Now that’s a new FIRE to burn inside you.
And wouldn’t you want to be FIREd like that? 😉
If words like Financial Independence, Financial Freedom and Early Retirement fascinate you, then you would be interested in reading further.
These words can mean different things to different people:
- Having enough money to not work ever again
- Having enough money to not work for several more years
- Having achieved a reliable combination of financial assets + passive income + part time income, to not worry about money ever again.
Technically, points #2 and #3 cannot be referred to as ‘real’ financial independence. Its more like semi-financial freedom. But still a commendable achievement no doubt.
‘Enough money’ by itself demands explanation here.
Atleast for me, it means being able to continue living my current life style and meeting all future financial goals.
All that is fine.
But you might now ask…
Why Financial Freedom?
I have written about this earlier too (Financial Independence Day) and reiterate here that financial independence has intrigued me for years.
But its mostly because the freedom it provides and not because I can spend more money without having to think about it.
Charlie Munger once said something that is very relevant here:
Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris – I wanted the independence. I desperately wanted it.
So essentially, financial independence is about not being trapped in the game that we are so accustomed to play –
Earn, Spend, Repeat.
It is rather about being in that (money) game and yet remain detached.
What About Me?
I am still years away from my F.I.R.E.
I am 31 now. So its not very late considering that I have been working towards it for last few years.
But many people (including close ones) ask me about why do I even want to ‘Do Nothing’ after few years?
I have to then explain them that Financial Independence is about having the ‘option’ of not working (or working part time on things you like). It doesn’t mean that I won’t work. Though being in a state of FI means that I am not forced to earn an active income in order to fulfill my financial responsibilities.
There is difference between retiring and achieving financial independence, which most people fail to understand.
Technically, financial independence (FI) is not exactly the same as early retirement. You can be in a state of FI and still continue with your job or business for as long as you want.
A famous early retiree Money Mustache explained it like this:
“This is the whole point. [During retirement,] you’re not going to sit around doing nothing unless that’s your true personality type… Retirement to me just means you’re free to do what you really want to do…”
I know what you are thinking. All this is easy to write about and difficult to put in practice. And I agree with you.
But that is how it is meant to be.
It is not easy to become financially free. It should not be easy to become financially free. Had it been, most people would have already achieved it. Isn’t it?
Infact early retirement can be achieved only by those, who really deserve it. It might sound a little cliché and bookish… but that is how it is.
How ONE statement by My Wife jolted me?
I have never made a secret of my desire to become financially independent as early as possible (even my x-employers knew about it). 😉
But working towards this goal requires sacrifices. You need to defer gratification, curtail unnecessary expenditures, save and invest more from a young age.
So obviously, you might have to make certain trade offs.
But once I was trying to talk to her about the rationale of early retirement and she said something that hit me like a bullet.
She told me that in order to achieve my destination quickly, I should not screw up the journey.
Read that again.
It is remarkably true. And if you have understood the quote, you will know how important it is.
Few months before my wife said this to me, I was increasingly becoming addicted to the idea of investing (and saving) more and more money to prepone my financial independence. This meant that I was quite reluctant in spending money even on things that were worth spending on.
And this was wrong on my part.
Goal achievement (atleast this one) should not be at the cost of killing the joy of multi-years long journey.
There is no point being rich when you can’t use those riches. You can continue to lead a really frugal life and hoard tons of money when you are 45 or 50 or whatever.
But, will you be able to use that money in ways that would have been possible when you were young?
You don’t want to be richest person in the graveyard. Isn’t it?
And this reminds me of a quote by George Lorimer:
It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.
But coming back to reality – there is absolutely no doubt that aiming for financial independence at a young age requires sacrifices.
And naturally, not everyone is interested in making those sacrifices.
Many prefer to live their lives to the fullest today itself.
And I don’t think we can call them wrong. Its just about having different choices.
But what if You really don’t want to be Financially Free before 60?
That’s a relevant question.
