The FI in FIRE: Financial Independence
A Quick Backstory.
Before you can work towards achieving financial independence, you need to understand what it means. I will provide you with our definition, but I want to share a quick story before I do.
When I was in law school, I really enjoyed meeting with attorneys and asking them to share the secrets of their success. Not everyone agreed to meet with me, but I was amazed at how many people happily shared their story. From dozens of meetings over coffees, lunches, and phone calls, one conversation in particular has always stuck with me. This attorney gave me a key piece of advice that I will never forget, and to this day, it is some of the best advice I have ever received:
"Live below your means so that you are not a prisoner to your job."
He elaborated on this advice by explaining that he knew many attorneys who really disliked their jobs, but they all stayed at those jobs, despite being miserable, because they needed that salary to afford their lifestyles. While he was speaking about attorneys in particular, this is not limited to lawyers. It is incredibly common for people in all professions to feel stuck in jobs they hate solely because they do not believe they could afford their lifestyle if they were to leave.
Whether it makes financial sense or not, many people feel that they “need” the newest phone, the name-brand clothes, and the fancy coffee. David refers to it as the “Granite Countertops Rule” - whether it is for the apartment you rent or the home you own, everyone wants a kitchen with granite countertops. I, myself, am not immune to this. The desire to “keep up with the Joneses'' is a tale as old as time. Especially with social media these days, it is easy to compare your life to the life of every friend, acquaintance, celebrity, and even stranger who has an active Instagram or TikTok account.
For many people, as their salary increases, so does their spending. This turns into a dangerous cycle that repeats with each pay raise. People end up living paycheck to paycheck, feeling handcuffed to their job, miserably awaiting the day they can finally retire. This can happen regardless of whether that weekly paycheck is for $1,000 or $100,0000. Have you ever read the statistics of how many professional athletes are bankrupt or under financial stress within a few years of their retirement? Look it up. The percentages are astronomical! No one is immune to this.
I was tempted by this when I got my first full-time job as a lawyer. I went from being a broke law student working part time at a local jewelry store to an attorney with a six figure income. It was very, very tempting to increase my spending with my higher salary, but I always had that one piece of advice in the back of my mind – live below your means so that you are not a prisoner to your job.
Looking back, I am incredibly thankful for that advice because it turned out that I hated that first job. I was absolutely miserable. It negatively affected every part of my life. After several months of "sticking it out," I knew I had to leave. Thankfully, I was able to eventually quit without worrying about my financial position because of that advice. Living below my means allowed me to a substantial amount of money into savings. This gave me the freedom to look for a new job that I might actually enjoy without needing my new employer to match my salary. I ended up taking nearly a 50% pay cut when I finally accepted another position. It is probably obvious that taking a pay cut like that was not enjoyable (it really sucked), but it turned out to be the best decision I have made in my career thus far. I would never have had the freedom to make that decision had I not listened to that attorney’s advice.
Be encouraged by this. Even if you feel as though you are currently handcuffed to your job in the way that I described, you do not have to find yourself in that position forever. You have the ability to change your life by changing the trajectory of your financial situation. It is not too late to begin your journey towards financial independence!
Defining Financial Independence
The term “financial independence” (sometimes referred to as “FI”) may have slightly different meanings for different people. Each definition of financial independence is a positive one, but the definitions I have read are not all equal. (Think about owning a kayak vs. a yacht - both allow for enjoyment out on the water, but they are definitely not the same!) We define financial independence as this: having enough money through passive income to live the life you want without needing income from a traditional job. This is what we want to achieve, and this is what we encourage you to achieve as well!
Financial independence gives you the freedom to choose how you spend both your time and your money. Imagine being able to work in a job you truly love and live the lifestyle you have always wanted without worrying about what kind of salary accompanies your job! That sounds pretty great, right? It is not impossible to have that life. What is the key? Passive income.
To fully understand our definition of financial independence, you must understand the difference between “passive” and “active” income.
Passive income is defined by the IRS as income from a business in which the taxpayer does not materially participate. Please know that when we talk about passive income here, we are not necessarily following those specific IRS qualifications. We define passive income as merely any form of income that requires little continuous effort to earn. This includes both the more traditional forms of passive income, such as interest earned on a bond or savings account, dividends from stocks, earnings on annuities, and income from rental properties. This also includes the more contemporary forms of passive income, such as income from affiliated marketing or royalties.
Active income, on the other hand, is income that comes from active participation in a business or other venture. For most people, their primary source of income (and possibly even sole source) is active income earned from their “9 to 5” job. While there is absolutely nothing wrong with a majority of your income being active income, especially while you are young, you will want to set yourself up to no longer rely on active income if you hope to comfortably retire someday.
The harsh reality is that many people are unable to retire at the age they expect because they are unable to afford it. They simply do not have enough passive income available to cover their expenses. In order to comfortably retire, a common guideline is to aim to replace 70% of your annual pre-retirement (active) income. If you are lucky enough to have a pension, then that significantly helps you in reaching this percentage. However, pensions are less common today than they were several years ago and require years (if not decades) to vest. Beyond just that, the average Social Security benefits are minimal today compared to the high cost of living in many areas around the country. Relying on a pension or Social Security benefits is not enough for most individuals to replace their active income for retirement. You need to be prepared and have passive income available. You need to have financial independence!
One of the most encouraging statements I can make to you is this – there is more than one way to get to financial independence. There are various strategies for saving, strategies for investing, strategies for diversifying, and strategies for merely getting out of debt. Some strategies might be easier than others, and some might make sense for one person and make no sense for someone else. The best way to find out which strategy is best for you is to take action and try some. You may find out that you really enjoy actively trading in the stock market, or you may learn that you prefer the ease of an exchange-traded fund (ETF). You may prefer investing in real estate. You may enjoy affiliated marketing. The most important thing is to just get started!
You have no excuse to sit back anymore. You now understand what financial independence means, and you know how important it is for your future. The next step is working towards getting there. Stick with us, and we will share as much as we can to help you on your own journey. There is no time like the present to start working towards financial independence!
- Bailey (and David)
