When it comes to the basics of what Financial Independence (FI) is and all the different types of FI from full FIRE (Financial Independence Retire Early) to just plain old Financial Independence, I think there is ample resources elsewhere that defines this and explains things such as the Safe withdrawal rate, savings rates, and precisely at what point one becomes FI. I expect most people that frequent this site will likely already understand FI in general so this post will mostly be about what FI means to me personally and why it’s such a big goal of mine to obtain it.
Despite the above, just to clarify. I define FI as simply having enough money from passive income such as a stocks/bond portfolio that will provide a person with all his expenses taken care of in perpetuity without the need to ever work again if one chooses not too.
What FI is not
Being FI is for me not about being rich or well off in the sense of driving a Mercedes Benz, going to the finest restaurants with 6 holidays a year, shopping in New York at Christmas and going to Paris every other weekend. When I am FI, it will look on the surface very ordinary for an outside observer, I will look very average and maybe even below average as my car will remain simple and functional, my wardrobe will consist of mostly items from Sainsbury’s or Tesco. I will go on maybe 1 holiday a year with a few weekends away in the UK at times – I will essentially be very much the same as I am now outwardly except for a few major differences that are harder to see. If I choose not to work or switch to part time, my neighbors might even feel I have fallen on hard times with me not doing the usual 9 to 5 every day. They would not suspect even for a moment, that in actuality I have hundreds of thousands in investments, own my home and with a fair wind will never need to work again for an income. I am glad about this, I don’t want to attract unneeded attention as discussed.
So to summarise for me – FI will give me the ability to live a mostly normal life activity/possession wise without the need to work which in turn will give countless sustained life benefits that are harder to see from an outside observer.
FI is an enabler
For me, FI is not the end goal or life mission as it were. It is simply a goal, a challenging long term goal and on reaching that goal the result – a sustained state of affairs and circumstances that will persist for the rest of your life. It is these enablers and circumstances that make this such a juicy, awesome goal to achieve. It is a goal that once reached will bear fruit that can be enjoyed each and every day. Not only however will this bring benefits at the point it’s reached, the journey towards FI itself provides similar enablers and plenty of fruit to gorge on along the way.
I am now going to discuss the FI enablers that stand out for me at various stages along the journey towards FI.
Enabler 1 – The possibility of FI
I think that before I come to some of the main enablers that stand out for me along the journey is firstly what many might not appreciate as much when creating articles like this which is – the mere awareness of FI and realisation that it is possible to achieve. Knowing that you are on a path towards hopefully never needing to worry about money, or even never even needing to work again as you could retire years before the norm is quite frankly liberating. Knowing you won’t HAVE to work until you’re 70 even if it results in worsening a medical condition you have is priceless.
Enabler 2 – Freedom from Debt
This refers to consumer debt and not student loan (well if on the old system with no real interest) or mortgage debt. This includes things such as credit card debt, bank loans, car finance, clubs and arrears on council tax or electricity payments. When you have these debts, it feels as though you are not in control of all what you earn. You need to pay other people before you can even pay yourself. This can make anyone feel trapped in a dead end job for fear of what will happen if they lose their job even for one month and fall behind on payments. Checking the mail, or answering phone calls can bring worry if debt collectors are on your back. In being debt free, the worry and frustration that can be present can simply melt away and you can put all that extra money into things you value including the pursuit of further FI.
Enabler 3 – Expected Unexpected Outgoings Fund (emergency fund)
Now, I like having an expected unexpected outgoings fund or emergency fund if you want to call it that. This could help pay for things such as a washing machine failure, excessive car mot charge to fix problems or £300 you urgently need to help Aunt Bessie. This fund creates a buffer that gives you extra money just when you need it. This allows for flexibility and the feeling that you are not so close to financial oblivion or the need for debt if you have an unexpected outgoing. This feels goooood. Just to note, I know some prefer credit cards for this but I like cash – £1,000 Expected unexpected outgoings fund (a mouthful indeed).
Enabler 4 – Cash is King Fund
I like having cash, I really like having some cold hard cash. Screw the opportunity cost that many talk about :D. For me, having some cash just gives such a big psychological benefit that I will take any possible hit of what it could have grown too had I invested it. I call it my income assurance plan in case I lost my job or any big expense that might obliterate my expected unexpected outgoings fund. Having it means I don’t need to touch my investments, lose some of my ISA tax wrapped funds or sell at a loss if I need the money during a bear market. It means I can change jobs easily whilst having a year or more to find another job. This makes me feel more free at work to say the right thing at the right time without any fear of me losing my job. I think it also comes from part of me not wanting to have all of my eggs in one basket and on a small level hedging against all of this investment stuff not working out although I do have strong confidence in it. My fund is £10,000.
Enabler 5 – FU Money (when Investments & Cash reach a certain size)
Now this is a thing of beauty. F*** You Money is an evolution of my Cash is King Fund. This is actually my investments themselves and includes the £10k cash as part of this. This puts you in a wonderful place where you know you could last potentially years without work and would always have breathing room in almost all financial emergencies that might pop up. This really starts to give you a sense of freedom and affects many areas of your life for the better. I personally feel so much more relaxed at work because I know I don’t have to worry if I were to lose my job, it would just be more of a hindrance having to look for new work and get that suit dry cleaned again. The more this fund grows the more care free I become and the fact is, it makes me a better more productive worker as a result as I am a lot calmer when at work. I know I won’t have to work for ever, and when I am asked what my 5 year plan is in a annual review, I sometimes joke to myself that I could say well… I won’t have to work ever again should I choose not too in 5 years so I really don’t know! I will define this stage as £50,000+ in investments/cash.
Enabler 6 – Owning your own home or Enough income to pay for Rent
Now I know my choice doesn’t appeal to everyone and there are many that will wax lyrical about how renting is better as you can invest the difference and end up better off with more money in the long run etc and it clearly suits some people’s personality types so it’s not a right or wrong thing. I however am definitely in the owning a home camp, I own my own home now mortgage free and it feels awesome, knowing that this is my home where I am free to do as I please suits me. I have no intention of moving around and travelling the world as my family are close to where I live now and I’m happy here. Not having a large mortgage/rent expense means that I don’t need as much money to reach sustainable FI, I also don’t want to be at the whims of a landlord who could kick me out or tell me I can’t own a cat. This enabler also applies if you can afford your rent in perpetuity – knowing that you will always be able to afford 4 walls and some shelter from the elements is bliss.
Enabler 7 – Base FI
I define base FI as having enough income from passive investments to cover all essential bills and expenses. This means that I will always have a home that’s warm with electricity and the cupboards will always be stocked with food and drinks. My council tax and internet, mobile phone, home insurance, car bills will also be paid without worry. The only expenses not included will be what I will call fun money and discretionary spending (holidays/expensive one off purchases). I could still do so much for free with this wonderful thing called the internet and go out on the cheap etc. I would however want to earn a little more to see and do a few more things that do cost money so I will still aim for Full FI after this has been achieved. Whilst at this stage, work could be done part time or in stints to earn all the extra money required for a single year, I could switch to contracting a few months a year. Work would only ever be needed and felt required for those extra things in life that make it all the more sweeter.
Final Enabler – Full FI
This is the dream target, this is where not only are all your basic needs and expenses met but all those extra big purchases, discretionary money allowance are all accounted for. This is when work truly does become fully optional.
So where am I in all of this? I am on the way to Base FI. The FU money keeps building month to month which feels great. I would love to know where you all are along the FI journey and what your thoughts are on this post :).