There are many who are just fine working till 60 or even more. So why should they be asked to make ‘even small’ sacrifices today for something that is decades away in future?
This logic might sound reasonable but here is what I think.
Aiming for FI means that you will be saving atleast a little more than what is normally required. This also means that in a few years time, you will have an extra financial cushion in form of larger savings. So in future, you decide that you have had enough (F*** the job) or you want to do something of your own (start a business), you will have the option to do it because you are financially stronger (with that extra savings you have). You can be much bolder in your decision making if you have little extra money. So it actually makes sense to target FI, atleast to an extent.
For me, financial independence is the biggest financial goal as of now.
But having said that, will I strangulate myself (and not spend money more freely) if I don’t achieve it as planned?
Not at all.
I have already made a course correction after being hit by that ‘bullet’ from my wife. 🙂
I now balance the goal of financial freedom with that of spending today on experiences / things that I want.
So basically, I am not saving as much as I actually can. But that is fine with me even if it means that my so-called ‘early’ retirement will be delayed by few years. 🙂
Now comes the next question.
How much is enough to retire early?
The answer is different for different people. And don’t believe the blogs/websites that write about other developed nations like US. There numbers wont work for Indians.
But the mathematical figure depends on factors like your cost of living (lifestyle & expenses), life expectancy, returns expectations today (& after retirement), inflation, other financial goals and your unique circumstances.
Some say that having funds worth 25 to 35 years worth of expenses (as per current lifestyle) is enough. This is a reasonable estimate to start with.
But one should do some calculations to really understand the requirements here. If you want to do it, you can try out early retirement calculators available online. But beware – those are not perfect as you might not even know which inputs are reasonable and which are unreasonable. A decently reasonable option is to take help of investment advisors like me 😉 if you don’t know how to ‘actually’ do it.
Will ‘any’ Early Retirement Strategy work?
Many readers have mailed me that how can one be sure that their strategy for achieving financial independence earlier than 60 will actually work?
Frankly, I just wish that I had some really smart answer for this.
But mathematics is something that we should believe in (not blindly though).
To increase the probability of success in achieving FI or RE, no doubt you have to save and invest more than others. You have to be conservative in your return expectations and also overestimate the impact of inflation (and maybe taxes too).
But still there are no guarantees here. You need to believe that a reasonably calculated strategy based on sound and sensible financial principles is what works. And as Steve Jobs said:
You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever.
So you need to have faith.
Also, what about other financial goals (like children’s education, marriage, real estate, etc.)?
Ofcourse those need to be taken care off too. You cannot be considered financially free if you don’t have enough funds to achieve those goals too. Isn’t it? So you need to save for those too – no questions about that.
How to achieve Early Retirement?
Easy option is to get lucky. But we all know how luck behaves. So lets ignore that option. 😉
Other option is obviously to work towards it the hard way – earn more, spend really less, invest correctly in right products and hope for the best.
It is not easy.
But think of it. You are trying to achieve something at 40 (or 45, 50 or whatever you choose), which others will be achieving at 60 or 65.
So you will definitely have to save and invest a lot. This means you will have much less to spend on your needs and wants. And there is no other way around it. Naturally for those who cannot control their urge to spend, financial independence or early retirement is out of reach without major lifestyle sacrifices.
But for many it is possible.
Many of you already know that you want it.
And your desire to quit the mad rat race lies dormant in you.
But unfortunately, you don’t know how to go about it.
Seth Godin once said,
People are not afraid of failure, they are afraid of blame.
Likewise, I am sure many of you want to do something about it. But are afraid about the consequences if you get it wrong.
Unfortunately, there are no easy answers here.
The choice between regular and early retirement is a question of tradeoffs and your life will change completely. Decision is tough and once you have decided to go after it, it is even tougher.
But I am not trying to scare you.
I am just asking you to think about it at a deeper level (and not just at mathematical level).
So take your time and think about it. Think of time when you will have no bosses to report to and other such scenarios. Maybe its really worth it. 😉