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Feb 12, 2019 12:56:35

Understanding Financial Independence

by @basilesamel PATRON | 1301 words | 385🔥 | 433💌

Basile Samel

Current day streak: 385🔥
Total posts: 433💌
Total words: 205089 (820 pages 📄)

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, 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 decide to leave it for a later time. 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 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. Getting money out of the equation usually helps. That's how your personal quest towards financial independence begins.


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.

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 full-time painter or writer...

In most cases, you don't have to be a millionaire to do what you love. What you really need is enough money to sustain your desired lifestyle: this state is called Financial Independence.

If the objective is to have enough money, how much money is enough money? It's a question with a simple 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. Don't believe me, make your own research, come up with your own conclusion. 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 answer, but 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.

Growing your income is hazardous. It takes a lot of hustle. On the other hand, people earning more tend to spend more. This vicious circle just creates more cravings for unnecessary stuff. You end up with golden handcuffs straying you further from any form of independence. Remember, financial independence relies almost entirely on how much you spend per year. 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


Investing

In this post, when I mention "saving", what I really mean is "invest".

If you have debts or a mortgage to pay, it's extremely important to pay it off as soon as possible. Once debts are out of the way, you have to invest the money you are not spending.

Investing is a scary word. Don't start imagining golden boys betting insane amounts of money in exotic and risky endeavors, I'm not referring to these mad lads. Just so you know, I am not an expert. 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, there is one concept everyone seems to agree on: 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. Two reasons: inflation, and compound interest.

Inflation is a general increase in prices, resulting in a lower purchasing power. 1000$ in a saving account today won't have the same buying power in 10 years. Investing your savings allows you to compensate for the increasing cost of living.

Investing money earns you interests. With index funds, the interest rate is low, but if those interests are compounded over many years they represent serious money. Let's say you invest 10000$ at an annual interest rate of 5%. After 20 years, your 10k$ will magically become 26,532$ without you doing anything. Once you invest enough money, you can live off those interests, also known as passive income.

If you just save your money in a regular saving account, you prevent it from working for you. Start saving, start investing!


The curious case of makers

Not all makers are equal in the quest for financial independence.

Makers with a full-time corporate job are more likely to reach financial independence sooner, and thus be able to work on their own project full-time.

Most freelancers don't have a stable source of income and must stash money for a rainy day. Rainy day money is not invested money.

Bootstrapped founders living on their savings are at the biggest disadvantage: you can't invest much when you don't have an income.

In all cases, you can't directly control your income, so it's really important to keep an eye on your expenses first and keep your burn rate low by living more frugally. Living frugally is not living cheaply, so don't start sacrificing your health by buying low-quality products and avoiding your friends.

If financial independence is your end-goal, keep things simple: don't become a full-time maker. Find a stable job, save as much as you can, and make on the side.

I consider financial independence as a milestone enabling me to keep on doing what I'm already doing without the constant pressure to make a living, so having a more traditional job is just delaying me from the goal I seek (mastery).

Similarly, everybody has their own goals and dreams. Finding your meaning will help you make the right financial decisions. Don't let others tell you how to walk, make your own path.

Originally published at makermag.com

  • 1

    @basilesamel Your writing has really improved here. Here's why:
    - Problem understood
    - Solution easily readable
    - Quote
    - Has some skimmable elements on it
    - Notes of a secret that I don't know (it's really investing, not saving)

    Matt Lo avatar Matt Lo | Feb 12, 2019 17:53:01
    • 1

      @mattlo Thanks! :D Yes I feel I'm getting better

      Basile Samel avatar Basile Samel | Feb 13, 2019 10:02:06
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