“FINANCIAL independence” has become a catchphrase over the past decade—in part because it’s the FI in FIRE, short for financial independence/retire early, a movement that’s captured the imagination of some and earned scorn from others.
The strategies touted by the financial independence movement are simple enough: Earn a large salary. Live frugally. Invest a substantial percentage of your income in low-cost mutual funds. The objective: Accumulate savings equal to at least 25 times your total annual spending. At that point, you should have a nest egg big enough to support your lifestyle—assuming a 4% drawdown rate—and you can consider yourself financially independent.
The ultimate goal? For many, it’s the opportunity to exchange a typical nine-to-five job for the fulltime pursuit of a passion, either as a hobby or as an entrepreneurial enterprise. The idea isn’t to leave employment behind completely, but rather to devote time to projects with personal meaning.
The financial independence movement has spawned an entire cottage industry, including blogs, podcasts and books. I recently read one of the latest books: Choose FI by Chris Mamula, Brad Barrett and Jonathan Mendonsa. Filled with anecdotes from people claiming to be financially independent, the book discusses strategies often used in the quest for financial freedom. The case studies profiled in the book frequently mention six-figure salaries and savings rates approaching 80%, but many of the principles presented could be applied by lower-income families simply interested in increasing the amount they save.
The book includes extensive information on tax-reduction strategies and budgeting tips, as well as a chapter devoted to reducing—or even eliminating—the cost of college. Other topics, such as how to get health care coverage if you don’t have access to an employer’s plan, are only briefly touched upon. New to the financial independence movement? Choose FI will guide you, step-by-step, through the process of eliminating debt, increasing income and saving a large percentage of your salary.
Obviously, financial independence is a good thing. But we warned: Sprinting toward that goal isn’t for everybody. A few years ago, I became intrigued by the idea of financial independence. By practicing extreme frugality, I managed to get my savings rate up to nearly 50% on a salary of $65,000 a year. While I liked seeing the value of my retirement accounts grow, I found it difficult to balance a high level of savings with the ability to engage in the activities I enjoy. Experiences like mine aren’t unusual.
Moreover, financial independence is, in many ways, just a new wrapper on some long-cherished financial notions. While the movement has taken hold among millennials, the core ideas will be familiar to a lot of baby boomers and Gen Xers. Earlier generations often subsisted on a single income. Owning just one car, and raising a family of four in a home with two bedrooms and a single bathroom, weren’t unusual. “Earn more, spend less” isn’t exactly a new idea. Perhaps the financial independence movement could most accurately be described as a throwback to earlier times.
Kristine Hayes is a departmental manager at a small, liberal arts college. Her previous articles include Pet Project, Educated Consumers and Nervous Bride. Kristine enjoys competitive pistol shooting and hanging out with her husband and their three dogs.
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Great article! I’m especially interested since you actually lived FI for a while and achieved a 50% savings rate. I’ve listened to ton of podcasts about FI, and they promote how you can still enjoy life cheaply – playing board games, spending time with your family, using travel rewards for your vacations, etc. I’m very interested in the other perspective – what things did you miss that just couldn’t be supported when saving 50%? How long did you manage to save at a 50% rate?
Hi Phil. I managed a 50% savings rate for nearly 2 years. Prior to that I was saving somewhere between 10 and 40%. I kind of ‘ramped up’ to the 50% rate over a couple of years. At the time, it wasn’t that difficult for me to do. I’m an extreme introvert, so spending time alone isn’t a problem for me. Spending an evening reading a library book is my idea of an ideal ‘night out’. At the time I was trying to achieve ‘FI’, I was also single and lived in an apartment. That was the hardest part for me…I owned two homes prior to getting divorced and moving into an apartment. Apartment life wasn’t my favorite, but it did allow me to save a lot of money. About a year-and-a-half ago, I got remarried and purchased a home. That was the end of my 50% savings rate. I put $80K down on my home and have spent a considerable amount of money fixing the place up. That said, I live in an area that’s pretty ‘hot’ with regards to real estate prices, so I feel pretty confident that my investment in real estate will pay off in the end. I certainly don’t regret achieving a high savings rate for those two years, but overall, I’m much happier these days just living within my means and saving a much smaller percentage of my income.