This blog is about financial independence in Europe. What is financial independence and what does it mean to be on this path? In this post I will explore the basic concepts of FI.
The words may sound not so familiar. Or they may sound a bit fuzzy. I understand that. Financial independence, it can be a bit vague, or even like spam, too good to be true. I will try to make it easy for you.
Financial independence is not about getting the richest person in the world. Yes, I write a lot about finance, but the journey to FI is not just racing to an enormous bank balance. It’s much more about being able to do what you want, whenever you want, in the way you want to do it. It’s about designing your lifestyle.
Because let’s face it. Are you happy in your current job? Are you commuting to work every morning with a smile on your face? Do you sometimes forget to go home, because you are 110% in the zone with what you do? If the answer to any of these questions is no, then you are probably not doing what you truly love.
Reasons to Become Financially Independent
There are a lot of very valid reasons for wanting to reach FI. These reasons all revolve around freedom and security. Freedom to do whatever you want such as traveling, and security to survive job loss, healthcare issues, economic downturns and more.
The Need to Be Free
If you just need to be free, you might use financial independence as a way to do so. Being free is a very broad term. When you tell people you want to become financially independent so you can retire early, they might picture you sleeping in every day and laying on the couch watching Netflix.
While you can certainly do that, being free is not just the ability to take naps whenever you want to (although that certainly sounds interesting!). It is also the freedom of choice. You get to be the boss of your own time, instead of other people telling you what to do all day.
Do you want to take a six week slow-travel holiday to South America? Just book a ticket and go. That is freedom.
Financial Independence to Reach Your Full Potential
Almost certainly, you will never reach your full potential if you keep slaving away at your day job. You’ll keep being unhappy about your job, while you make other people rich. It is time you make yourself rich. Bot financially as well as intellectually you should reach for your full potential.
Let’s face it, when you work a day job, how big is the chance that you’ll start a new company, or invent something? It certainly happens, but executing on these ideas takes a lot of time. It’s just so much easier if you’re not held back by an employer expecting you to work for 40-50 hours per week excluding your commute.
When you’re financially free, you could take a sabbatical from work and work on your idea. If it works, that’s great. If it doesn’t, well, your worst-case scenario is everyone’s sure-case scenario: going to work.
You Can Be Picky About Any Job
I recently switched jobs, (March 2018). It was a fantastic experience. The economy is great, my skills are in demand and it seems that companies cannot get enough good people. I consider myself not just one of those good people, but rather one of the best. In this scenario, switching jobs is a nice experience. The reason is not because potential employers are trying to please you. The reason is because you can be very, very picky about the job.
It took me 9 months to find another job. I liked my old job, but I wanted to move on. Because I liked my job I was in a fantastic place to be picky. I didn’t need to leave immediately.
During those 9 months I interviewed with 7 companies before I found the one that I really, really liked. It had to do with a lot of things. Maybe I didn’t really have a connection with the hiring manager, or the salary they offered was too low. Their offices were too far out, or the job was too narrow and therefore boring. In the end I found the job I liked, with a great, great manager, and a lot of opportunities for growth.
Now imagine being in this position without being in a very strong economy. I mean, my position here was part skills, but definitely part luck. What if you had to leave your job, during a downturn in the economy? You better make sure to have a lot of money in your bank account to provide you the freedom to be picky.
You Will Be Ready for Though Times
Financial stability is not only providing you freedom, it is also a form of insurance.
I believe you if you tell me you love your job. But what if suddenly your old job doesn’t love you anymore? Jobs are not made to love you back. Your direct manager might be a genuinely good person, but companies don’t have feelings. There’s only one reason that you are there: they need your brains and body, and have the budget to hire you.
When any of that stops, you’re out. The need for your particular skill is not needed anymore? Bye-bye. The economy tanks and your sector is hit the hardest. Good luck staying on. You love your job, but it doesn’t love you back.
Maybe it’s not about job loss, maybe there’s a sickness and you have to pay a lot of healthcare bills. Or there is any other problem in your life or that of a relative. It’s so much easier to deal with problems if you’re rich.
How Financial Independence Works
To become financially free, you need to have a couple of things in order. The most important part is saving more money to invest. Saving more is all about widening the gap. The gap is the spread between your income, what you earn, and your expenses.
So to reach FI, you have to make more money, spend less, so you can save and invest more. You can earn more by working your butt off in your day job to get promoted, or start a side hustle. Maybe you work in an in-demand field such as software development or data analysis and you can easily switch jobs to get an instant pay raise.
Spending less is another strategy to widen the gap. You can spend less on virtually anything, from big line items such as housing and transportation to eating out less and buying less expensive gadgets.
Now that you are saving more and more money, it is time to invest. Money that is invested, such as in stocks, bonds, or real estate, grows and maybe even yields a cash flow. By recycling that cashflow you can grow your money over time and reach financial independence sooner.
Depending on how much you have saved up and invested, you are in either one of five stages of financial independence.
The 5 Stages of Financial Independence
Here at the Fire The Boss HQ, I came up with these 5 stages of FI:
- Call the fire department!
- Poor but aware
- On the path to FI
- Fuck you stage
- Complete freedom, you fired the boss
The first stage is a bit of a joke. You are definitely in stage 1 if you scream call the fire department when you hear people discussing FIRE.
If you are reading this, you’re probably past stage 1. In this stage you’ll find people that do not even know about how they could change their financial lives and with that their future.
People that read FTB are probably in stage 2 or 3.
When you are poor, but at least aware of your financials, you are in stage 2. Maybe you’ve not done a lot yet, but you are reading and learning. For example, you’re trying to save up a basic emergency fund and pay off your highest interest loans. You’re not quite the personal finance nerd yet.
When you really start to make progress, you’re in stage 3, or underway.
This stage is the longest of the 5. You are working on paying off loans, to get your negative net worth to zero.
In the meantime, you start investing some money into retirement accounts. Your wealth is growing slowly but steady.
Before you know it, your negative net worth turned into positive 10, 25, 100k. You are well on your way to reach financial independence. It’s a long way to go but you’re heading in the right direction.
There will be a moment when you just want to say “fuck it” and walk away. Being in stage 4 gives you exactly this opportunity. In the FIRE community your pot of money is referred to as your fuck-you-money, or the money that enables you to just walk away.
How much money you need for your FU-stash can differ wildly between people. Some people are happy shouting “FU” at somebody when they have 10,000 euros in the bank, because they can survive a couple of months on it if they need to. I call that my emergency fund.
Others might be calling their portfolio FU-worthy when they feel they can withdraw a couple thousand euros per year from it, using a safe withdrawal rate. Obviously, they need much more than the person I described above.
For me, FU-money would be having about 3 years worth of expenses in my investment accounts, besides my emergency fund.
Congratulations, you fired your boss! After accumulating lots of cash and investments, you are now financially free. You don’t have to work anymore and maybe you’ve even told your boss already. Nice job, keep it up (and let me know, I would like to interview you)!
How far along the path to financial independence are you? Do you aim at FIRE as your end-goal? Let me know in the comments below: