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When I first learned about personal finance, I was all about FI/RE (financial independence, retire early). But then came along financial freedom. But how are they different, and what has that nuance unlocked?

Shoot us an email at moneywithkatie@morningbrew.com and let us know if you unlocked any epiphanies in the process. We’d love to hear from you.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

• Stanford Marshmallow Test

• Why Rich Kids Are So Good at the Marshmallow Test, from The Atlantic

• Our episode on the 4% Rule, with Bill Bengen

• Bill Bengen’s original research

• Sample compounding returns calculator

• Our episode on the perfect save rate

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Katie:

I got my start in personal finance with a baptism by FIRE, Financial Independence, Retire Early. This rhetoric was such an integral part of my financial education so as to distort it completely. And I say distort because the philosophy takes regular personal finance tactics and basically turns them up to 11 becoming so extreme that most, quote, unquote, normal underlying assumptions about best practices may actually change in this paradigm.

For example, in the traditional versus Roth debate, the, quote, regular person personal finance advice might recommend a Roth 401(k) unilaterally because the regular person is likely only saving in a 401(k) and nowhere else is not interested in optimizing and may plan to work until they're 75. Given those parameters, Roth probably is the better choice for them. But someone who is ready to optimize and earning a lot of money and interested in retiring in their 50s, not so much.

Most modern day adherence of the FIRE movement may clarify that it doesn't have to be extreme or claim that I'm misrepresenting the movement's intent but I don't even mean it derogatorily. The FIRE world has a lot of valid philosophies, many of which, if adopted widely, would probably put most people in a far better financial position. After all, saving 30% of your income instead of 10% is probably going to create better long-term outcomes, right? I am merely calling out the cultural differences between traditional financial advice and FIRE principles. The same way that someone who grows up in the UK is likely to feel differently about, say, football than someone who grows up in Southern California will feel about it.

Financial independence or the magical threshold above which you have enough money invested, that you no longer need to work for income has always been an inspiring charge for me but it's not a financial motivation silver bullet as I learned recently while chatting with a friend who's trying to get better with money. A few weeks ago, my friend asked if we could get on the phone to talk about his finances. He had recently switched jobs and he realized his total compensation was going to be more than $200,000 which left him feeling both titillated and terrified. When I logged into the Google Meet, he told me, "I feel like I finally make enough money to actually do something with it and I don't want to blow it."

Before long, it became clear to me that we needed to locate his why. What was going to motivate him to make the decisions that would get him furthest? He told me he's really disciplined about going to the gym and eating healthy food but, for some reason, he noticed his discipline didn't extend to his finances. I asked him if he felt his health goals had a, quote, why attached because I had a hunch that there was a larger vision that was guiding his fitness behavior. Whether it was looking a certain way or feeling a certain way, I figured he was clear on that already. He confirmed my suspicions and then I couldn't wait to tell him about financial independence. I was like, "Oh, my gosh, I'm about to blow his mind," so I pull up the financial independence tab of my wealth planner and I started plugging in his numbers like a rat pressing the sugar water button.

I was so excited to show him his path forward and I was so confident that it was going to suffice as his powerful why, that everything was going to click once I showed him this information. But then his response was underwhelming, to say the least. He was like, "Yeah, that's cool, I guess, but I don't really want to not work." It was a bit of an aha moment for me. Financial independence, depending on how far away it is or how much you like your job, is a bit like life's marshmallow test. And for those of you who have somehow managed to avoid this famous story, the marshmallow test was a study at Stanford in 1972 and it tried to measure how well children could delay immediate gratification to receive bigger rewards in the future. Some people really would prefer to eat the one marshmallow now than delay gratification by 15 years.

Interestingly and relatedly, recent research found that kids from affluent families were better at delaying gratification in this famous experiment. That is to say people with more money tend to be more comfortable with trusting that the future will play out as promised and believing that the metaphoric second marshmallow really was coming. But as I've abandoned many of my more extreme fi takes like my former refusal to pay for convenience or only showering at gyms to save money on shampoo, I'm realizing that a few of my default positions on financial topics were informed by these early retirement strategies in a way that I had ceased to even notice. It had become my status quo and now I'm starting to question some of these fundamental foundational principles to take another look.

