Money blogger says what?

Isn’t this a website where I’m supposed to tell you that you’ll never be rich and free if you indulge in all your silly whims?

Sure, sometimes – but today, I want to share something I’ve been thinking about with regards to the path to financial independence.

For the uninitiated, financial independence (or “FI”) describes a financial state in which you have so much money invested that you never have to work again – in other words, you’re financially independent from the working world. Work is optional.

If this is the first time you’re hearing about FI, you probably assume you’d have to have many, many millions of dollars for this to be true – but it’s probably a lot less money than you’d think. To learn more about FI, how it works, and why it works, check out this post.

In the meantime, let’s break down why an article with this title even needs to be written.

The obvious temptation when pursuing FI

When I found out about financial independence, I felt like someone had just handed me the cheat code to life.

All I have to do is save 25x my annual expenses? Easy! I’ll start right now! She said, driving her leased Acura RDX and toting around her Louis Vuitton Neverfull. Narrator: She did not.

Because even when you’re “only” trying to save (read: invest) 25x your annual expenses, that may not be tens of millions of dollars – but it still might be somewhere between $1M and $2M. Considering that the average household income of an American family was around $68,000 in 2019, it takes a while to save $1M or more – even if you’re saving half your income. (Which is, spoiler alert, why most people do take 40 years or more to reach retirement age.)

After all, let’s pretend our family was saving half their income at $68,000 per year – $34,000 before tax, because I’m lazy.

Using the government compound interest calculator and assuming an average rate of return of 7% with +/-2% variance each year, it still takes this family 17 years to hit their $1M benchmark.

So what is our FI-hungry family probably tempted to do?

Cut every corner possible.

When you’re fired up about FI (pun intended), the temptation is obvious – consider the calculation.

Annual expenses * 25 = your FI number that’ll support you indefinitely, as long as you only ever withdraw about 4% per year.

How do you both (a) make the FI number smaller and (b) save it faster?

By spending less.

This is why spending less does do more for your FI pursuit than earning more, because spending less shrinks the number.

Let’s make it real:

Family spending $34,000 * 25 = $850,000 to reach FI

Family spending $30,000 * 25 = $750,000 to reach FI

Spending just $4,000 less per year cut the FI number by 11%.

While this might seem like a slippery slope that you’d like to find yourself on, lowering your expenses more and more, it’s still a slippery slope.

This hypothetical FI-hungry family is likely going to be pretty willing to start cutting extra costs anywhere they can find them. That’s why – when most people hear about the financial independence community – they imagine a bunch of boring-ass people eating brown bananas and saving 90% of their income, living like the Duggars got cut off from their TLC contract.

If you want to hit FI as soon as possible, you’ll probably overcorrect at first.

Why is this a bad thing?

While the temptation to deny yourself and sacrifice at every turn might feel noble – prudent, even, if you still harbor immense amounts of Catholic guilt like I do (blessed are the poor, right? They will inherit the Roth IRA!) – it’s problematic.

I’m not talking about the emotional or psychological reasons it’s problematic.

I’m talking about the mathematical reasons why this strategy has no longevity.

Your FI number has to sustain you forever. By investing 25x your annual expenses, you’re all but guaranteeing you can withdraw 3-4% per year in perpetuity to live on without running out.

If you get your expenses artificially low in order to reach FI, you’re going to set yourself up to live the pauper’s lifestyle forever.

Remember that, once you’re FI, you still want to enjoy your life

I’m all about sacrifice (Catholic guilt, remember?). Hustle, hustle, work, grind, pack your lunch, brew your own coffee – whatever! I’m into the ethos of #WorkEthicMania.

But let’s not lose the forest through the trees here – the point is to be able to walk away from work if you want to (or at the very least, have the freedom to choose your work without considering income as a factor – pretty cool, huh?). It’s freedom.

What happens when you hack, scrimp, and deprive your way to FI? You basically guarantee that the only lifestyle that FI number can support is the one you’re currently living – and that doesn’t feel very freeing.

Here’s the reality: When you reach FI, you very well may decide to stop working. You’re probably going to have a lot more time on your hands. You don’t want to feel like you can’t leave the house or do anything because your FI number is only supportive of a lifestyle that’s intensely minimal if that lifestyle doesn’t feel good to you. Then you’re trapped.

The operative words: “A lifestyle that feels good to you”

Some people can happily live on $15,000 per year. The van lifers know all too well that it’s possible. But if that’s not what you want, even if you can get your monthly expenses that low (and lower your FI number accordingly), your financial independence won’t feel very good.

How do we find balance?

It comes down to intentional spending (ew, do I sound like a wellness blogger now?) – spending your precious dollars where they add value to your life, vs. sleep-walking through the beauty aisle at Target and buying any product that came from a semi-decent brand team.

If you feel like you’re crossing the line into true deprivation (read: never treating yourself, ever), you’re probably setting yourself up for a lifestyle that’s not sustainable (at least, not enjoyably) in the long-term.

The one caveat to the deprivation tactic

The reason the math doesn’t support deprivation as a means to FI is because it changes (reads: lowers) your annual expenses artificially, and then locks you into that lifestyle by lowering your FI number, too.

If you really want to get there faster, you can calculate your FI number based on your ideal lifestyle – the amount of money you want to spend every month to enjoy your life – but then spend less (sometimes, a lot less) than that in the interim so you’re able to save more and get there faster.

For example, I’m spending about $2,500 per month right now. That means my FI number is $750,000.

But am I really living it up? Living high on the hog? No.

Do I want to lock myself into spending $2,500 per month for the rest of my life? No, I don’t think so. I don’t want that restriction. Because sure, I can pull it off now, but what about in 10 years from now? 15? 20? I don’t want to reach early retirement and then realize that I’m miserable or that I’ve limited my options.

So I don’t shoot for $750,000.

Instead, I’m really shooting for $1.25M. If I can hit $1.25M, I’ll feel plenty comfortable leaving traditional employment and venturing out on my own to do any number of things.

4% of $1.25M is $50,000 per year, or $4,160 per month – about $1,660 more than I spend now.

That cushion feels good to me, because as it is, I’m certainly not depriving myself – but I’m also not drinking a $5 cold brew every morning, and in early retirement, maybe I’ll want to.

In summary

Financial independence is supposed to be about options. If you deprive yourself in order to get there faster (by artificially lowering your FI number), you’re actually depriving yourself of the very thing you set out to achieve in the first place: freedom.