Financial Independence 101

If you are new to Financial Independence, this post is for you. If you are not new but you’ve ever found yourself in the situation where you try to explain what you’re doing to family and friends and get the blank stare or the shrugged shoulders or the dismissive comment – this post is also for you.

Sometimes I feel as if I am living a double life. I take care of my boys, manage my career, meet with friends and family and yet all the while, it feels like I’m working on this life-changing thing that none of them know much about. Something that has the potential to change my life so radically for the better I want to share it with them all so they can do it too.

Those of us that have had the light-bulb moment know how crucial the message is but it can be hard to convey. So I wanted somewhere to send them that has everything they need to get started. This is my attempt to provide that hub.

(For anybody that’s not much of a reader – there’s something for you too at the bottom of this article).

Financial Independence 101

What’s it All About Anyway? What is FI and what’s the point?

1. Start Here for a brief introduction – a quick 2 minute read of the what and the why.

2. Curious? Thinking this Financial Independence thing could be the missing link in your life? Wondering how it works and where to start?

Let’s dive just a little deeper and read an excellent article which explains the relationship between what you spend and how much you need to save to achieve the lifestyle that suits you. It will show you the easy maths that you can use to figure out when you have enough money invested that you can live off your investments for the rest of your life….. and yes, that is entirely possible.

What is FIRE and How Does It Work written by Ty Roberts over at Camp Fire Finance  is the most straightforward explanation of what FIRE is and how to achieve it that I’ve found.

What is FIRE How Does it Work?

The Magic of Compounding

3. Ok, so now you’re thinking – I’m onto something here. Problem is, those numbers are huge. There is no way I can save 500k or 250k. (Hint – you don’t have to save it all…. ).

Don’t forget that if you are employed, you may well be getting a helping hand from your employer by way of their contributions to your pension or retirement savings plan – it doesn’t all have to come from you but it all counts.

Now step in the greatest mathematical discovery of all time – Compound interest 🙂 No complicated maths here, this is just the idea that interest builds on interest, putting a rocket booster under your savings.

Coined by Albert Einstein as the eighth wonder of the world, by the power of compound interest, £10,000 invested in the stock market earning 7% annual return and left alone for 10 years becomes £20,097. Stuff it under your mattress and you’ll earn nothing. Spend it – and it’s all gone!

compound interest graph

For anyone that gets excited by the numbers (that would be me 🙂 )  Monevator has a neat compound interest calculator for you to play with. Use 7% for the interest rate as a good rule of thumb for average investment returns. Play around with what happens if you add £100 a month or £500 or £1,000 and you’ll start to see the magic in action.

Earn, Save, Invest

4. Still with me? Ok, so we’ve talked about what Financial Independence is all about, why you might want to achieve it and how it may be easier than it first seems. Now we need to think a bit more about accumulating that stash.

For my take on the three steps you need to take to get that pot of funds accumulated read this.

And over at ESI Money is a great article about the money moves he made that made early retirement happen.

Isn’t Investing Risky?

5. One of the biggest reasons so few people ever try to achieve Financial Independence is fear. The stock market is risky / I don’t understand it / I don’t want to lose all my money – all these are common objections. Or if you choose another investment vehicle like the property market, you may think that house prices are going to fall / it feels like the top of the market.

But think about it this way – what’s the alternative? You will never get rich stashing money in the bank. You will be lucky not to lose money as inflation eats away at any paltry returns. So the alternative is what – to spend it? Once you’ve spent it, you’ve lost it all!

If that’s not enough to convince you, we need to bring in the voice of reason. Let one of the most experienced and well-respected voices in the FI community – JL Collins – demonstrate the resilience of the market through one of the most troubled periods in history and tell me you don’t feel reassured.

money-coins-stack-wealth-50545.jpeg

Yes! I Want to Do This – Show Me What it Means for Me

6. Congratulations! That’s a lot of reading – now you’re fired up and raring to go so what next? Well you’re in for a treat – here you have your very own Interactive Guide. This article is nothing short of brilliant and through a series of questions Minafi will guide you from where you are now, through how much you should save and how much you will be able to spend when you reach FI – all this completely tailored to your own circumstances!

I Can’t Do All That Reading

person-woman-music-pink.jpg

We’re not all programmed the same. So for those who prefer to listen rather than read, or for anyone that wants to listen and read, there are some great podcast resources out there.

  1. Mr Money Mustache – something of a cult hero in the FI community, MMM has helped spread the word to millions. Hear his story and his philosophy in an interview with The Mad Fientist.
  2. The Why of FI  – from The Choose FI podcast – why we pursue this path, why we think it’s a life ‘superpower’ and how it can help you escape the hamster wheel of life decades earlier than most people could ever dream.
  3. Michael Kitces – The 4% Rule and Financial Planning for Early Retirement Interview by The Mad Fientist – how to figure out how much of your investments you can safely spend so you can live off them forever
  4. The Voice of Reason – JL Collins talking about the ups and downs of long term investing on the Choose FI podcast.

And Finally…..

If you like what you’ve read here you have now been introduced to some fantastic blogs and podcasts where you can find loads more information. Or if you like a longer read, these are my recommended books:

  1. Your Money or Your Life – Vicki Robbins
  2. The Simple Path to Wealth – JL Collins
  3. The Millionaire Next Door – Thomas J Stanley
  4. The Richest Man in Babylon – George S Clason

I hope this collection of resources is helpful – if so please share! As always, I’d love to hear your comments. Do you find it difficult to get the message across to family and friends? Do they understand your choices? Have you convinced anyone to join you on the path to Financial Independence? Let’s talk 🙂

 

23 thoughts on “Financial Independence 101”

  1. This is a great post on the how and why if FIRE with links that back it up. I agree with your book choices, YMOYL is a book I return to every couple of years to top back up my resolve and understanding of my why.

    Like

  2. Just found your blog and enjoyed reading this post. Who doesn’t want to be financially independent? Thanks for the insight and reference material. I will have to read those books.

    Liked by 1 person

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