Welcome back to the Money with Katie Show, rich girls and boys. I'm your host, Katie Gatti Tassin. And the conclusion I'd like to explore a little more deeply today is that financial independence is the end all be all that I've long believed it to be and how to think about it a little more critically. We'll get into it after a quick break.

Sometimes the financial independence concept in general can be a bit confusing. It's one thing to grasp something heady like the 4% safe withdrawal rate in theory but it's another thing entirely to apply it to your own situation and even more challenging to wield it as a motivating force. I love my job and I still find work optionality to be a very powerful motivator but it might not move your emotional needle. McCall, another close friend of mine, once told me that it seemed like such an if rather than a when, that she didn't feel very motivated to try. As in, "Well, I'm not sure I'm ever going to get there so I don't really feel compelled to attack it full force.

And I get it, the economic and employment environments that many people find themselves in right now can engender a sense of hopelessness about the future that make it seem as though effort is futile. So, let's boil down the concept of financial independence into numbers that are a little easier to wrap our heads around then we're going to examine a potentially different, more attainable and, therefore, more motivating goal worth striving for. Sometimes when I explain the math of five to people, their eyes start to glaze over. It's just 12 times monthly spend and then 25 times that and then, well, unless you're more conservative, in that case, you're ... Yeah, it's not exactly a contender for most interesting conversation topics when Euphoria season two exists and Beyonce is about to drop a visual album.

But another reason why it tends to lose us psychologically is because the numbers we're talking about seems so hard to conceptualize. If you've been hanging around the personal finance corner of the internet for a little while now, you might be acquainted with some of the 4% rule research that serves as a guidepost to understand how much money we need to accumulate in order to be a financially independent. And if you'd like to hear the world's most adorable interview with the man who discovered the safe withdrawal rate in the 1990s, we'll link our conversation with him in the show notes.

But since most of us deal with dollars in the tens of thousands realm and only occasionally in the hundreds of thousands realm like if we're buying a home or negotiating a new high salary, financial independence conversations where we're dealing with dollars, most likely, in the millions realm can seem laughably out of reach. It's hard to understand how we could go from a few thousand bucks in our savings account to a 401(k) worth $3 million. Exponential compounding defies conventional intuition and some of us feel so discouraged by it that we just check out entirely. Like both of my aforementioned friends, we assume the goal is unreachable and so we swipe and tap and insert our way through town. That's a credit card reference, not a sexual innuendo though, I suppose, it could apply to both.

But what if we reverse engineered our five formula to understand what a far more comprehensible amount of income requires? What does, say, every $100 per month we spend mean for our net worth goal? What about each dollar? $100 per month equals $1,200 per year, times 25, equals $30,000. For every $100 per month that we want to spend in our post-work lives, we would need $30,000 invested to reliably produce that $100 in monthly income. And remember, this is assuming it's invested in a very specific type of portfolio in the stock market with between 50% and 75% large cap stocks and 25% to 50% government bonds according to Bill Bengen's original research.

To break it down further at its most fundamental level, for every $1 you want to spend each month, you would need $300 invested to produce that income. Now, this provides a better sense of what casual spending can amount to. Often, we see examples that show what $100 invested 20 years ago would've turned into but this is the opposite. This part of the exercise is telling you what you'll need 20 years from now to produce that $100. To flip the coin over and look at the other half, it might also be worthwhile to value our $1 today. If I have 40 years ahead of me and I'm assuming a 7% average annualized rate of return after accounting for inflation, I know my $1 will likely 15X in that time. I don't need to invest $15 today to have $15 in 40 years from now, I just need to invest $1.

