Why Everyone Should Strive for “Financial Independence,” Even if You Don’t Plan to Retire “Early”

I’m just going to put this out there now: I don’t really understand why people are sometimes offended by the idea of early retirement. Every once in awhile, you’ll get someone who’s utterly aghast at the idea of retiring before you’re decrepit.

“But what are you going to do with all your time? Aren’t you going to be so bored?” I don’t know about you, but the last time I was “bored” was when I was 12 and my computer access was revoked for abusing my Club Penguin privileges.

I have a list longer than my 5’1” body of things I want to accomplish, books I want to read, places I want to visit, languages I want to learn, and skills I want to master. Hell, sometimes I’m worried that if I don’t start now, I might not do it all before I die.

Early retirement doesn’t mean hanging up the work laptop to watch Jeopardy all afternoon and count the wrinkles in your crow’s feet. It means that if you want to work, you can work on your terms, and if you want to f*** around for a few years, you can do that, too. My dream is to create stuff like this for the rest of my life and never have to worry about if it makes any money or not (because spoiler alert – it really doesn’t).

In short, it means total freedom.

And I get it – total freedom can be scary. “Freedom” for Saturday and Sunday is fun. Total freedom makes you face yourself in a whole new way. So I can understand why, to some extent, people cling to their employment as an identity-defining facet of their lives. I’d love to challenge you (and myself) to give yourself more credit than that. You are more than your job, and you have more to offer the world than you probably even realize.

What’s financial independence?

When we talk about financial independence, I don’t mean in the broad, touchy-feely way that we feel empowered by the ability to pay for our own stuff (although that’s valuable, too).

“Financial independence” in this context means you have so much money invested that the compound interest and returns on your investments make enough every year that you can keep using your money at a pre-defined pace and it’ll always replenish itself.

Sounds pretty dope, right? And lucky for us, there’s an easy way to calculate what your financial independence number is. In other words, it’s a very easy equation to determine how much money you need to have invested in order to live on the amount indefinitely.

I feel like the first time people hear about this concept (myself included), they’re incredulous – like it’s too good to be true.

The consumer culture we live in has a very specific script it prescribes for us. Ready for this? Get your Prozac handy, because it’s going to knock you on your ass.

Grow up, take out student loans to go to college, work an entry level job to pay them back, buy a car, buy a home, saddle yourself to hundreds of thousands of dollars in debt because that’s the “adult” thing to do, make yourself feel better and numb the madness through impulse purchases, alcohol, Netflixes binges, and sugar, then live your entire life chained to the treadmill of your 9-5 so you can afford the aforementioned debt minimum payments!!!! Then, when you’re 65+, you can have whatever measly contributions you made to your 401(k) to live out the rest of your days in some retirement community and call it a life.

Are you depressed? Because that just depressed the shit out of me.

Financial independence basically takes the script and rejects it outright: Instead of blindly taking your number at the deli of traditional life decisions, it says, “Actually, I’m going to keep my fixed expenses as low as humanly possible, work hard, get insanely creative with my income, invest like hell, and walk away from all that noise at 35 or 40 so I can spend the next 50 years doing whatever I want instead.”

There are plenty of critics of this idea, but you know what? I don’t think it hurts to strive for it, even if you don’t actually intend to retire early. What about just having the choice? Wouldn’t the option feel pretty good? I don’t know about you, but I do my best work and feel most fulfilled when I don’t feel utterly stuck.

A few really beneficial side effects of pursuing financial independence:

• It resets your reward system to be grateful for what you have. Because you’re turning down the consumer hamster wheel, you learn to appreciate the little things. You no longer need bigger, better, newer and fancier to keep your amygdala tickled.

• You’re constantly thinking critically and applying your skills in new ways to try to earn or save more, which can be fulfilling in and of itself.

• And, most importantly, it gives you something compelling to work toward. More on that below:

If the choice is, “Buy and have the shiny thing or refrain and don’t have the shiny thing,” you’re automatically set up for failure

It’s a binary that’s going to test your willpower every time. If it’s “have” or “don’t have,” what human being in their right mind would ever consistently be capable of choosing “don’t have”?

