When I’m not busy thinking about my journey to financial independence, I am usually thinking about if financial independence is worth it for others around me. Being on the path to financial independence gives you a completely different mindset compared to the rest of society. So I did some research and thought deeply about whether financial independence is worth it for everyone.
So, is financial independence worth it? Financial independence is worth it for many people, but it is not worth it for everyone at a young age. Everyone should make it a priority to achieve FI at some point in their life before they are no longer able to work.
Early financial independence is a privilege that is only available to a select few. There are many questions you should ask yourself and many concepts that you should know so that you can make the choice to reach FI. Financial Independence Retire Early (FIRE) is a goal that requires a certain kind of personality and values to make worthwhile.
Is Financial Independence Worth It?
Financial independence is definitely worth it if it is possible for you. This is because FI is the ultimate financial security. Even if you are unable to achieve a net worth that fully meets the requirement of being FI, just the fact that you regularly save and invest most likely puts you light years ahead of your peers. No one cares as much about your financial well-being as you do, so you need to be responsible for it yourself.
I believe that financial independence is worth it for just about everyone, but achieving financial independence so that you can retire early is a different story. Retiring early might not be for everyone. There are a few scenarios in which retiring early might not be necessary or even desirable for some people. However, everyone should be saving and investing their money at some rate so that they can achieve financial independence by the time they are no longer able to work and bring in an income.
Traditional retirement follows this philosophy of being financially independent and ceasing to work. In order to cease working, you must have something that is providing you with income to live your lifestyle. Too many people are getting to retirement with inadequate savings and then they are forced to rely almost completely on Social Security. That’s a problem because Social Security is designed to replace only 40% of your income. As a result, “For people aged 65 and older, the 2018 poverty rate was 9.7 percent” according to the U.S. Census Bureau.
Therefore, It is my opinion that we should not rely on social security for any of our retirement goals because it is a program that can be changed at any moment under any administration. Instead, we should take our retirements into our own hands and be responsible for our own financial security. Then we can treat any social security that we (might) get as a nice bonus.
What Is The Point Of Financial Independence?
The point of financial independence really is many. There are several points and arguments in favor of achieving financial independence. Perhaps the most significant point is that FI is the ultimate form of financial security. Peace of mind is maximized when you are confident that you could theoretically live out the rest of your life never earning another penny. Even if it is your intention to never stop working until you physically no longer can, being FI keeps your mind at ease no matter what your job status is or the overall state of the economy is.
Another good point in favor of financial independence is that it allows you to pursue passions that you would not otherwise be able to pursue because of work commitments. When you no longer are required to work for money, then your options generously multiply. When money is not the primary factor, you have the ability to travel, volunteer, raise children, pursue hobbies, or work in a field you are passionate about.
One point that many people interested in financial independence will say is that financial independence will make them happy. While it’s true that FI could provide you with the means to be happy, it is not a guarantee. There is no doubt that financial security will make you happier than someone without it, but being completely FI is no sure-fire way to happiness. If you are interested in hearing more about the complexities of FI and happiness then I recommend you read this article I wrote that covers it more in-depth.
Who Is FIRE Right For?
People who want a change in careers, but money holds them back
If you have ever daydreamed about your dream job, but cannot pursue it because you need the money at your current employer, then FIRE might be right for you. FIRE allows you to seamlessly transition into a new career with very little risk because you are not tied to high paying, but stressful careers. All of this can be done at a really young age if you are able to start working towards it as soon as possible.
People who want to be in control of their time
Time is a precious limited resource. Time is something that no amount of money can realistically buy. Our time here on earth is but a blink in the grand scheme of things. We should strive to make the best use of our precious time. The best use of our time is up to us to decide if we have achieved financial independence. If you haven’t achieved it, then your time might be used at your employer’s discretion.
People who want to travel long term
FIRE and travel go side by side. Traveling long term is much more affordable than it is in the short term. Everyone should have the opportunity in their lives to experience something different than what they are used to. If you yearn for that kind of adventure then look to FIRE. The great thing about FIRE is that you are actually young enough to fully enjoy travel and capable of going off the beaten track every once and awhile.
People who want to volunteer their time to good causes
If you are a giver that wants to volunteer and make the world a better place, then what is holding you back from that? Most likely the answer is “money” because that seems to be the limiting factor in most of our lives. Volunteering for free doesn’t exactly pay the bills, but living off of your assets could pay them and allow you to give back for the tremendous opportunities that have been granted to you.
People who enjoy not being wasteful with limited resources
FIRE is also heavily associated with frugality. Being frugal means that you are not wasteful with your limited resources, especially your financial resources. If you are someone that enjoys limiting their wasteful output then FIRE might be a good fit for you.
What Is FIRE Not Right For?
People who are already fully happy with their lives and jobs
If you are already completely happy with your job and what you do with your time then congratulations, you have already made it. You should however still invest and save regularly so that you can build financial security and stability for one day when you are no longer able to work.
People with very low-risk tolerances
Tackling financial independence means taking on a lot of risks. Your investments will fluctuate in value, sometimes dramatically. If you are the kind of person that can’t sleep at night with volatility then FIRE might not be for you. The risk you take in FIRE is a heavily calculated risk, but some people just can’t stomach it.
People who cannot realistically attain FIRE
Unfortunately, there are some people in this world that cannot realistically retire at an early age. FIRE is a privilege that is afforded only some people. It is really unfortunate to say, but opportunities for people around the world vary drastically. If you live somewhere with unlimited opportunity then don’t take it for granted.
What Does It Take To Achieve Financial Independence, and Retire Early?