So, you can put these two shortcuts together to see that, yes, you may need $300 for every dollar you want to spend in the future but, since each dollar you invest is going to 15X, assuming a 40-year timeframe, you're not on the hook to come up with all 300. $20 invested today will turn into 300 40 years from now, producing your $1 of spending so you just need to invest that $20. And for other time horizons, if I have 30 years of compounding, we're talking about each dollar invested multiplying by around seven and a half times, every $1 turning into $7.50. And if I have 20 years, we're talking about $1 turning into roughly 380. As you can see, the difference between 20 years and 40 years is vast.

You can always use a compounding returns calculator to generate more precise estimates but you get the picture. You need a lot of money to be financially independent but, fortunately, time and compounding are on your side. We'll be right back after a quick break.

So, we've just taken a big goal, your overall fi number and we've broken it down into the smallest increments possible which helps us contextualize what each $1 today could be worth in the future as well as what it costs to reproduce the same dollar in income later. For example, if you knew you wanted $2 million in today's purchasing power, 30 years from now in retirement, you would need to invest a steady $1,800 per month for all 30 years for a total of around $649,000 in total contributions or about $1.4 million less than what you'll actually end up with. Or, if you were interested in frontloading all of your effort, you could get 250K invested quickly and then let it sit there for all 30 years.

So, if you've got a quarter million sitting around today, that's about as good as having 2 million in three decades, congratulations. But for those who may not find financial independence to be a very magnetic goal, it might be more beneficial to focus on financial freedom instead.

Now, I know this sounds like a semantic hellscape and, to some extent, I am making up my definitions as I go along. But I want to differentiate between fully work optional millions and millions in the bank and, for all intents and purposes, money is no longer your primary concern. Financial independence might be Wonka's chocolate dipped Roth IRA, rainbows, unicorns and funded taxable brokerage accounts where you are free of anyone else's clutches. You've got enough money on the bank that you never need to work 9:00 to 5:00 again if you don't want to but there's a different phenomenon that happens a lot faster, something that allows you to move freely about your life called financial freedom.

Now, financial freedom is the point at which the clause but I can't afford it is mostly stricken from your vocabulary. You want to move across the country, you want to change jobs, you want to take a six-month sabbatical to learn about basket weaving, be your guest, you've got it like that. Sure, you might not be able to square dance out of your Fortune 500 company and leave a trail of subtle but pointed insults in your auto replies just yet but you're no longer operating from a place of financial restriction. And most people really overestimate how long it takes to reach that point. After all, saving between 20% and 30% of your income means you'll have a full year's salary saved in three to five years and that's assuming you're only saving.

If you throw some bull market fuel on the fire, you may find yourself with a lot more a lot sooner and this is partially why we recommend a save rate of around 35% wherever possible in our perfect save rate episode. And while saving 20 to 30% of your income probably won't happen overnight, doing so for a couple of years is a goal that's likely achievable with 12 to 18 months of concerted effort as opposed to a 20-year plan. It feels a lot more tangible, your behavior today actually impacts the outcomes as opposed to something you may have a tenuous grasp of in a spreadsheet but not in real life. If goals in the millions feel too far away to be motivating, consider striving for elimination of the phrase but I can't afford it. How would that feel?

Imagine for a moment moving about the world in a way that most of the reasonable things you want in life, to extend a vacation by a few days, to get both pairs of joggers when you can't choose a color, to treat your friends to dinner regularly and internalize that feeling, that's what financial freedom feels like and it does not require a multimillion dollar net worth to be possible. Reaching your first six figures in investments, for example, may take a couple of years depending on how much you're earning, what type of employer match you have, if any, and what the stock market is doing in the short term, aka jump cut to Q1 and Q2 in 2022. But once you hit, say, $120,000, you've got enough money invested already to reliably produce $400 per month in income or, more impressively, $4,800 per year. That's a sizable car payment, that's two Equinox memberships, it's 45 burrito bowls. I think it used to be 50, thank you inflation.

