Aug 7, 2016

What is Financial Independence and How Do I Get It?

What is Financial Independence?

Sounds pretty sexy doesn't it?  I'm sure you'd like to put that on your LinkedIn profile--Financially Independent.

What does that mean though?  Simply put, the early retirement community points to having 25 years worth of expenses saved as the indicator for being financially independent.  So, if I spend 30k/year for my family of 3, and I have 750k saved in index funds... yep, I'm financially independent.  I'll cover the specifics on how this is done in the future, but for now--that's enough.

How Do I Do It?

Well, to focus on the Pareto principle, don't buy too much car and too much house on credit.  Oh, and watch your "eating out" expenses.  These are the biggest culprits I see from my clients, and you would do well to keep a lid in these areas.  I know that seems like someone telling you to "spend less" and doesn't seem like that great of advice, but I truly believe a focus on these areas will put you ahead of 90% of investors.  This will also serve the purpose of "burning the candle at both ends" potentially reducing your annual expenses which will require a smaller "stash" as Mr. Money Mustache would say.

But Why?  What Will I Do All Day?

Most people don't have a hard time buying into the idea of not having to work anymore, but if you're one of the select few that are ultra-motivated, view it instead as Financial Independence, rather than retirement.  This way, you can DO YOUR BEST WORK!  What does that mean for you?  Have you put off being an entrepreneur?  Would you like to spend more time with your kids, or volunteering in non-profits?  Have a desire to learn a new skill like being a home-builder?  Financial Independence allows you to do this?

Example

Yours truly just eclipsed the 600k net worth milestone.  What does this mean?  Am I financially independent yet?

Nope, not quite.

I plan to sell our current home in a high cost of living location, and purchase a new home with cash for around $300k.  This leaves $300k in index funds.  Using the Trinity study, I know I can spend approximately 4% (with several margins of safety) annually, adjusted for inflation, with a relatively high level of certainty I won't run out of money over a 50 year period.  (Rawr, yes, early retirement experts are angry with this statement, but relax, I WILL earn money through part time/entrepreneurial ventures so RELAX)!

With 300k in investments, this provides 12k/year in income.  My family's annual expenses are 30k though, so I need another $450k to be able to claim financial independence.  By my estimates, I should reach that coveted title in about 5 years.

I'll link to a great article by Mr. Money Mustache titled The Shockingly Simple Math Behind Early Retirement which details why "burning the candle at both ends" is such a great strategy for early retirement.

Until next time friends!  If you'd like future posts sent directly to your email inbox, please subscribe by typing your email address into the box on the upper right.  I promise not to spam at all, just posts (probably 2 to 3 a month max).


Tortoise Banker

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