The secret isn’t having stronger self-control, it’s putting structures in place and creating a mindset that simply tests your self-control less often.

That’s why financial independence is so damn compelling. The choice is no longer “have the thing or don’t have the thing,” it’s, “have the thing now or get closer to my impending permanent freedom forever.”

Let’s talk about how to calculate your number

I’m not kidding when I say once I saw this, it lit a fire under my ass that blasted me into 2035.

I spend $2,600 per month, give or take a few hundred. It fluctuates a little (some months I may only spend $2,300, others might see it float up closer to $3,000), but $2,600 is the average. In other words, I need $2,600 to exist in my current state of being.

Once you know how much you spend per month (a crucial component of this equation, and a byproduct of an effective budget), you know enough to determine your number – just multiply it by 12 to understand what your annual spend is, then multiply THAT by 25 (I’ll explain why below).

$2,600 per month * 12 months in a year = $31,200 per year

My life, as I live it now, costs $31,200 per year. Of course, there are areas I could cut back to drop this number even lower, but I’m fairly happy with the balance I’ve struck for the time being.

$31,200 * 25 = $780,000

If I have $780,000 invested, I can retire. Why? Because if we assume an average rate of return of 7%, I can use $31,200 of my money every single year, and the interest will always replenish that money used. (Again, in this mathematical vacuum – some years will be better, others will be worse.)

If you’re sitting there like, wait, hold on – so you could just live forever on $780,000? Yes.

For example, in year one, I could put myself on the Payroll of KG for $2,600/month, and be left with the following:

$780,000 – $31,200 = $748,800

Assuming the market returns 7% that year, I’d finish with $801,216. Notice anything funny there? It’s more than I started with! That’s the law of large numbers. Of course, I wouldn’t be taking out $31,200 all at once; I’d withdraw $2,600 month over month, which means the balance would stay higher, longer. This example is conservative in the sense that it removes the big chunk all at once.

The idea is that this magic math problem can go on indefinitely.

To the extent that you trust Calculator.net, check it out:

The obvious down side is that you can’t really spend more than your allotted $31,200 (in this example) or the equation will break, but I’ve found I can live relatively large (by my standards) on $2,600 per month.

I was about to launch into a bunch of different scenarios, but I think you get the point. This is why lowering your expenses helps speed up this timeline exponentially. I know I saved $115,000 in about three years – I don’t think it’s unrealistic to assume I could get to $780,000 by 35! But let’s say I increase my monthly expenditures to $4,000 per month. Now, my number needed to sustain that lifestyle indefinitely is $1.2M.

I’m not telling you to actually retire at 35 and live on $2,600/mo. for the rest of your life

What I’m telling you is to consider how a goal like that could change your perspective on temptation and reward.

For me personally, the temptation to spend $1,000 instead of invest it drops dramatically when I consider that I’m essentially using my money to build an elaborate escape route, should I ever want it.

Imagine turning 35, having $800,000, and deciding you want to take a year off to travel and try something new. Great. You can spend $2,600/mo. and still end the year with more money than you started, even if you don’t make another dime (again, assuming you get a 7% rate of return – never a guarantee).

I really simplified the “FI” mathematical breakdown to make a point

And I know a more devoted follower of FI will probably poke holes or offer up other scenarios (some suggest multiplying by 33 instead of 25, for example, if you’re really young).

But I think it’s crucial to get clear on WHY you’re saving – the why will carry you through all the many temptations that will cross your path.

I created a Wealth Planner with a Financial Independence tab/tool that will take your numbers (monthly spending, income, etc.) and spit out your optimal “lean FI” and “fat FI” scenarios, and how your money would grow even as you withdraw it (in other words, what your “$780,000” is). If you’re interested, check it out.

Candidly, I’m shooting for at least $1M total, but realized while writing an article over the weekend that I’ll actually probably be able to bounce as soon as my taxable account hits $500,000 – because my 401(k) and Roth IRA would keep growing untouched for the next 25 years, and that’ll be more than enough by the time I use them (that’s a post for another day; stay tuned!).

I was on the phone with Ella the other day talking about my $100,000 article and she goes, “So wait, what are you saving it for?” I audibly laughed and said, “So I can be free before I’m 65.” And you know what? You can too.