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  • Bemi

Is Financial Independence (FI) Realistic?

Updated: Jan 12, 2021

What does it take to become Financially Independent?

Financial independence (FI) is all the rage at the moment but what does it REALLY take to acheive FI and how realistic is it? Let's start with a loose definition:

One has ‘enough’ to sustain their lifestyle without needing a job

However, there are different perspectives on how to achieve FI, how much is enough and what to do with your life when earning an income is no longer an important consideration

The concept of FI sounds good. Imagine waking up on a Monday at whatever time you choose and then spending the day doing whatever takes your fancy. Imagine visiting the Himalayas for 6 months because you want to experience a new way of life and then loving it so much you decide to stay for 3 years without a concern in the world about money or income. Imagine having the freedom to walk the kids to and from school every day, then spend the time in between working for free for a cause you care deeply about. The dream of financial independence is not one dream – it is many millions of individual dreams all shaped by the idea that a massive pair of scissors has cut through the link between trading TIME for MONEY. It is about the freedom to make choices. I imagine a Utopia in which no one needs money because all the resources a person needs magically appear at the point of need and everyone is free to explore whatever talent(s) they have.

My first introduction to the concept of FI was via Robert Kiyosaki and Sharon Lechter’s simple but powerful masterpiece – a book titled ‘Rich Dad Poor Dad’ I was in my early 20s and had only recently gotten through a spell of homelessness. I remember thoroughly embracing the concept: understand the difference between assets and liabilities, then buy/create assets that generate cash flow to meet my living expenses, which are kept as low as possible. Once my net cashflow from my assets is equal to or greater than my living expenses, I become financially independent.

More recently, I learned about the ‘FIRE’ (Financial Independence Retire Early) movement. Essentially the idea is that you work out the annual living costs associated with the lifestyle you want, which is not an easy task by the way. Then multiply that by 25 to get the number needed for you to retire. For example, if you feel you can live off £30,000 a year for the rest of your life, then you need to accumulate £30,000 x 25 = £750,000 (usually in shares, but could be other asset classes) to be financially independent. The assumption being that 4% is a safe withdrawal rate for drawing on your savings if the £750,000 is invested in a well-diversified low-cost passive tracker fund.

Let’s have a closer look at a simplified equation for FI

  • FI = Passive Income from assets is (greater than or equal to) Living Expenses

So, there are two key levers to pull: increase the passive income from assets and reduce living expenses

Increase Passive Income from Assets

A simple definition of passive income is any income which does not require your consistent effort. Assets are anything that can generate passive income. Examples include shares paying dividends, properties that generate rental income, music that pays royalties The question then arises: how does the average 9-5 worker build assets? Usually by saving and then investing but could also be by using creativity to build businesses (e.g. ice cream business, consultancy) and then systemising them so they can operate semi-independently without consistent effort – what I like to call ‘SET and FORGET’ businesses.

Assets can be created from thin air such as writing music, a brand, a book, an online training course In property, there are anecdotes of NO (or None of Your Own) money down property investing, which can generate infinite returns. You’re probably already mentally striking off some of these ideas as not realistic or feasible for most people. If you are, then I’d argue that you are right to be cynical. If it was easy, everyone would be doing it. For starters, a typical 9-5er would ‘feel’ that they lack the one key ingredient they’d need and that is TIME……. Time to learn about shares or property or the business of interest and Time to implement the ideas once learnt. They’d also need Radical Thinking and Radical Action, which often requires buckets of motivation and buckets of self-belief. They’d probably need access to someone who’s walked the specific path they are interested in. So- while the concept of FI sounds good, we can conclude that one side of the equation – increasing passive income from assets is very challenging.

Reduce Living Expenses

OK – this is actually a relative statement. It’s a case of reducing living expenses relative to income. The FIRE community for example advocate saving 50% or more of your income. It’s easy to see why. The more you save, the more money you can put to work for you. Imagine lots of £1 coins in grey suits marching off to work for you. Not all roles are created equal: a salaried GP may take home £80,000 per year, a salaried electrician may take home £35,000 a year and a shop keeper may take home £15,000 a year. The GP has a greater capacity to save and invest IF living expenses haven’t gradually crept up to match income levels. However, the reality is that lifestyle creep tends to bring living expenses closer to income – and these are not necessarily frivolous things. A couple may have never thought about private education but if they suddenly realise they can afford it, they might feel that they want it. It takes a combination of factors, including self-awareness, restraint, a compelling vision of the future, a community of like- minded people and innate happiness to live way below your income level.

So… is FI realistic?

Well, the first point to consider is that society probably wasn’t built with the idea of FI in mind. Throughout history, humans have had to toil consistently all their life and only a select few (Kings, Queens, Lords, could live an FI life and don’t get me started on how the likes of Alexander the Great or Genghis Khan acquired their wealth. So why should humble Joe Bloggs think that achieving FI would be easy or that it is achievable? Sure, Joe Bloggs could be one of the lucky few: born into generational wealth, super talented sports star or musician, lottery winner Or Joe Bloggs could be one of the ‘exceptional’ few: the 1 in 10,000 that make it to become captains of industry, earning 7 figures. But for the vast majority of people, FI will be difficult to achieve because society just wasn’t built that way. I must also clarify that the difficulty is not just to do with earning but also the mindset around spending.

It is also important to recognise that achieving FI is not like some ‘holy grail’ It’s probably more of a way of thinking than a specific end destination. Achieving FI will NOT make you happy if you weren’t already happy to begin with. All of Life’s problems will not suddenly magically disappear. You could achieve FI today and then an unfortunate life event happens that scatters all your plans. You’re probably reading this and thinking that I sound quite negative about FI, but I’m not. The really special thing that FI gives you is CHOICE – the freedom to design your life as you see fit (within reason of course).

I believe achieving FI is realistic if you internalise the fact that RADICAL change would be needed. You can’t expect to do the same things you’ve always done and see a different result. Achieving FI requires a complete mindset shift and a good starting point is Understanding your WHY. Why do you want to be financially free? What does it mean to you? Do you have a compelling vision of the future that PULLs you towards that dream?

If after reading this article, you decide that achieving FI is something you might be interested in, then I’d encourage you to research further and not let the thought die due to inaction. The younger you are when you start the journey, the faster you are likely to get there. I started in my early 20s and achieved FI within 15 years. To be honest, I didn’t even know I’d achieved it as I’d been so focussed on the process. It was when I was preparing to visit a financial planner that it dawned on me.

I’ll end by recommending three actions:

  1. Read the book Rich Dad Poor Dad by Robert Kiyosaki. It costs about a fiver on Amazon at the time of writing and is well worth it. This is a mind opening book as opposed to a how to book. One important warning – do not guru..fy the author to the point that you accept absolutely everything he writes or says. Filter through your own value system and draw your own conclusions.

  2. Read the book The Richest Man in Babylon by George Clason. Also a fiver on Amazon

  3. After reading those two books, find a friend or two who would like to go on the FI journey with you.

I hope you have found this Money Thoughts article useful.

Regards Bemi


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