When you’re growing up, you always hear from your parents that you need to become an adult and become financially independent right? Get a job, pay your own bills, and stop mooching off your folks. But really, it can mean so much more! What is Financial Independence?
Real Financial Independence is not just working for your money but having your money work for you. It’s the ability to say “screw you” and stomp out of the office waving a one fingered salute when your boss asks you to work over the weekend for the 3rd week in a row. Because you know you don’t need that job to support yourself or your family.
(Adulting 101, the above scenario is probably not advised. You don’t want to burn bridges in the work place in case you ever need something from them in the future.)
So many people go through life thinking they have to work til they die or at least until they’re in their 60s or 70s to retire, but you don’t have to. Instead of saying “I’m too old for this sh*t” in your 70s, wouldn’t you rather say “I’m too FI for this Sh*t” in the next few year?
Let’s get acquainted with the common terms of the FI Movement so you can start reaching for your own Financial Independence.
What is Financial Independence?
Financial Independence (FI) is when you reach a level of investments that passively pay you enough that you no longer need to work to cover your living expenses. These investments often come from stocks and bonds but can also come from things like Real Estate Rental Property income or a business that is run without any help from you.
Passive Income Sources
- Stocks
- Bonds
- Real Estate Investment Trusts (REITs)
- Rental Properties
- Automated Businesses
How to Figure Out Your Financial Independence Number
A simple rule of thumb often discussed around Financial Independence is the 4% Rule. A study done in the 1990s by financial advisor William Bengen found that through a century of market history, retirees should be able pull out 4% of their total investments from the time of retirement and increase that amount for inflation every year, and never run out of money. Again, this is a rule of thumb, not a guarantee.
This assumes that the market will earn about 7% average annual growth and that inflation will go up about 3% every year, thus you should have about 4% of growth left to live on without having to pull from your principal (starting balance).
So because 4% goes into 100% 25 times, you can figure out your FI Number by multiplying your desired annual income by 25.
Let’s assume you live on $60,000 a year now and figure you will need about that amount when you stop working, you multiply $60,000 x 25 = $1,500,000
If you want to have approximately $60,000 a year to live on in retirement, you will need about $1,500,000 in investments.
FI Numbers Can Change
Now, figuring out your FI Number by multiplying your living costs by 25 does not take inflation into consideration between the time you figure out your FI number and the time you actually stop working. Costs always go up. Do you know those stories about buying a loaf of bread for 5 cents back in the day? I’m lucky if I can find a loaf of bread for less than $5 now! (Remember, I live in Hawaii)
If you are going to stop working in less than 5 years, hopefully, inflation shouldn’t impact your number too much, but if you are going to continue working for many years, your FI number may be a moving target as your life changes and inflation does its thing on prices.
You’re required living expenses today could be totally different from when you stop working. If you are a family of 4 living in a High Cost of Living City like Los Angeles, Honolulu, or New York now and need over $150,000 a year for living expenses, that may not be your situation when you decide to retire.
Maybe when you stop working, you will move to a smaller town with a lower cost of living and the kids will be moved out. You won’t need as much to live on.
Or maybe you are living in a small midwest town now with low costs but plan to move to a warmer, more expensive, coastal city or travel all over when you stop working, you might need more than you currently live on.
To calculate your FI Number with your current numbers in mind but also be thinking about your future living expenses and adjust as needed.
Levels of Financial Independence
There are a couple of different levels of Financial Independence often thrown around in the FI media:
Lean FI
Lean FI is when your investments provide enough income to get by without many extras. This is usually around a $10-40,000 a year budget for most. At this level, most people can afford basic living arrangements and food but not much else. This can easily become Barista FI, I’ll explain what this means shortly below.
Financially Independent- FI
Regular FI is when your investments provide enough income for a basic lifestyle, plus some extras like a few vacations a year, dinners out every once in a while, and being able to live comfortably but not extravagant. This is usually around a $50-100,000 annual budget.
Fat FI
Fat Fi is when your investments provide enough income for a rather comfortable lifestyle. This might include international travel, fancy dinners out on the regular, and living in a high cost of living coastal town. This level of income is usually around $110-200,000 a year.
Part of figuring out your FI number is deciding what level of lifestyle you want to live.
What is Barista FI?
Barista FI is a term for when you are basically Financially Independent, maybe you’ve reached your Lean FI number, but could use a little more income or benefits to be comfortable. You don’t want to work your full-time job anymore so you find something to supplement your investment income. People often think of working at Starbucks when they say Barista FI.
Starbucks is known for flexible hours, isn’t often thought to be an extremely challenging job mentally or physically, offers medical benefits, and is usually a lot of fun with good food or drink perks.
Barista FI doesn’t have to mean working at Starbucks, obviously. It can mean finding any part time job that YOU actually enjoy.
- Maybe you like playing golf and can help out at a golf course a few hours a week to earn some extra money and some free rounds of golf
- Maybe you enjoy glass blowing or cooking and decide to offer a few classes a month or sell pieces at art expos or cater parties throughout the year
- Maybe you love to read so you work part time in a book store or library, or even get into audio book recording
There are too many options to list, but you get the idea.
Barista FI just means that you are basically Financially Independent and don’t want to work full-time anymore, but could use a few extra dollars a year to really be comfortable or just like the benefits. So you find a way of earning money that you actually enjoy and doesn’t cause too much stress, unless you like a bit of stress every once in a while, like a part-time party planner.
Ideal Barista FI Job:
- Pays enough to ensure you are comfortable in addition to your Investment returns
- Offers benefits you can use, like medical insurance or free golf rounds (or whatever you enjoy)
- Is only as hard as you want it to be
- Flexible hours so you can enjoy your time as you want
- YOU ENJOY IT.
What is Coast FI?
Coast FI is when you have enough money saved and invested already that if you were to never put another dollar in between now and your planned retirement age, you could just let compound interest do its thing, and you’d have enough money to comfortably retire.
Example:
Let’s say a 35-year-old has been saving hardcore since starting work at 22. He’s been investing in low-cost index funds the entire time. He has saved up $450,000 and has it invested earning an average rate of 8% annual growth.
Now, if he has looked at his necessary expenses in retirement and decided he needs $3,000,000 to live on by the time he retires permanently at 60 year old, he actually does not have to put another dollar into his retirement account between now and the time he turns 60.
He can work whatever job he wants to cover his basic living expenses for the next 25 years and not have to worry about retirement contributions!
This is often a comforting milestone to reach. It means that you can work whatever job you want, so long you can cover your current living expenses, and you don’t have to worry about taking care of your future self in retirement, they’re already covered.
Wrap Up
Now that you better understand the terms surrounding Financial Independence and what it might mean for you, I hope you feel motivated to start your own journey towards Financial Independence.
Let’s get Too FI for this SH*T!
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