What is Financial Independence and how to achieve it?

Financial freedom is having enough passive income from your investment or businesses so that you can choose not to work if you don’t want to. Passive income is the income generated without having to work for it. Interests, dividends, rental property income and royalty from music or book sale are some of the examples of passive income. Financial independence and early retirement or commonly known as FI/RE (or FIRE) is a popular concept among personal finance bloggers. But it is not a commonly known concept among the general population, immigrants included.

It is also necessary to make a distinction between financial independence (FI) and early retirement (RE). RE is to stop working before the normal retirement age, say in the 30s or 40s. Being financially independent will enable you to retire early, but you do not have to stop working as soon as you achieve FI. At that point, even if you continue working, work becomes a choice and not a necessity or an obligation. A lot of people who have achieved FI say that just being in a position where work becomes a choice is very liberating.

Why do you need FI? Time is a great asset. Most people are trained to trade time with money. If you are a regular employee, this is what you are doing. You give 40 hours every week to your employer and you get a paycheck in return. This is not a necessarily a bad deal since it allows you to pay for your food, housing, clothes and other needs. But if you value your time for more than just a paycheck or if you have better ideas about how you would want to spend your time, a regular job almost feels like a trap. Being FI will allow you to skip this trap and let you use your time on your own terms.

Not everyone hates their job and I am not saying you should. In fact, I do not hate my job either. But I am also not a big fan of needing to have a job for life or until you are old. In fact, a number of people (for example doctors) who have spent a number of years of extensive work to prepare for their careers have also pursued the path of FI to be able to quit their job. Although I do not make anything close to a doctor’s salary, I went to school until I was 28 years old and when I finally started working the career of my dream, I realize that I do not like to work all my life. Somebody in the past designed that we should work a fulltime job until we are 60 or 65 years old and it was not my idea. It does not have to be yours either. But there is a way out if you want to work for it.

What prevents most people from achieving FI? I had an income of around 20K a year for six years in the US. What is even interesting is that I was also paying for college (around $7500 a year) with the same income. Although I was not living in a grand luxury, I was not miserable either. I shared apartments with my friends and lived on low-budget just like most college students. I could still occasionally party and go on vacations. I even made some expensive roundtrips to Nepal during those years. Although I did not save much during that time, I was still living a decent life. How did I manage it? My expenses were lower than my income and I only spent what I could afford to. Most people in the US live beyond their means and that prevents them from achieving FI.

I do not recommend that you to live on 12K a year budget, but you can definitely live comfortably with a budget of 20K. If you are married or have a roommate to share a living cost, you can live comfortably with the 25K-30K budget. Mr. Money Mustache of mrmoneymustache.com spends less than 32K a year for a family of four and he has millions on his net worth. My and my wife’s combined expenses for this year is around 25K not including taxes. This included three roundtrip plane tickets to Nepal and a number of domestic vacations. I understand that every person has their own expenses and your expenses may be 50K or 100K a year. That is ok as long as you have means to pay for it. For example, doctors having 100K in expenses can still save another 100K for their FI if they have an income of more than 200K.

If a household having a median income of 60K a year can retire at the age of 60 or 65 years, why can’t you retire around 45 years if your household income is double of that? What if your household has two software engineers with a combined salary of 200K or a doctor with even higher salary, why can’t you retire in your 30s? Theoretically, you will be able to save more money in 10 years compared to what a median household can save in 30 years. So why does it not work practically? Why don’t we see all the doctors retired in their 30s or software engineers retired in their 40s? Is it because all of them love their job that they do not want to stop working? We all know the answer. It is because their expenses go up as soon as their income goes up and they will never be able to save enough to retire early.

This is what they call “rat race”. Wikipedia defines rat race as “an endless, self-defeating, or pointless pursuit.” This is how most people live. As soon as their income rises, they find a way to raise their expenses. It could be in the form of a bigger mortgage, a car loan, or buying things that they hardly need or use. Personal finance bloggers call this a “lifestyle inflation”.

You do not have to do what everyone else does. After I got my first Engineering job, I started wondering what should I do next. At that time, I was already married to my wife and I did not know what should be my next step or goal. When I was in high school or in college, I focused on getting good grades so that I would get a good job. I was always striving to achieve this goal in life. Now I actually have achieved it, I did not know what to do next. I started talking to friends who were in the business longer than I was and were a few years older. Everyone pretty much had the same answer, “you don’t have a goal in life anymore. Buy a house, make some babies, and take care of them. You are not in college anymore, so you do not need any goals.” In other words, they were living just as any other American middle-class family and would recommend me doing the same.

I realized that this is where most people end their pursuit of better things in life. We look around us to see what everyone else is doing and we follow the same path. Don’t get me wrong, having a family and raising kids is a meaningful experience and I am thinking of having kids as well. In fact, I value family above everything but I was not satisfied that I had to stop there. This is how my pursuit of FI began. I heard a saying that most people are missing a great life just because they are satisfied with a good life. I truly believe that it is true and FIRE let you have a great life. After all, doesn’t retiring in your 30s let you have more time to spend with your family?

If you are still with me this far, you must be interested in FI as well. How do you achieve it? Earn more income, cut down your expenses including taxes, invest your savings and count your dollars. It is not that difficult. If you have 100K to 200K in annual household income, you can achieve it as early as 5 to 10 years. Although it helps, you do not need a high income to retire early. On the next post, I will write about how you can achieve FI in 5 to 10 years.

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