So, how do we turn the I can't afford that list into the I got it like that list? The exercise that I would recommend trying, and one I'm going to do myself and then I'll report back in the newsletter at some point so subscribe, baby, is making a list of the most common events or thoughts that trigger the phrase I can't afford that this week. Like when you have the urge to go out to eat on a Tuesday or someone invites you on a trip or you feel inclined to book a 5:00 a.m. flight to see grandma because it's cheaper or when you're feeling fed up with your boss and you think, "Man, I wish I could just quit this job without feeling like I needed to have something else lined up right away." Anytime a thought like that crosses your mind, try to quantify how much money it would really take. What is the gap between the way you're currently living and the way you want to be living because that vision may not totally exclude paid labor.

In the FIRE world, that was always the operating assumption. How much money do you need to live the life you want to live without any work at all? That question elicits answers that are typically a million dollars minimum even to live what I would call a rather uninspiring life that is spending less than $40,000 per year total. It's a big, big hurdle getting to a million dollars with potentially a small-ish reward but that's not necessarily the case in this framework. It might feel a little reminiscent of Ramit Sethi's rich life framework and I'm really attempting to quantify that. Maybe having $100,000 in investments would provide that sense of security and ease. Maybe it's an extra $500 per month in income that would allow you to shrink the gap between the discretionary spending you're able to do now and the type of entertainment budget you want to have.

When I tried calculating this for myself a few years back, I remember realizing that I could live my largest and most booshtastic life with an extra $5,000 of spending money per month. That was my grand vision of, if I could spend all the money I wanted to on everything I wanted completely without limits, it would cost about $5,000 more per month. Now, that's not nothing, of course, but it's not like saying I needed an extra $20,000 per month. I could wrap my head around five grand. I was like, "Oh, okay. That's the pipe dream? It just takes $60,000 more per year. Okay, I can work up to that." Seeing the number associated with my living large vision for life helped me see opportunity everywhere.

If you knew it was an incremental thousand dollars, you suddenly have a sense of scale for incremental effort that might be required. If you work in a commission-based position, it could be one additional deal per month. If you're a business owner, it could be an increase in conversion rates by 2% on your checkout page. If you're a salaried person with a side hustle, it might be two additional freelance pieces per month. Regardless, it's the burrito bowl effect that I referenced that, once you have a number and a motivating goal associated with it, the shape of the final puzzle piece might become a little more obvious. And what's been really interesting about working so closely with another financially savvy individual has been the ability to have intimate financial conversations regularly and watch changes in real time.

So, you know her, you love her, from Rich Girl Roundup, I wanted to get Henah's take on how this shift happened in her life. So, Henah, thanks for coming off the producer link so I can pepper you with questions and thanks for being willing to share your own financial journey a little bit today.

Henah:

This is exactly like the conversation you and I have offline but now we get to bring that to the audience which is great.

Katie:

I know, it's just such a perfect fit today. So, give us a brief summary of how you thought about money when you first joined the team. How were you thinking about your financial goals and progress?

Henah:

I've talked about this in the show so it's no surprise that I made very little money for a long time in the nonprofit space, like 40, 50, barely breaking 60,000 but it felt like I had been really stagnant for a long time. I was basically just building up an emergency fund and then paying it down because I would get laid off or my husband would get laid off or those kinds of things would happen. And so, I never even got to the point of thinking about investing and financial independence and financial freedom. It was more of a, yeah, I'm putting money in this retirement account but I'm not actively thinking about it. And now, we're what, 20 months in and I feel like my mindset has shifted drastically.

Katie:

Interesting. So, I guess then you've already told me how you felt about your financial independence number if it was not really a consideration. But did you know it? Did it motivate you?

Henah:

I had no idea what the number was. If you had told me, "Oh, I don't know, how much do you think you'll need to live?" I would've been like, "I don't know, a million dollars." I would've just made up a number that seemed really big, I had no idea.

Katie:

So, I know you know it now.

Henah:

I do.

Katie:

Can you share a little bit about what it is now?

Henah:

Yeah. Between my husband and me, our FI number currently is around 3.3 million.

