my life goals is to retire by 50. I don’t remember where this goal came from or why I specifically chose 50. But setting the arbitrary goal forced me to define the actions to get there – and helped me discover financial independence. I’m going to be talking quite a bit about personal finances on this blog (because I love to talk about it). So I thought I should get my thoughts down on: what IS financial independence?
What is Financial Independence?
Financial independence is when your financial state is independent of your job status.
Cool. Blog post over, right? (Ha)
Money is a funny thing. Nobody will tell you what goals you should be setting. Or if the goals you set are a good fit for the lifestyle you want to live. Compound that with uncertainty about retirement (hello, fellow millennials!), whether you’ll be able to own a home, what kids or future medical expenses might cost… and all of a sudden, you’re lost in a sea of variables with no land in sight.
I was in that sea when I discovered the subreddits r/personalfinance. That helped me get my financial life together by wrangling credit cards to help build good credit and working toward paying my student debt off early. Oh, and fixing my Target shopping habit. THEN, I found r/financialindepedence, and the path to retiring at 50 suddenly snapped into focus.
On r/financialindependence, I learned a lot of concepts for managing personal finances. I learned about the 4% rule (more on that later) and how to maximize your tax-deductible savings options. But I also got a more detailed answer to the question, “What is financial independence?”
Financial independence is when you have enough money that you don’t have to work in order to afford your lifestyle.
And there are three key phrases in that definition that you can think about to define what financial independence could look like for you.
…you don’t have to work …
The concept of financial independence often goes hand-in-hand with a goal of retiring early, but that’s not the only end game. Maybe you can’t imagine your life without your job, or maybe retiring seems like an unattainable goal. Either way, it doesn’t mean that working toward financial independence isn’t for you.
In fact, I would argue that decoupling financial independence from retiring early is a worthwhile mental exercise. How many stories have you heard about people that retire and then have NO IDEA WHAT TO DO WITH THEMSELVES? That may seem incomprehensible to you. But after being jobless for just over a year, I know a job can provide a much-needed sense of purpose.
If you take financial independence by itself, what it gives is freedom. Freedom to decide if you want to work at all. If you do want to work, it gives you freedom to be honest at work. If you don’t depend on the job for an income, you will have a newfound confidence to contradict your boss, ask for that raise, or even quit if the job isn’t serving your needs anymore.
Financial independence isn’t about dropping everything to watch all of Netflix. It’s about giving you the freedom to decide where and how you want to work. And it’s worth taking some time to consider what that is.
…afford your lifestyle…
Have you ever thought about your budget independently of your income? Most of us think about our money by starting with how much we make and subtracting from there. And that’s a perfectly serviceable way to build a budget. But the core concept of what financial independence is demands that you think of your expenditures as different from your income.
Mr. Money Mustache, a prominent blogger in the early retirement community, has a post about how spending less leads to retiring early faster – it’s a pretty simple math problem. If you spend less now, you will save a higher percentage of your income. And if your expenditures are lower, you also have a lower savings goal overall because it’s based on what you’re spending.
Don’t get me wrong – I’m not saying that you should move to a shoebox and eat only lentils. But in order to afford your lifestyle without relying on a job, you need to be deliberate in what your lifestyle is. And to me, that means prioritization. I’m not big on fashion or makeup, so I don’t spend a lot on those things. I am, however, a fan of travel, food, and my hobbies, so I spend quite a bit of money on those things. But choosing what I do and don’t spend my money on is what will allow me to afford my lifestyle later in life – because I know what my lifestyle IS.
So what’s your lifestyle? What do you value enough to spend money on? And what do you choose not to spend money on?
Perhaps releasing scarves into the breeze is a priority for you?
…enough money…
So how much is enough? The rule of thumb in the financial independence community is 25 times your annual expenses, so that you can follow the 4% rule and have your savings last forever. So to get that number, add up how much you spent last year and multiply it by 25. (You ARE tracking your spending, right?).
But it’s not that simple. This simple calculation has a lot of assumptions baked into it, namely that your current spending will cover any lifestyle changes you expect for the rest of your life, and that the stock market will reliably return 7% until forever. I’m not going to dive into the latter reason, just trust me when I say that there’s some uncertainty there.
But when it comes to your lifestyle…there’s a lot of uncertainty there, too. For me, I’m currently renting an apartment with my husband in Berlin. I can say definitively that I won’t be living in this apartment forever, especially because our lease has a 4-year cap. But we also would like to get a dog, have children, and buy a house at some point in our future. And though we might be able to pull it off, our current expenditures are unlikely to cover ALL of those life changes.
Health is also a big question mark when you consider financial independence, even living in Germany.
So right now, we don’t know how much money we’re going to try and save. The short answer is, “As much as possible.” The long answer involves some musing on interest rates, withdrawal strategies, and long-term employment strategies.
Just suffice it to say that this is probably the most complicated part of financial independence. But take some time and think about how much you spend now and how that could change in the future.
So…what is financial independence to ME?
The definition of financial independence is to not have to rely on employment income to survive. But for me, financial independence represents a shift in my thinking and a collection of tactics I’m employing to hit my goal of, “retire by 50”.
I’m the kind of person that enjoys playing with numbers and modeling out what the future could look like, so this concept is a good fit for my interests. So let me know if you want to chat about strategies!
But if you’re the kind of person who gets freaked out by money, know that you’re not alone. And if you’re that kind of person but still wants to know more about how you could employ some of the tools in the financial independence toolkit in order to reach a financial goal, PLEASE reach out – I would love to help if I can!
