Financial independence is becoming something of a buzz word, and you may have heard it around the place. It can radically change your life for the better. But what the heck is it?
Put simply, Financial Independence (or FI to its friends) is, quite simply, the point at which your wealth – be it investments, property, whatever – reaches a point at which you can cover all your living expenses without having to work to earn money. As many of us find there is too much month left at the end of the money, we may be tempted to write this off as some kind of unattainable nirvana that can only be achieved by those on six figure salaries or higher.
Certainly, if your outgoings are high, you are going to have to stay on the treadmill indefinitely just to cover your costs – regardless of how much you earn. But other options do exist, and increasingly, I am hearing people talking about these.
The first, and principal, part of Financial Independence is to reduce your monthly expenses to a level where you can save money.
This is a very personal exercise, and it will be different for everyone. It is all about sifting out the things you really want and need, as opposed to the clutter accumulated from habit, boredom, unhappiness, etc etc. This can be a really amazing process, as most of us have some spending habits we can easily lose.
My work CV is full of gaps
In my pre-family days I regularly got itchy feet. I realised that it was actually pretty easy to save money quickly by cutting out the stuff I didn’t need. This enabled me to have numerous years off work to travel, volunteer, and surf.
For example, back in the day, when I was a wage slave, here’s how I saved for one early extended trip abroad:
- I cycled to work instead of getting a monthly tram pass (saved £30 x 12 months = £360)
- I was cycling 5 days a week, so I cancelled my gym subscription (saved £30 x 12 month = £360)
- I stopped buying a latte every morning and just brewed up in work instead (saved £2 x 5 days a week x 42 weeks in the office = £420)
- I made a sandwich instead of buying lunch every day in town and cut out the can of coke altogether (£4 saved x 5 days a week x 42 weeks in the office = £630)
- I also limited my after work drinks to a Friday. (Not sure how much it saved, but it would be considerable.)
After 18 months, I had enough saved from my fairly mediocre monthly wage packet to pack it all in and go off for a year of adventures. Woo hoo! Adios, office! I burnt my shirt and tie in the back garden. Not for the last time though. That would come later.
If I had decided to carry on saving rather than blowing it all on a year long trip, then 10 years of just cutting out the lattes and making lunch would have put me an extra £20-£30k savings in the bank. Back in the late nineties, that would have paid off my mortgage. In terms of financial independence the big point is that the money that you are probably currently blowing on fripperies, you can put to better use. Firstly to get debt free. Then to start investing. It is amazing to see how quickly you can build up savings once you get into this mindset.
But hold on! I hear you say. I thought this Three by 30 thingy was meant to be about climate change and doing good things for our beautiful world. Not some dough-head financial blog. Well, yes it is. And the point is that it’s all linked. If you are wasting resources, you are wasting resources. You control this, and you can make it work for you instead of against you. Once you start, it can quickly start to look like a big win all round.