You Don't Have To Catch F.I.R.E. To Be Financially Free
The Difference Between Financial Independence and Freedom
Everyone would like to be financially independent. The problem with F.I.R.E (Financial Independence Early Retirement) is it shouldn't be your goal. Our life goals shouldn't be to sit on a beach drinking pina coladas for 40 years. After a few months, they really don't taste that good.
For the average person, financial independence takes an entire working career. For even the most extreme savers, it can take up to 10 years of work. But what about financial freedom? Now that's a goal worth achieving and it's not as hard as you think.
First, you'll have to define what financial freedom is for you. For most, it's having enough money to work how you want to work so you're able to have flexibility in what you can buy so you can live the lifestyle you prefer. Once you define it, it's time to come up with a plan to get there and set some goals.
Financial Independence is when you could stop working forever and continue to pay for your desired lifestyle.
Financial Freedom is the ability to choose how you want to work and when you want to work without stressing about how you'll pay your next bill.
Financial freedom is having the ability to do what you want with your money, but you may still have to work. That's okay because ideally, you're doing what you love. This is an important distinction because many people think they need to be fully financially independent or catching "F.I.R.E." to be free. That is an awesome goal, but it's not necessary to reap some really awesome lifestyle changes.
By working towards financial freedom you can focus on building a lifestyle you want and still give back to society through your work. There will always be people that figure out how to retire by 30 or 40 and travel across the world, but that lifestyle is extremely hard to achieve.
To be financially independent you have to live an insanely frugal lifestyle or you have to be raking in some serious dough for 10 or more years until you can 'retire'. It's an admirable goal, but extremely hard for the average person to achieve. What isn't as hard is financial freedom.
How You Can Achieve Financial Freedom
Be intentional with your money and you will gain financial freedom in a short period of time. The timeframe will depend on your savings rate and how much you make compared to what you earn.
"Our savings rate is the single most important thing to focus on to achieve financial freedom."
To gain Financial Freedom there are two parts to the equation, your living expenses and how much income you make. The best part of focusing on your savings rate is it's a win-win. You are focusing on increasing what you make and meanwhile reducing what you spend to achieve a higher rate of savings. By reducing our living expenses, we're actually reducing how much money is needed to be financially free because when you can live on less you don't need as big of a nest egg.
Being financially independent means you have to be able to live off of your investment income and have enough to continue to save more money on top of that. I have read many posts where bloggers will call themselves financially independent because their expenses are 24K a year. That's about what my family spends as well for basic necessities. However, what about putting your kid(s) through college? Or paying for your next car? Most people can't save for those things if you're living on 24k a year.
The goal shouldn't be about living off your income and being financially independent when you're 35 or 40. Instead, we should be focusing on how we can build a 'working retirement'. That's working how you want to work. If you enjoy your job and never want to leave it, that's awesome! Keep doing what you're doing, just make sure you're putting a little away in retirement. Even if you plan to work forever, you'll eventually have to quit working.
"Build a life that doesn't feel like you 'have' to go to work, that's freedom."
For a younger person to be financially free, it is often just a matter of getting your basic expenses covered to be able to pursue the career of your dreams or a passion project. If you're 30 or 35 with no mortgage and no debt, a world of opportunity opens up. You don't have to try to save $1M so you can withdraw 4% each year, or $40,000, each year. Instead, focusing on a working retirement means working how you want to work and you just need to cover your basic expenses plus any future savings you may need.
How To Gain Financial Freedom Early
There are many ways to build financial freedom. The approach I am taking is focusing on saving and investing enough now towards my retirement and kids college fund that at some point in the near future I can slow down or maybe even completely stop funding them.
For example, if you had 250k in your retirement account by 30 years old your balance would be just under $3.7 million dollars by the time you retire at 65 at an 8% return. In today's terms, given an estimated 3% inflation, that'd be equivalent to over 1.3 million dollars. Most people could retire off of that.
What about other things like my kid's college fund? If you are able to accumulate 50k per kid in their college fund by age 5 that means you'd have 160k in their college fund in 15 years given an 8% return. That may not fully fund their college, but that would go a long way to pay their college tuition. Giving your kids an opportunity to come out of college with little or no debt.
If these goals seem extreme, it's because they are...you have to live life differently to achieve them. You have to be a financial hipster. Anyone can achieve these goals if we can focus on getting out of debt and focus on living differently. My wife and I did it, and you can too.
Living in the heartland of the United States may bring some additional benefits, such as lower cost of living, than if you live in a big city on one of the coasts, but it doesn't mean you can't achieve everything you want to achieve. I know many people that make enough money to make this happen while living on the coast.
Few People Successfully Retire Before Traditional Retirement Age
Many bloggers and F.I.R.E advocates aren't truly 'retired'. If you're reading about them it means they are working. They are either blogging, vlogging, or freelance writing. As they should be! Our life goal shouldn't be to figure out a way to not work at all which is what retired typically eludes to, for 40 years. That doesn't leave you feeling fulfilled. What feels fulfilling is living a lifestyle that provides the freedom to do what you want, when you want, but also giving back to society through your work. I currently have a 9 to 5 jobs and am happy because I love it. Eventually maybe I'll do something else for work, but for now, it brings me enough freedom while providing me a lifestyle I enjoy.
As former General Electric CEO Jack Welch wrote:
"Who wants to just retire? Banish that word from your vocabulary," Welch wrote on LinkedIn in 2015. "You've got to constantly reinvent and take a chance on something you've always wanted to do -- it's what keeps you alive. You're never done."
Paths To Achieve Financial Freedom:
1) Work hard and save your money - Save enough money and you can live off the interest, this one takes the longest so if you choose this strategy, be patient. This is a great strategy though if you love your job or career and are okay with keeping at it until you are able to quit working or scale back from your 9-5.
2) Build income through a business - Are you a go-getter? This strategy involves starting a business that pays you enough income to support you financially. It will take more work than working a traditional 9-5 and is more risky, but it can bring you freedom faster. Being a business isn't easy but it can be very intrinsically rewarding, bring you the freedom to create your own schedule and ultimately be your own boss. Businesses are also taxed more favorably than individual income. That being said, starting a business will usually take more time and money up front, however the reward and financial freedom can be great.
3) Eliminate debt- Often times, eliminating your debt is the fastest and surest way to gain financial freedom. Eliminating debt payments frees up thousands of dollars each year from your living expenses to do more of what you want. Paying off debt is also the easiest way to increase your savings rate because you can save the money you no longer pay towards your old debt.
4) Work part-time - This can be on top of your day job if you are looking for more money to achieve your financial goals, or you can scale back from full-time work to a part-time job. By implementing strategies 1 through 3, it doesn't take that long to get to where a part-time job could support you financially. This is also a great option to move to part-time work as you launch your business. If you're trying to take the leap to full-time entrepreneurship, working part-time can be a great intermediate step.
The goal of all of this is to build balance and a lifestyle that brings you the most happiness. Some people like to work. Some people don't. Define what you want and build a plan to achieve it. It's not that far away if you can work towards giving yourself the financial freedom to live how you want to live. You will have to live differently. That is both exciting and scary. Own it, so you can own your time and money. If you do, no one can take that away from you.