What is Financial Independence (FI)?
As humans, specifically Americans, we love the concept of independence. Maybe it’s in our blood, or maybe it’s because of the widespread societal pageantry of July 4th (Independence Day). Regardless, we love our independence and the idea of that applying to our finances is invigorating.
You may have previously heard of the phrase Financial Independence (FI) or the FI movement, but aren’t quite sure what that means. Maybe you’re familiar with the FIRE (Financial Independence Retire Early) community or Mr. Money Mustache. Or maybe this phrase is completely foreign to you, please allow us to explain.
At The Compounding Interests, we subscribe to many of the principles of FI and would like to provide our definition of FI, its’ history, and how it applies to you.
Definition of Financial Independence
The source of all knowledge, Wikipedia, states, “Financially independent people have assets that generate income (cash flow) that is at least equal to their expenses.”
I don’t love that definition since I feel it is a bit simplistic, but it does provide a general understanding of the concept of FI. I prefer to frame FI in terms of the 4% rule.
The 4% rule (or general benchmark) is based on the Trinity Study which showed that an investment portfolio could fully fund a 30 year retirement, given a 4% yearly withdrawal rate. So, if your accumulated investments (25 times your yearly expenses) allow you to withdraw 4% of your portfolio to cover your those expenses, you are considered Financially Independent (see example graphic).
There is debate over whether the 4% rule should instead be a 3-3.5% “rule” instead, but even the most cautious of portfolios would return enough income given a large enough nest egg. Stock and bond returns aside, FI is just what it says, having enough passive income to cover your expenses.
FI vs. FIRE
The term FIRE (Financial Independence Retire Early) has been adapted to the simpler FI (Financial Independence), given that it allows for greater flexibility to achieve FI and still work. FI vs. FIRE is partially a matter of semantics, but in order to avoid potentially alienating people who love their job, or love working, the term FI has been used as a more accurate reflection of the community’s goals.
The Compounding Interests is a site about the pursuit of FI or FF (Financial Freedom). We think there is great value in work but we also can appreciate having the freedom of not being tied to a paycheck.
History of the FIRE movement
Ever since the concept of retirement was born, many people have amassed enough money to fund their retirement. The 4% rule is not a new concept and has been a general aim of traditional retirees for years.
The FIRE movement questioned the norm of retiring at ~age 65 and emphasized the cutting of expenses and achieving a high savings rate in order to similarly employ the 4% rule, just at a significantly younger age. The FIRE movement allows for a work-optional approach to life, and rebels against the paycheck to paycheck struggle that so many experience.
Key FIRE players
One of the first founders of FIRE, and perhaps the most well-known, is Mr. Money Mustache (MMM). MMM was the gateway for many FIRE enthusiasts and his strict approach to lowering his expenses and investing the rest, has many considering him the ‘Godfather’ of the FIRE movement.
Since MMM, there have been others FIRE personalities who specialize with focuses on minimalism, frugalism, tax-optimization, house-hacking, or travel rewards. However, despite their different areas of specialization, they all operate through the lens of a pursuit of FI.
In addition to MMM, JD Roth, JL Collins, and ChooseFI have all been instrumental forces in the FIRE community by presenting new ideas and honing the overall message.
Levels of FI
While FI aligns with the 4% rule or 25 times your yearly expenses, does it mean that you are either at FI or not at FI? There are more obvious checkpoints on the FI journey such as being Half-FI, or having half your FI number saved. Another traditional checkpoint is lean-FI, when your investments could fund a boiled down no-frills lifestyle if need be.
But in addition to the objective, measurable checkpoints, we feel that simply starting to change your attitude towards money and evaluating your expenses is perhaps the first and most important checkpoint/level.
In the movie The Matrix, Keanu Reeves character, Neo, unplugs from the fake, artificial world of The Matrix and realizes that he needed to wake-up and face the truth around him,
We similarly believe that society needs to “break free” from the message around us that emphasizes constant consumerism and that debt can solve all our problems. Shedding consumer debt, learning to manage your money, and investing, are all levels that anyone can complete. Andnd if you make these changes, it’s as Obi-Wan Kenobi famously told Luke Skywalker, “you’ve taken your first steps into a larger world.”
Your version of FI
Hopefully you have found this description of FI to be informative and thought-provoking. FIRE, the 4% rule, travel rewards, and frugalism are all key pieces of FI and we encourage you to consider them and see what resonates with you.
Here at The Compounding Interests, we agree with many of the FI principles but feel that FI alone is not a complete story. Our version of FI is referred to as FISD or Financial Independence Spiritual Dependence as we seek to honor God with our lives and our finances.
Jonathan Mendonsa from ChooseFI version of FI can be summed up by the idea of a Fully Funded Lifestyle Change (FFLC) and he refers to FI as a superpower that must be used responsibly and to help others. We agree with him and think FFLC does a good job encapsulating the FI message. Troy and I have ‘gone down the rabbit hole’ of FI and we want to try and spread this amazing message far and wide, we hope you will join us.
What is your personal flavor of FI? Which tools in the general FI tool belt will you choose to employ? Let us know in the comments below!
