What is Financial Independence (FI), and why should I care? I had this question when I first heard about FI. Below is my take on the benefits of Financial Independence.
The first three sections provide an overview of Financial Independence (FI). To skip to the FI benefits, go to the section: ‘Benefits of Financial Independence’.
What is Financial Independence?
Wikipedia says, ‘ Financial independence is the status of having enough income to pay your living expenses for the rest of your life without having to be employed or dependent on others’.
This income typically comes from your assets. For example, you may have a couple of houses that you rent out, and the rent from those houses is enough to cover your living expenses. Or you may have money invested in stocks, and the dividends from those stocks are enough to meet your living expenses.
Financially independent people do not have to work to live. They can work if they want to, but they do not need to work for a living.
Although the philosophy behind FIRE is timeless, the modern version primarily comes from the 1992 book ‘Your Money or Your Life’ by Vicki Robin and Joe Dominguez and the 2010 book ‘Early Retirement Extreme’ by Jacob Lund Fisker.
Financial Independence and Early Retirement
If someone has enough money to meet their needs, they are financially independent, regardless of how much money they have and, more importantly, regardless of age. Someone can be financially independent at 30 or 40 or 50 – age does not matter.
Consider two people – one who is 30 years old and the other who is 50. They both have the same amount of annual expenses: $50,000.
If the 30-year-old has assets that generate $50,000 in annual income, she is financially independent.
On the other hand, if the 50-year-old has assets that produce $40,000 in annual income, she is not financially independent. She still needs to work to get the additional $10,000 needed for her yearly expenses.
Financial independence can enable early retirement, but not all financially independent people retire early.
Getting to Financial Independence / Early Retirement
There are three ways to get to Financial Independence:
- Earning: Earn more money. This can be achieved by increasing your current income (getting a raise) or adding other sources of income (side hustle).
- Saving: Spend less money / Save more. This can be achieved by cutting expenses and living a frugal lifestyle.
- Investing: Invest the savings wisely. This is typically achieved by investing in broad-based, low-cost index funds.
People can choose one or all of these ways to achieve FI. However, I have found that Saving is the most transformative path.
Although FI is necessary for early retirement, it is not sufficient. Especially for FIRE folks, the retirement period can be 60+ years (if someone retires in their 30s). So it is essential to plan carefully for that.
Benefits of Financial Independence
Attaining financial independence is neither easy nor quick (unless someone wins the lottery)! However, once you reach FI, it can lead to some incredible benefits.
Not just that, I have found that many of the benefits of Financial Independence accrue during the journey itself (you don’t even have to wait until you get to FI).
Below are the most transformative benefits of FI based on my experience:
1. Do What You Want (even if it means you want to work)
This is one of the most obvious benefits of financial independence. Since you do not need any more money, you can do whatever you want with your time. You are not tied to a job. Suddenly you have 40 or 50 ‘extra’ hours a week!
You can take the world tour you always wanted to do but never had time for. You can spend time with your friends who constantly complain about not meeting you often enough. You can start the new venture you always wanted to start but were afraid you would not have enough time for. There is no end to the possibilities…
Some people (like the Finer family) may choose to work. That does not mean they are not getting the benefit of FI. In fact, the opposite. Since they are at FI, they can objectively evaluate if they want to continue to work or not. If they still decide to work, that means they like / value their job. And at some point, if the nature of the job changes (restructuring, new boss, new location, etc.) – they can re-evaluate if they still want to continue to work.
2. Be Better Prepared for Life
Life is full of surprises. Sometimes they are good surprises, sometimes not. FI is the best preparation for life’s surprises.
If you are at FI, you can take advantage of the positive surprises. For example, if your friend decides to get married, you can share their joy without having to worry about missing an important office meeting. And it is not just about the big surprises. With FI, you can take advantage of even small surprises. For example, if it is a great day outside, you can go for a walk without feeling guilty about missing work.
FI also helps you deal with some of life’s nasty surprises. For example, if layoffs are happening in your company. Being at FI (or even close to FI) can provide a great deal of buffer in such situations.
Additionally, there are also several low-level stresses always present during work. For example, thinking about the next email, upcoming review, presentation, etc. Although these may not be big events like a layoff, these small stresses accumulate over time. I have seen a marked improvement in my health and well-being due to FI.
3. Long-term Thinking
The road to FI is a long one. My FI journey took about 10 years. What it meant was that I had to do long-term planning. Now that I am at FI, I am looking forward to my early retirement – which could be 40-50 years. Planning for long-time horizons like these is not easy.
But it is helpful because it gives you a good idea of what you want to do in life. You cannot plan for decades without being clear about what you want to do in life.
Life is what happens to us while we are making other plans.
Allen Saunders
FI has helped me have a better relationship with money. Before FI, I wanted to earn money because that is what everyone does! But there is no end to that line of thinking. No matter how much money you have, you can always want more.
After FI, money is not the goal, but a means to a goal. So now, instead of trying to make even more money, I can focus on other things in life.
4. Frugality
This one surprised me. When I started my FI journey, I was unaware that saving would have the most significant impact on my early retirement timeline. Neither did I know that the discipline of saving would lead to other wonderful things in life.
For example, now I am a minimalist. It is not that I do not buy things. The difference is that I only buy things that bring me joy or add value to my life. Before my FI life, I used to have an Amazon box outside my door almost every other day. I am not sure what I used to order, but it was clearly not necessary – no one needs to buy stuff every day. Now, I hardly ever order anything, and I make sure it is something I intend to use when I do.
My lifestyle is now much more sustainable and, more importantly, simpler. This allows me to focus not on stuff but on other, more important things.
Look around. All that clutter used to be money.
The Minimalists
5. No Regrets Life
If you look at the list of regrets that most people have at the end of their life, the common denominator for most things is either time or money. For example, some of the regrets are – focusing too much on the job, not spending enough time with family / friends, not exercising enough, not traveling enough, not taking enough risks in life, etc. The common thread here is either they do not have enough time to spend on things they would like or enough money to do the things they would like.
FI solves for both these aspects: money and time. FI gives you the time to do the things you want to do without having to worry about the money.
In Conclusion
Financial Freedom means taking care of the financial aspects so that you can enjoy your freedom.
The above list is not exhaustive. Even after my FI journey, I still keep learning new things / discovering new FI benefits.
I hope you discover many more on your own FI journey…