Tag: Financial Independence

I’ve been learning about financial independence (“FI”) over the last couple of years.  I was introduced to this terminology via the podcast “Choose FI“.  (I heard about them via another great financial author and podcaster, the “White Coat Investor“, Dr. Jim Dahle.  This FI movement, I think, is in line with how my husband and I naturally and intuitively live – living frugally, spending wisely, and trying to save as much as possible.  This movement, though, highlights the fact that this choice of lifestyle isn’t typical. Indeed, perhaps, we should all be saving more than we do and it should be the natural life path for all of us.   Gone are the days of pensions and company loyalty, and your company of 40 years “taking care of you” upon retirement. Now, there are 401K’s, and independent savings accounts, and the onus is placed on the employee to save properly and to be financially responsible.  But how many of us are really well versed or trained in this idea of saving for the future?

The average savings rate for the United States is indeed a bit paltry, at about 6-9 % from the research I have seen on statistics websites (here and here are some resources tracking savings rates that I came across).   To truly retire “on time” at age 65 (which is an arbitrary number, by the way, picked when Social Security was created and chosen since that was close to the average life expectancy at the time), a savings rate probably double this average (12-20%) is likely more in order.  As Americans are living longer as well, thanks to better healthcare and technology, we likely need even more money in our nest egg to live off of in our “golden years,” and the odds of living past 65 is indeed more likely than 50+ years ago (I’m sure that is something to be thankful for). And if you are a “late starter” like me, with a delay in starting full time employment after over a decade of training and schooling to become a physician, the savings rate should be even higher to “catch up”, i.e. 20-30% or higher.

As I teach my kids about money in the coming years, I hope to teach them about the power of savings and compound interest.  If you can harness the power of time and save early, and embrace delayed gratification, you can really ensure future retirement and future freedom in life, freedom away from employment.  You can’t  dwell too long on your past mistakes, but I sure wish I had saved more when I was younger.

I saw the documentary and read the book, “Playing with FIRE” by Scott Rieckens a couple of months ago, and I think this documentary and book both can be a good introduction to the FIRE (Financially Independent, Retire Early) movement for those without prior knowledge.  For me, a lot was review, but it was nice to see this with my husband who I’ve been discussing this concept with, and highlighting the tenets of Financial Independence, primarily analyzing and controlling spending to be more in line with your values, and to increase your savings rate.  Spend less, save more. For the early retirees highlighted, I believe their savings rates were 50% or often higher. I thought the documentary was a good introduction into how we should save more to buy back our independence. I don’t necessarily plan to “Retire Early” but I do embrace the  concept of Financial Independence as a tool for freedom.  I would like to make work optional, perhaps work part time and set my own hours to allow more time for my family.  In that way, I could continue to work simply for the mental benefit and emotional benefit of helping others, instead of the stress and strain of earning money to payoff debt or pay bills. 

As the “Playing With FIRE” documentary highlights, the idea of financial independence is simply math, and this can drive your retirement if you so choose, be that early retirement or standard “65 and older” retirement. You want to ensure you have enough money in your accounts, or enough income via passive means (e.g. real estate rental income, etc) to ensure you have enough money to live off of. For the early retiree, to ensure you live off of the returns of your investments, you would calculate your needed portfolio (or your “FI number”) as 25x your yearly spending needs.  (I won’t get too technical here and dig too far into the weeds (you can read other fine blog posts or books out there about how this math works). But the value of 4% withdrawal rate stemmed from a well known Trinity Study from 1998, which analyzed several retirement portfolios and their success rate.  It turned out via their analysis that a 4% withdrawal rate succeeded 95% of the time. That is, there would be a 95% chance your money would last your entire needed retirement.  And the 25x multiplier is due to the fact you would divide your annual spending by 4%, so the math is you are taking 1 divided by 4%, which is 25.)

One criticism I have for the documentary is that it seems to make frugal living seem like a chore, and at times highlights a big savings rate as sacrifice, or being deprived. But I don’t necessarily see living frugally as deprivation. I instead try to see my choices in life, money or otherwise, as ways to live my values and to live life intentionally.  If I want to spend on trips, or books, or electronics, in the long run, this can be okay. But on the flip side, I won’t have money for other things I may not value as much, such as having coffee out every day, or clothing, or designer purses. And I am okay with that. You can’t have everything.  I believe that instead of striving to hoard money or wealth, you should instead focus your efforts choosing what you want in life.  And money can be your tool to get that life you want.  Spend wisely in the areas of life that light you up, and make choices NOT to spend in other categories that don’t matter to you.

A budget is a way to ensure you are spending within your means.  In my opinion, it is meant to be a tool for living well, not a tool for suffering and deprivation or highlighting all you have done wrong the month before with your spending habits.  The way I see it, you get so much money to work with in your paycheck. Some of that money can go to what you need to spend on (fixed monthly expenses, such as rent or mortgage, utilities, etc), some can go toward what you want to spend on (what you value, ideally, but are highly variable from person to person, such as hobbies or entertainment), and some should go to savings, either for cash flow (e.g. emergency fund, or for short term funds needed in the next few months to years for planned purchases, or for long term savings, such as investing for retirement).  The set expenses need to be covered, such as mortgage and utilities, and these are not very negotiable for the most part. (You can of course analyze these fixed expenses from time to time and shop around, for example, on rates for your insurance.  But for the most part, there is going to be a need to pay something for these needs each month.)  What is more exciting for me in terms of spending plans and budgeting is the variable part of your spending.  The variable spending category NOT have to follow a cookie cutter formula placed on a website. I.e. you do NOT have to spend X% on entertainment, and/or Y% on food. You can adjust these spending amounts as you see fit, and this can be a moving target as well. Each month does NOT need to follow the same pattern.  You could push to be more frugal in one area to free up funds to go nuts in another area you really want to spend in.  If one month you want to spend more on travel or vacation or going to restaurants, go for it. But realize that you won’t have extra leftover to spend on clothing, or electronics, or whatever other variable/luxury item you desire. (Aren’t a lot of the things we buy these days luxuries?)

 

I see financial independence as a gateway or tool toward  my own time independence.  I would love to have more control over my day to day life. I want to have autonomy and power over how my day is set up.  If every night could be like a Friday night, or every day like a Saturday in terms of my mood, that would be awesome!  No dread, nothing to fear, just fun and activities that I can pick.  If I want to work, I will do so. If I want time for a prolonged vacation, or an impromptu trip to a park with my family, I can do so.  Time is unfortunately a limited resource. We are essentially trading our time at work for money, and in the end, when it comes to retirement (either traditional or early), we are trading that money back for time. 

My plan for the near future is to first pay off my student loan debt. After this, I will then refocus these funds toward aggressive savings toward my goal of financial independence.  I will work on enjoying my journey toward financial independence.  You need to enjoy the ride, and not be too focused on the end destination.  After all, if you fixate too much on the goal, you will miss some of the fun along the way.  I also see this financial independence journey as a way for me to combat burnout.  With this tool, I can start to see my life and my actions as more meaningful.   In my daily work life, sometimes my job can feel like drudgery.  But for me, financial independence has allowed me to better see future freedom, a way I can control my life in the near future. Financial independence will enable me to create a life I want, one where I have control over how my time is spent.  This is truly liberating, exciting, and fills me with incredible hope.