Katie:

Awesome. So, does that number motivate you or is that like a, "Oh, that's so much money that I can't even wrap my head around it."? How does it feel?

Henah:

It motivates me in the sense of, okay, now I actually know the number. I think I feel a little bit like McCall who you had shared, it felt so big why I even go towards that so I've reoriented myself into smaller goals for now. But having the financial independence tab on the wealth planner and seeing it break down by year was really helpful for me because it makes it more tangible. I can see how year one of my 25 or 30-year plan could help me get there but it's still hard to wrap your head around when I have just started making more money. And there's still a financial scarcity mindset piece to this a little bit, I'm trying to be more of the abundance mindset and know that it will hopefully only go up from here and then that makes it feel a little bit more tangible.

Katie:

Well, I'm very appreciative of the shameless unprompted plug. So, hashtag join the wait list. Okay, so some back of the napkin math. You know you need 3.3 million, I just typed that into a compound interest calculator. And to have 3.3 million in, I'm going to assume your timeline is probably around the 25-year point because that would have you retiring in your early to mid-50s, that means you would need to contribute or rather you and your husband would need to contribute around $1,750 per month—

Henah:

What?

Katie:

... for the entirety of that time.

Henah:

That's nothing. It's not nothing but it's so much less than I thought it would be. Are you sure? Did you do the math?

Katie:

I did the math. Well, investor.gov did the math. But yes, I know how much you've already invested so, to be fair, I put in your current investments, I put in the monthly contribution of 1,750, 25 years and then I know that, because your 3.3 million is basically what 3.3 million will be worth in the future and not the equivalent of 3.3 million today, I went ahead and used 9%. So, I'm using the, quote, unquote, real historical rate of return as opposed to an inflation adjusted discounted rate of return but, yeah, $1,750 a month should get you there in 25 years. And obviously, it goes without saying, if you were to do more, you would get there faster or you'd get to that point with more money.

Henah:

I know you can't see me but my hands are literally over my eye. I feel like I deferred what I could have been doing thinking it wasn't going to make a huge difference just to see this and to be like, "Oh, that's what, $[875] a person per month for the next 25 years, that's it?" Obviously, that's not nothing but that's not ...

Katie:

Yeah. But like you said, it's not like $5,000 a month, it's not what you would assume what you would need. But you mentioned that you had started, and I know that this is true because we've talked about it a little bit, with, quote, unquote, smaller goals. And I think, by smaller, they're still pretty big to be fair, but they're more near term. So, what is the financial goal that motivates you most? Can you talk a little bit about that?

Henah:

Yes. So, I have two right now. One is maxing out my 401(k) which we talked about in another Rich Girl Roundup in four days. It will have been the one-year mark of when I started contributing to that and the market has been down since I started putting money in and I still have $30,000 saved in there in which my life has not changed in a negative way by contributing the max. So, that to me was like, "Oh, shit, okay. You can do this and it's not going to drastically negatively impact your life. In fact, $30,000 is a lot of money to have passively put aside." So, that was one that made me realize, okay, I can do this.

Katie:

Big daddy Henah with her 401(k) max.

Henah:

I can't believe that all it took was a conversation of you being like, "Just do it and try it and see what happens," and now I have $30,000 extra, that blows my mind. The other financial goal that my husband and I have been saving for, and we're not planning to use it in the next year or so but just actively trying to get there, is saving for a down payment. So, I know this is like Katie canon that I should not want to that house but-

Katie:

Ha, ha, ha. No, no, no, you're allowed to want whatever you want. You're allowed to want whatever you want.

Henah:

I'm totally kidding, Katie has been very supportive. But I have always dreamed of having a house, that's always been a north star for me and so my husband and I have buckled down on putting $2,500 a month combined every month into a house fund and a down payment on a house is, usually, if it's 20%, you're looking at six figures. So, it's smaller growth but it feels much more tangible than a $3.3 million number.

