When I was a child, I wanted to be a mad scientist inventing crazy machines. At 10 I wrote about becoming an engineer. Upon graduating from engineering at 23 I became an entrepreneur. Mastery has always been my purpose: creation, knowledge, helpfulness with a twist of activism... this is what I live for. Every apprentice on the path to mastery must make its own things at some point, and every master lives off making her own products. Many people want to start their own business. Broadly speaking, many want to live life on their own terms.
I'm lucky enough to have a passion for a craft where decent jobs are plentiful and where it's simple to launch your own business (but still hard to grow) - software. It gets tougher in artistic ventures. Maybe you lack the confidence to make an attempt at building your own sustainable business and you decide to leave it for "a time where I will have acquired enough experience".
What is Financial Independence?
In the collective unconscious, Financial Independence is the line between what I have to do and what I want to do, a gateway to a delayed life. You might be in a situation where you don't really like your job but you still have to pay the bills and feed your kids. Or maybe you already launched a business but it's not generating enough revenues to work on it full-time. There is nothing wrong with the delayed life plan mentality. You need money to eat or to buy the land that will grow your own veggies. Not everyone can leave a job overnight. However, you have to actually take steps towards making your wish a daily reality, towards financial independence.
People don't want money, they want the freedom that comes with having money: spending more time with your loved ones, work from anywhere in the world, become a painter or a writer full-time... in most cases, you don't have to be a millionaire to do so. What you really need is enough money to sustain your desired lifestyle: this state is called Financial Independence.
Now, how much money is enough money? It's a question with a simple general answer called the 4% Rule: you need 25 times your annual spending saved and invested in financial assets. It sounds like a magic number. There is a lot of theories and controversies behind it, I prefer to let you make your own judgment. Here is an article going deeper into the subject: The 4% Rule: The Easy Answer to How Much Do I Need for Retirement. It's a simple general answer, though coming up with your very own personal answer is a huge introspective work.
It's all about saving
There are but two ways to gain this financial freedom: you can either increase your income or decrease your expenses.
Most people focus on increasing their income, but the latter is easier. You can act upon your expenses today. Being a maker, your income tends to fluctuate even more depending on your job situation, so you really need to take control of your expenses.
Growing your income is hazardous. It takes a lot of hustle. When people earn more, they tend to spend more. This vicious circle just creates more cravings for unnecessary stuff, which doesn't help in your quest for financial independence. Remember, financial independence relies almost entirely on how much you spend per year. Broadly speaking, the only metric you should work on is your saving rate.
Your saving rate is simply your annual income (how much you earn) divided by your annual expenses (how much you can live on). Based on the 4% rule and your saving rate, you can infer how long it will take for you to reach financial independence. According to this article depicting the relation between the 4% rule and your saving rate, simply living on 35% of your take-home pay allows you to "retire" within 10 years. What's interesting is that a simple change of 5% in your saving rate has a huge effect on the number of years it takes you to become findependent:
simply cutting cable TV and a few lattes would instantly boost their savings to 15%, allowing them to retire 8 years earlier!! Are cable TV and Starbucks worth having two income earners each work an extra eight years for???
from "The Shockingly Simple Math behind Early-Retirement" by Mister Money Moustache
In this post, when I mention "saving". What I really mean is "invest".
Investing is a scary word. Maybe you are already picturing golden boys betting insane amounts of money in exotic and risky endeavors. When I talk about investing, I'm not referring to these mad lads. I am not an expert and investing looks scammy when you know nothing about it, but when you read a lot about financial independence for the Johns and Janes of the world, you can't miss the concept of index funds.
Index Funds are a special kind of mutual fund. I won't go into the details but you can read this article from Vanguard. Vanguard is the investment management company that launched the first index fund for individuals, so they are more suitable than me to explain the concept. The main benefit for you is that it is low-cost and low-risk. Of course, it's not magic, so it has low returns. Now, you might wonder why you should invest your savings if you don't have a high return on your investments. Well, it's because of two key concepts to understand: inflation, and compound interest.
To be continued... Next up: inflation, compound interest and FI in the case of makers