There are 2 primary things that you can do in order to increase the amount you can invest and build wealth for financial independence. They are either reducing expenses and/or increasing income. Each method has its pros and cons. Reducing your expenses can be very easy up to a certain point, but you cannot keep reducing your expenses forever. You will always have some basic expenses.
Your income can be thought of as technically having no limit, but in order to gain more income, it will take more work, sacrifice, and possibly stress. You can increase your income through increased labor and work output, or you could find ways to build passive income. Passive income is simply income made while not directly trading your hours for money. Passive income does not always mean that it will require little effort, there are different levels of passiveness. Generally, the more passive a venture is the less reward that comes from it.
Overall, a combination of reducing your expenses by limiting wasted spending and increasing your income smartly is often the best bet. In theory, it is very simple, but in practice, it can be difficult if you do not have a grasp on your financial life. Much of what it takes to become financially independent is a mind shift in the way you think of money. To get started with this mind shift, I would highly recommend that you read the book “Your Money or Your Life” By Vicki Robin.
What Is Your FI Number?
While there are many different ways to achieve financial independence, the most common one in the FIRE space is having a financial independence number. Your FI number is generated by utilizing what is known as the 4% safe withdrawal rate. The 4% safe withdrawal rate is a conclusion from an in-depth study on safe withdrawal rates in retirement known informally as the Trinity Study.
I won’t go in-depth on the study in this post, but it basically concluded that if you withdraw 4% or less of your assets per year, then you historically have had a 100% chance of never running out of money in 30 years with a well-diversified portfolio of stocks and bonds. To calculate your own FI number based on this safe withdrawal rate you can simply take your annual spending and multiply it by 25.
For example, if you spend $40,000 per year then multiply it by 25 and you will get $1,000,000 in assets that you would need to be considered financially independent. 1 million dollars is your FI number in this case. Conversely, you can multiply $1,000,000 by 4% and get your annual spending of $40,000. It really is that simple to find your financial independence number. I go into much more detail on the calculations for calculating your FI number in this article.
In reality, finances and the economy are much more complex than that simple formula so not everyone agrees with the 4% safe withdrawal rate. Everyone has different risk tolerances, lifestyles, and responsibilities. Some people in the FIRE community have argued in favor of a 3% safe withdrawal rate instead. Others have argued that passive income should be a focus during retirement. Your mileage may vary and therefore you will need to take several factors into consideration when planning for your own FI journey.
Questions To Ask Yourself About FIRE
What type of financial independence appeals best to you?
There are several different ways you could achieve financial independence, and there are several subsets of it. Some of them include Fat FIRE, Lean FIRE, Coast FIRE, Passive Income FIRE, and Barista FIRE. (Each link takes you to an article that explains the subset of FIRE in great detail.)
What path to financial independence is best for you?
Just as there are several different kinds of FIRE, there are also several different ways you could reach them. The main one includes reducing expenses, increasing income, and increasing your savings rate while investing in index funds. There are many other paths such as rental real estate, businesses, etc. Think critically about what path you would enjoy more and which path could be more realistic for your lifestyle and situation.
What kind of savings rate could you realistically maintain?
Your savings rate is one of the most important factors in calculating when you can reach financial independence. Most people are unable to save even the most basic personal finance recommended 10% of their income. Are you one of those people, or can you see yourself actually being able to save upwards of 50% of your take-home pay? A really great calculator for calculating how long it will take to reach financial independence can be found on Networthify.com. This calculator can give you an estimate based on your savings rate, expected return, and expected inflation rate.
What would you spend your time doing if you didn’t have to work for money?
Would you work anyway? Would you travel? Would you stay at home all day, sit on the couch eating bonbons? A realistic answer to this question is really important for determining if you should seek early retirement. A really popular and well-known phrase in the FIRE community is that “you need something to retire to, not just something to retire from.”
Is FIRE Actually Realistic?
This is completely a subjective question because what might be realistic for me, might not be realistic for you and vice versa. I think that FIRE is a realistic goal for me and for many people in first world countries. If you fall into the category of having an above-average household income then early retirement could be a possibility for you as well if you make it a priority.
When it comes to inflation, FIRE is realistic because the 4% safe withdrawal rule takes inflation into account. The average annual expected return for most people doing their FI calculations is around 7%. That 7% includes a withdrawal rate of 4% and an expected average annual inflation rate of 3%.
The expected return in the FIRE calculation is usually at least 7%. The return is an average annual return. Some years the returns will be high, some years they will be low, and some years they will be negative. Taking all of the returns and dividing them by the number of years gives you the arithmetic average return. For example, If in three years you experience annual returns of 26%, 4%, and -8% then your average return is 7.33% over those three years ((26+4-8)/3 = 7.33).
Looking back at historical returns of various market indexes shows average returns within that range. In fact, the S&P 500 index has returned an average annual return of close to 10% since its inception. Past performance does not guarantee future performance, but it’s the best guess that we have.
Everyone Should Try To Achieve Financial Independence At Some Point
Even if you aren’t exactly concerned or interested in achieving FIRE, everyone should pursue financial independence by the time they retire. There will come a point in our lives where we will be physically and/or mentally incapable of working. At that point, we will be glad that we have enough assets to support us. It’s better to be financially independent and not need the income than to not be financially independent and need the income.
How do you get financial freedom in 5 years?
In order to get financial freedom in 5 years starting from a zero net worth, you would need to invest 80%-85% of your income with an average annual return of 7% with a 3% inflation rate over those 5 years. More information on how this is possible can be found in this article.
What is considered financial independence?
There are many different scenarios that could be considered financial independence, but the most common one includes utilizing the 4% safe withdrawal rate and the 25x annual expenses formula. By this definition, if you spend $40,000 per year then you would need $1,000,000 in assets to be considered financially independent.