In the current “financial independence retire early (FIRE)” movement, many people discuss only the ability to retire early. It seems to be the only benefit to leave your 9-5 job behind.
However, when you are at the beginning of your journey to financial independence this goal seems so far away. It is discouraging to even make the first step towards this dream. Like many large projects, it helps to break down the goal into milestones.
Ideally, each milestone has its own benefits, grows your independence from money constraints, and reduces the stress in your life.
Debt is like financial prison
If your journey starts at a point where you are in debt, it requires you to meet those monthly payments every single time. Emotionally this is like living in a prison. The rules are very strict and if you violate them, you are punished even more.
While many people seem to live happily with their credit cards maxed out, your financial independence suffers.
It’s also not very smart to purchase items for consumption on credit. While you can enjoy the stuff immediately without waiting, you pay for the product AND also the interest on the loan to pay for it now.
Living in debt is a trap because unforeseeable changes in your life might get you into a debt spiral. When you can’t even pay the interest on the loan(s) your debt will increase. This means you start paying interest on the interest you were not able to pay in the first place.
Emergency funds free you from fear to go into debt
If you saved some funds for emergency expenses, you will no longer react with fear to any unplanned expense or loss of income.
For example, if you have three months’ worth of expenses saved and lose your job, then you have 3+ months to look for new work and income without having to borrow money for living expenses. You are not in control when your employer decides to lay off people. An emergency fund is something you control and allows you to weather the storm.
Having this kind of financial independence lets you also stand up at work for what is right. You can challenge a boss that asks for unfair or unethical actions because you don’t have to fear that much being fired.
Growing savings give you peace of mind for retirement
If your savings grow steadily because you regularly add to them then you’ll have a good feeling that you are providing for the long-term. It also feels awesome to be prepared for the moment when you will retire from work because working ’til your last breath is not desirable or even an option.
If your savings are invested well, it is also a joy to see additional income compound, for which you did not have to labor yourself. This is the beauty of capitalism and the freedom for all to participate in it as an investor.
The volatility of investments can induce some additional fear of losing the money that was once in the bank or brokerage account. It can be really gut-wrenching if that balance drops by 40% or even below the levels one has saved in the first place. Luckily, I teach you here to have faith and simply stay invested. A diversified portfolio recovered over the long run and yielded substantial returns over periods of 30 or 40 years. This has been demonstrated many times.
Earning passive income allows you to decide if, when, and how to work
Live is more than work or a 9-5 job. Business people need others to work to scale their businesses. A business leverages your 9 – 5 labor into profits. When you provide the capital in form of your investments, it is you who leverages your savings into the passive income you desire.
With passive income and knowing your expenses, you can calculate when you can retire from this job you have. The more frugal you live, the easier it is to reach this breaking point. Because you need to have enough passive income to cover your frugal expenses. And also if you live frugally your share of income that goes to savings should be high, so your balance invested should grow quickly.
A frugal lifestyle increases your financial independence
You can see it this way. Living a frugal life and saving enough to cover this lifestyle is a great achievement. Afterward, you can freely decide to keep a job to make your life more luxurious. You are also free to decide to do some volunteer work or to travel. You can always take on temporary work to pay for the next travel that is not part of your regular lifestyle budget.
It is very reassuring to decide when and how to work to make some extra income. This income might afford you some extra luxuries above the base passive income you already secured. Any level of financial independence gives you the freedom to decide how much you want to work.
Financial Independence is the absence of financial dependencies
Financial independence is not always defined in “me” terms. You should also think about financial dependencies towards others.
Providing for your family
If you are the sole breadwinner in your family, then you feel the obligation to provide for your spouse and children. Maybe you even provide for your parents. This is a moral obligation you, hopefully freely, took on. However, it also is a financial dependency, that does not allow you to change your life at will.
It is smart to enable other members of your family, such as a spouse, to also contribute to the family income. This helps even if it seems not to be needed right now. It also empowers a spouse to be more independent by herself or himself. Enabling someone can have the form of work experience or training or studies. This relieves the stress of being the only one to contribute to the family income and can also speed up the journey to reach fully passive income.
Participating in the family business
Some families with a business require all members to work in the business to earn the family income. If you are part of such a family, you are in quite a financial dependency. On the one hand, you need to work for the family business, on the other hand, the family business provides for you. Any change here is highly individual and there is hardly any general advice one can give. However, being aware of such a dependency might give you a better perspective. You can start to embrace the situation or start to save or negotiate your way out.
Financial Independence is personal
While many in the FIRE community talk about early retirement, financial independence is foremost a question of freedom. The freedom to make life-changing decisions and not to have to fear the financial consequences. This freedom is no absolute, but it is true freedom nevertheless.
I encourage you to think about what financial independence means to you. Think about your financial dependencies and how you feel emotionally towards them. I’d further encourage you to talk about these emotions with your spouse, parents, or friend. If your emotions are uncomfortable then remember them whenever you make expenses that are not within your budget.
