“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.