Financial independence means you have enough wealth to live on without working. Financially independent people have assets that generate income that is at least equal to their expenses. Income you earn without having to work a job is commonly referred to as “passive income”.
Financial independence goes by a few names like financial freedom, financial independence retire early (FIRE) or FI.
Anyone that knows me well is aware I love the idea of financial independence. The broken message today is we just can’t survive, even in households working two jobs it is impossible to make ends meet. No matter what we try there is not enough money to go around, everything has gone to shi*t….. And don’t even start on pensions or retirement.
In reality many people could follow a path to financial independence in their lifetime, and be a lot happier too. I was one of these people who thought it was impossible to get out of debt and that my future with money was hopeless.
My views changed when I stumbled upon writers / bloggers / pod casters talking about Financial Independence. Worldwide there are over 2000 FI bloggers, mostly based in the USA. There are also a growing number of Financial Independence UK writers, 150 I know of, all telling their unique story of their path to financial freedom. For reference I’ve added a few below.
Principles of Financial Independence
Financial freedom boils down to spending less than you earn and investing the difference. Eventually the money you have invested can generate enough income to cover most or all of your expenses.
What Are Investments?
Investment income can come from places like Pensions, ISAs, property, savings accounts, side jobs, investing in the stock market etc. I like to think of an investment as something returning money in the short or long-term.
How Much Do I Need To Retire From Work?
This is the million pound question, and I’m afraid there is not a simple answer. Personal finance is unique to each person and only you can figure out what will suit your life choices.
To find your FI number you should know your expenses vs how much income you could generate from investments. It all depends on how much you spend and how much you ‘earn’.
Compound Interest Example
Some people like to reference the 4% rule and the 25 x expenses rule , so lets use this example:
£10k expenses per year = 25 x £10k = £250,000
£250,000 is the amount I would need for investments to ‘earn’ £10k per year.
I could withdraw £10k each year, and because my investments grow I shouldn’t run out of money, ever. This is a very basic explanation but I hope this is clear.
£250,000, Lol Are You Joking!!??
Yeah, I know that is a staggering amount of money, but please stick with me, and remember places like workplace pensions will give you free money towards your savings. Say you somehow manage to save £400 a month from age 20 to 45. If you can invest at 6% it will end up growing to £278,583.57.
The magic of compound interest means more than half of this money pot is interest, in other words free money. Below is the compound interest calculation, look at the 3rd column and how it grows larger each year. After Year 12 the interest has even grown larger than the amount you are adding, like a runaway train.
Financial Independence Is Simple But Not Easy
So here we have it, a very short explanation of the math behind financial independence. To be clear I’m not saying it is easy or even possible for everyone, we all have our privileges due to the life lottery we’ve drawn. However it is possible to build a better financial life for yourself, no matter where you are starting from or your age.
For the record I’m not quite sure how or if I will make it to full financial independence or even what I would do with my time if I didn’t have to work for money. I do know since I figured a few money rules out I have been able to gradually get out of debt and start to save something instead of spending everything I earned (and more *facepalm*).
You might be surprised what opportunities come around once you escape the debt trap and started to put your money somewhere it can earn interest. I like knowing my money can work for me instead of me working for my money. I’ve stumbled on a life changing process and want everyone to understand how it can work in their favour, simply by making a few small changes that add up over time.
Thank you for taking the time to visit my blog, I’d love to hear from you in the comments section or on social media (EatSaveLiveUK). Good luck with your money journey, wherever it takes you.
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- 7 Books For Financial Freedom
- The 5 Steps to Wealth, EatSaveLive’s Guide to Early Retirement
- Why I’m Using An ISA To Build Wealth
- Financial Independence Day 25/4
- 10 Expenses Everyone Should Know When Buying A House
- What Is A Credit Score and How Does It Work?
- What Will I Do After Early Retirement?
- The Ugly Truth: The Costs Of Working
- What Is Financial Independence?