I think that is a fairly simple definition of financial independence but there are a lot of different things in there that need de-coupling and explaining...…….
Time and money
Most people work for a living. They get up at 7am on a Monday morning and get ready for work. They go into the office or work online from home and trade hours of their life for money. At the end of each month they get a pay check which compensates them for their work. This is how the world is set up and most people have accepted that they are going to get a job after they have left education and work until they retire (which is 65 and rising in the UK) when they will get their time back to do what they want to do.
Most people have accepted the traditional way of doing things and never challenge it. They don't think about doing things differently to get different results. They sit in jobs they don't like waiting for a retirement where they can actually do what they want when they are free.
In a job you trade your time for money and if you stop giving time then you stop getting a pay check. This is how the world is set up.
The question for most people is will the money last til the end of the month until they get their next pay check. In a recent report* fewer than half the UK households on a low to middle income have any money left at the end of the month! Less than HALF!!
The concept of financial independence has at the root of it decoupling time and money so that even if you don't work you have enough to live each month. If you take some of your monthly income and invest it each month so that it compounds over time to build into a pot of money that produces a return more than your monthly expenditure meaning you don't have to work any more!
It is about investing in assets that generate a return whether you work or not in that month.
Investments and buying assets
Use your money to buy assets not liabilities. Most people have no idea where their money even goes let alone investing it wisely! Do you know where your money goes?
There are so many different ways you can invest your money I wrote a beginners guide to investing in the UK here that will help you get going.
The financial independence community as a whole, broadly recommends investing in Vanguard index funds over the long term. I am going to write an article soon which shows you tactically how to do that and how to get started but that one is coming soon.
The key to this whole thing is to buy investments that compound over time to leave you financially independent where you don't have to keep putting in time to get a return.
Invest your money early on in assets that produce you an income and give you back time.
I have had a realisation over the last 8 months about just how powerful this is. Katie and I have reached financial independence now and she has left her corporate job and we no longer ever have to work again if we don't want to.
I don't think this really hit me until I was doing my annual reflection in Estonia in January and I was writing about what I want to fill my time with. What really occurred to be is that the years of saving and investing have bought me 40 years! I am 40 years old so I probably have another 40 years left (I don't smoke or drink) and I can do anything I want with those 40 years without any ties what so ever.
My saving and investing has bought me 40 years of freedom. Where I can do anything I want to !
A lot of people see financial independence as depriving yourself from having things in the moment to buy freedom later. I see it differently as I have never deprived myself and I have still got to FI!
So this all sounds good but what next...………..
The 4% rule and property
There is a VERY famous article written by Mr Money Mustache called the Shockingly simple math of early retirement. Read it.
The basic concept comes from a report written on long term returns from the stock market called the Trinity Study which examined how long you could survive on your investments in different scenarios.
Here is how it works. You can live on 4% of your investments if invested in the stock market without having to worry (too much) about ever running out of money. So take the lump sum you have invested currently and times it by 4% and that is what you can live on each year without having to worry.
If you had £500,000 saved and invested you could live on £20,000 a year forever without having to work again.
If you have £1,000,000 saved and invested you can live on £40,000 for the rest of your life without having to work again.
The maths is very simple but the act of getting this sum saved and invested over time is the real challenge and one that most people will never achieve. But you are smarter than most people (you must be as you read my blog!) and we can work out how to do this together.
In the PopUp Business School workshops I run when I tell people this maths most of the reactions are that sounds great but I could NEVER save that much money. NEVER!
They haven't yet started to work on increasing their income, reducing their spending and then using the magic power of compounding over time to be able to reach it. I am going to write lots more about these 3 subjects as we go; the purpose of this article is to give the main thinking of what financial independence actually is.
Katie and I have 2 small investment studios that we rent out. The return on these two properties is between 8-9% at the moment and this comes in the form of rent paid to us each month.
Property gives us a slightly higher rate of return but it is less passive. I get calls to repair the tap and the toilet and I have to work for my money.
You can achieve better returns than 4% by investing your time again but then you are back to coupling your time to your income and the purpose is to de-couple the two so you are free to do what ever you want!
Read the Mr Money Mustache article and put your questions below. These are going to inspire me to write more for you as we go!
The whole purpose is to invest your time and energy into making money that will buy you assets and free you from having to work. Freedom is the aim so you are free and have the financial resources to do what ever you want with the time.
There is a short cut. Don't spend anything at all and then you are financially free right now because you don't need any money to live off.
Most of us want a base level of stuff, house, food and a nice coffee every now and again and these take financial recourses to get. Financial independence gives you these financial resources without having to work again.
One of the challenges that always comes is "yeah but I love my job so why do I need Freedom?"
If you are in that position then that is awesome! Congratulations and actually that is the position I am in. I love working at PopUp Business School and don't want to stop but I do want to take a break every now and again and go and do something else. Financial Independence gives me the power to step off the conveyor belt of income needed and go and try other projects. This March I am taking 7 weeks to go to Los Angeles and write a movie which I am going to work to pitch to the movie studios and sell!
FI gives me the option to be able to step off the wages drip feed and go and do other projects without worrying about money at the end!
Even if you love your job now things change, situations arise and I would rather be financially prepared for it than in a mess.
I think financial independence is a worth goal for everyone to work towards to a certain extent even if you don't make it all the way to completely FI. Even if you only saved and invested a small sum each month the feeling of having money compounding in the back ground gives you an incredible sense of freedom.
The next article I write on this subject is going to be on how to get started practically and how to make this happen. I wanted to get as many of the core philosophies of money and investing out before we dive into the practical steps of investing in the UK.
If this stuff sounds remotely interesting then I would suggest doing some more research and learning more about it. What's the downside to a little more knowledge and a few more options in life?
I have started writing all sorts of guides to being FI and you can find them collated on this Financial Independence Page. I will continue to link to all the different articles I write there
Why am I writing this stuff? There are 3 main reasons:
Write me a comment below and let me know what you think (good or bad), share this article with someone who is complaining about their job or if you want to be alerted when I write new articles then sign up to the mailing list below.
Anything I can do to help you be successful just ask.
*The report on income is here
Alan Donegan: PopUp Business School Co-Founder, Entrepreneur, Financially Independent Pizza Lover, Marvel Movie fan and soon to be Script Writer
I built this website to share the life lessons I learn along the way, the cool stories, the adventures, the amazing people and everything I learn from all the stupid mistakes I make! If you want to keep up to date then stick your email in below. I promise to never share your email address or spam you! Alan