What Financial Independence is all about

This is a guest post. The author runs the blog www.myfinancialshape.com documenting his Journey towards Financial Independence by 2024.

Introduction

Over the last decade, the topic Financial Independence and Early Retirement (FIRE) has gained tremendous interest and popularity in the Personal Finance Blogging sphere. There’s a ton of websites on that concept, from iconic blogs of Mister Money Mustache to a huge number of inspiring websites documenting people’s Path Toward Financial Freedom through a combination of a down-to-earth lifestyle and the establishment of various Passive Income Streams. What’s so fascinating about the concept of Financial Independence is the fact that it consolidates many topics. We are talking about a lifestyle that goes to some extent hand in hand with a variety of aspects such as Minimalism, Dividend Growth Investing, ETF-Investing, Real Estate Investing, etc. This makes it so broad and to a turntable for several aspects in Personal Finance.

Definition of Financial Independence (FI)

FI describes the situation in which a person’s assets (e.g. dividend-paying stocks, rental properties) generate enough income to sustain or even exceed his or her expenses.

Financial independent people don’t need to work anymore to cover their basic needs as their wealth throws off enough passive income (e.g. dividends, rents, interests, etc.). They are in a position, where they can/could Retire Early.

The acronym FIRE is used less often than FI. Most people that achieved FI, continued some kind of work, established businesses, etc.

Early Retirement is not the primary focus

FI means that someone is in a position to leave his or her job. They can if they want to. It’s just one of the many options they have. They can structure their life on their own terms.

It does not necessarily mean, that these people will eventually retire from their day job. In fact, many keep with their job or after a certain time-out resume their work life.

It’s a lifestyle

So, financially independent people are intrinsically motivated, they work because they want to, and not because they need the money. They are in the enviable position to truly follow their passions in life.

What’s so interesting about people pursuing FI is the fact, that it’s less about the goal itself than about the life-changing process that has been initiated. In my view, it’s about the journey itself, it’s about creating options, living more consciously with regard to consumption habits, work philosophy, purpose in life, etc.

One of the most precious things one has in life is TIME. And usually, we work for companies and trade time against money so that we can pay our bills. The concept of FI breaks that trade-off (time vs. money).

It’s a moving target

One might think, that the concept of FI is just for millionaires, or high-income earners.

But that’s not the case. So, what does it take to achieve FI?

It depends on just one thing: the savings rate. The question is, how much in percent is someone able to keep from his or her job income in form of savings. The higher the savings rate, the sooner someone can achieve FI. Mister Money Mustache wrote a fantastic blog article about The Shockingly Simple Math Behind Early Retirement.

Everyone interesting in FI and Personal Finance, in general, should read this article, for me, it has been an eye-opener.

Just let’s look at some numbers:

With a moderate savings rate of 5 %, it would take 66 years to reach FI. That’s a long time. Now, let’s assume someone manages to cut his or her spendings and is only spending 50 % of all net incomes: he or she could retire in 17 years, which is a much reasonable time frame. Now let’s increase the savings rate to 60 %, and the target can be reached in just 12.5 years.

Basically, everyone can pursue FI

As said, the cost basis and spending behavior is the key factor.

The individual savings rate is not set, it can be controlled and increased over time as it is determined by the spending habits and the (job) income. Both elements can be improved over time.

People often think, that their job income is limited. But that’s not true. There are many ways of increasing the household’s income level (you can try to negotiate a higher salary, change your job, there are ways for side-income e.g. through freelancing, etc.).

One can easily substantially boost the savings rate by being more conscious with spendings and while savings increase, money can then be put to work to establish Passive Income e.g. from dividends paid by high-quality companies such as Coca Cola, Hershey etc. . It’s a virtuous circle, while spendings are reduced, the income level of the household increases due to addition cash inflows in form of dividends.

It’s a win-win situation for everyone

The fact, that someone is on the road towards FI already puts someone in a tremendously powerful position. A life-changing process is happening.

A virtuous circle has been set in motion: the focus is less on consumption and instead on finding ways to keep more from the hard-earned money from a job. The focus is on saving money and putting that cash to work to generate Passive Income e.g. by investing into dividend-paying stocks such as Coca-Cola, PepsiCo etc.

It’s a huge learning process that is beneficial for so many aspects of someone’s life such as work-life balance, time for the family, personal health, creativity, etc.

People pursuing FI inherently and automatically live less resource-intense, they avoid inefficiencies wherever possible which is also beneficial for our planet and our society as a whole.

About Financial Shaper

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