Katie:

And how did you begin the process of road mapping your path to that goal? I understand that, when any person is going to look at, "Oh, I need $120,000 to put down on my dream home," that's still a pretty big goal. It's not millions but it's not 10 grand. So, can you talk us through how you thought about road mapping your way to that goal and the, I would say, 18 months later update because I know that it's been a little while now that you guys have been really putting a lot of focus on that goal.

Henah:

I think a little bit of this is the millennial story of my husband and I got married and then the wedding gifts from there became the foundation for starting the house fund. And so, after we had already gotten those gifts, I was like, "Okay, well, I can already see that we're making progress towards this," and then I was like, "I know that we will probably want a house in two or three years." At this point, this was a couple months back because we've been moving a lot, we don't necessarily know where we're going to settle down but I was like, "Okay, if I can give myself two years."

We had David Greene from the house hacking episode on the show and I was really listening to what he said about potential with house hacking or not even using all of that for down payment but I just said $100,000 seems like a safe amount of money to put aside even if I don't use all of it for a down payment and I tracked backwards from that. And then we've been doing that every first of the month for nine months now I want to say and so we're making pretty good progress. But one thing that I had texted you about, I think, maybe last month was realizing that, if we just continue this plan and we throw bonuses or tax refunds or something in there, that we can actually reach this goal within the end of next year which just seemed so wild because being able to set aside that kind of money even a year and a half ago would've been literally impossible for us.

So, outside of the Katie advice to increase your income and then max out a 401(k) and invest the tax benefits, there was no way we could have hit this goal now. So, I think my update is that we're tracking towards all these things, it's very exciting and it just feels much more in reach than something like $3.3 million but also compared to any time in my life previously.

Katie:

Totally. And you and your husband are contributing a lot to this house fund goal, you're also contributing a lot to your 401(k). Both of these things, I would assume, were made possible I'm hearing by a combination of you increasing your income as well as just having the financial wherewithal, really, to understand how to make plans like this and to focus your energy on the right things which is great. But I'm curious, throughout this process, has there been a mental shift at all from, you mentioned this scarcity mindset, but I would say that's what we're dubbing the I can't afford it phrase.

Henah:

Mm-hmm, yeah.

Katie:

Have you noticed yourself pulling back from that or feeling as though this has freed you up a little bit in your ability to spend?

Henah:

I think so. I noticed, six months ago, I would still be worried about buying socks for $20 because, at the time, when I was making $50,000 pre-tax, 20 bucks, that felt hard. I think, now, I'm moving into more of a I'm making enough money that this does not need to be a financial concern. So, I do think that I'm moving away from $20 and $50 purchases feeling limiting and moving into bigger numbers but I think I still am working on the abundance thing. I really resonated with when you said, "I don't maybe need to book the 5:00 a.m. flight anymore to save 30 bucks, maybe I don't need to feel bad or guilty about having a migraine so I order takeout one day," those things have helped a lot and freed up a lot of the guilt and anxiety and instead I just am like, "No, this is what money is for, you can use it instead of only saving it and deferring it for the future," but, yeah. Does that make sense?

Katie:

It does. I think your point about those two examples of the flight time and the takeout when you need it, I also have had moments like that where I know it's irrational but I'm like, "Ooh, I shouldn't order takeout tonight, I want to save the 20 bucks." Even though I don't have the time to cook, I'll put myself through it just because it feels or I'll be looking for the cheapest flight rather than the good time and I'll have to sit there and have a realistic and rational conversation with myself of, "No, Katie, you can afford to book the flight that's at the good time. You don't need to book the cheapest flight, it's fine."

Henah:

That has been really eye-opening, I think, as well is realizing that financial freedom does not have to mean that I'm going to quit my job which like, "This is also my resignation, Katie," but it just means a little bit more freedom in my everyday decisions which has been really, really nice.

Katie:

Shoot us an email at moneywithkatie@morningbrew.com and let us know if you unlocked any epiphanies by doing this process, we would love to hear from you. And that's all for this week. I will see you next week, same time, same place on the Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer and additional fact checking comes from Kate Brandt.