Some people are lucky enough to live at the intersection of their passion and what they get paid to do, but most people are not. Most people slug through the week, as their time is someone else’s, and look forward to the weekend to do what they enjoy with their time. If you’ve never seen this Friday vs. Monday video, now is the time…
Most of us have experienced these emotions at some point, and wondered what it would take to be the penguin every day, and to wake up excited about how you’re going to spend YOUR time. That’s what Financial Independence is all about – having the means to do what you love and not worry about your finances; for some that may mean keep doing the same thing they’ve always done, for others it’s focusing more on their passions, hobbies, families, etc.
In Our Financial Rules – #1: Live within your means, I wrote about living within your means and trying to achieve a savings rate of over 33% of our net income. But what’s the point of saving all of this money? Shouldn’t we want to live a remarkable life now and save just enough to retire when we’re 70? The answer is Financial Independence (FI) and having the freedom to live the life you want, now. For us, FI is our financial finish line and the culmination of everything that we are working towards.
What is Financial Independence?
Financial Independence is accumulating enough wealth (financial assets) to live the lifestyle you want without having to work.
When I started my first job 13 years ago, my idea of financial Independence was to save 6% into my 401K to get the employer match and work till I’m 65. Get something from social security, and I should have enough to retire. There was no number, no specific amount, and measure of success along the way. “Retirement” was a distant dream for when I had grandkids.
In 2013, I discovered the world of personal finance and the community of bloggers who loved to write about it. This thing called FIRE, Financial Independence / Retire Early Movement, was everywhere. Most of what I read about FIRE pointed back to the same article: The Shockingly Simple Math Behind Early Retirement by Mr. Money Mustache (or MMM). I was hooked!
To support FIRE, MMM lays out the math behind two important concepts. The Rule of 25 and the 4% Rule. The rule of 25 states that your FI number is roughly 25 times your annual spending. Let’s say you spend $50,000 per year, you need to save 25 times that amount or $1.25M to be financially independent. This assumes that you will continue to spend $50,000 post FIRE increasing with inflation. So how do you know if that is enough money to live off of? The 4% Rule compliments the rule of 25 and states that if you withdraw 4% of your savings annually to live off of, you will not run out of money. In our example, this would mean withdrawing $50,000 each year. The 4% Rule was established through the Trinity Study which was completed by 3 professors at Trinity University and found that “withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods”.
The first time I read this post, my mind was spinning. It completely changed the way I thought about saving for retirement and reasons to accumulate wealth. MMM lives an intentionally frugal lifestyle where he spends $25,000 annually and consequently saved more than 50%-75% of his income to achieve FI in less than ten years. While extreme frugality doesn’t resonate with my wife and I, or the lifestyle we want to live, what struck me was the logic, realistic path to get to FI, and an established goal and guidelines with which to get there.
As a result of that post and continued research, I finally did the math which took shape in what I now refer to as Our Life Spreadsheet. The spreadsheet has evolved in the last four years, but at its core maps out expected monthly Income Statement, Cash Flow and Balance Sheet through 2083 (I figured age 100 was a good stopping point). I plan to dedicate several posts to this spreadsheet, so stay tuned.
How we calculated FI
While I liked the simplicity of the 4% rule, my finance brain was inspired and I wanted to take it to the next level with Our Life Spreadsheet. The spreadsheet allowed us to flex various inputs such as savings rates, income & expenses by month and stock market returns to determine when we would be financially independent. We could also input a possible retirement date and see if we would ever run out of money. With conservative assumptions for market returns, income growth and aggressive (3%+) assumptions for inflation and spending patterns, we found the right scenario for us.
We now have a goal and roadmap to be financially independent by age 46 or 10 years from now. When approaching the SAHD decision, I updated the necessary income and expense line items I called out above and monitored the savings rate. The result moved our target age from 43 to 46.
Does Financial Independence mean you have to stop working?
One of the most common misconceptions about the FIRE movement is that its comprised of a bunch of lazy millennials who don’t want to work. Once you start to learn about the community and the main influencers, you see that very few actually stop working post FI. While most do quit their corporate job, working 9-5, very few stop making money. FI allows you to do what you love. Winston Churchill is quoted as saying “If you find a job you love, you’ll never work again.” Being Financially Independent allows you that freedom to discover what it is that you truly love and pursue it. I find that I am most happy being with my family, learning to be a dad to three little boys, and talking about personal finance with anyone who would listen – thus this blog!
For us, the FIRE movement is much more about the Financial Independence than the Retire Early. While our calculations assume no income post FI, Mrs. Family Worth and I are wired to work and make money. Financial Independence for us will allow freedom with our work. The ability to take 3 months off during the summer and explore the world with our 3 sons. Jumping in an RV and seeing the Grand Canyon shouldn’t be reserved just for those who are 65+.
Being a Stay-at-home Dad is pretty close to FIRE
For me, being a stay-at-home dad is similar to what I hope to achieve after FIRE. Being a SAHD allows us the flexibility and freedom to live the life we truly want. Ultimately what is important to us is spending time with our family, being able to raise our sons, watch them grow, and experience the world with them. While the SAHD decision does require Mrs. FW to work for another 3 years in her corporate job before we reach FIRE, she is one of those people who’s found the intersection between passion and her work and will continue to work regardless. Good thing she gets paid well to do it, too.