Financial Independence made easy (er)
You have achieved financial independence when the money generated by your assets exceeds the money you consume. The time frame for this is typically divided into quarters of a year.
An important consideration here is that it doesn't matter how much wealth your assets generate or how much you spend. So long as the former is more than the latter, you are financially independent. But just as getting shredded and eating healthy is as much as state of being as it is a lifestyle, financial independence is a lifestyle. You can't make changes to that lifestyle drastically and still expect to remain financially independent. Once you have established a method to living your life that eats up, for example, $5000 per quarter, and your assets are giving you $6000 per quarter, you can't exactly go buy a new corvette and put it on financing. You'll blow that $6000 per quarter threshold out of the water, and you begin withdrawing from you net worth instead of from the asset account that typically covers all of your expenses and way of life.
What sparked the idea for me to write about this is that any reduction in the day to day, month to month, or year to year spending is a direct contribution towards achieving financial independence. If you can reduce your amount of quarterly, scheduled spending through a change in lifestyle, then you have reduced the amount of passive income you require to reach financial independence.
The neat thing about this concept is that it's much easier to reduce your day to day consumption of resources than it is to build assets that generate wealth. Suppose you've got $100,000 in the stock market and it's delivering 7% a year on that investment. In order to get an extra $1200 year appreciation out of that investment, you've got to add $10,143 per year to the account (because it's already generating $7000 a year, and 17,143 * .07 = $1200).
When examining expenses with financial independence in mind, justifying a change in lifestyle such as switching from a smartphone to a flip phone, or eliminating a car payment seems much more reasonable and prudent. Consider the following scenario:
By eliminating your cell phone, you can shave $240 per quarter, or $960 per year, off of your asset appreciation to financial freedom target. In practical terms, that means that you are able to invest $10,000 less than you otherwise would have to in order to achieve financial independence. That could translate to an entire year of diligent savings! If you can trim fat and make some huge sacrifices in a few areas of your life, and cut out $500, $600, or $1000 of typical monthly spending, that could correspond to as much as $150,000 less that you have to invest to make it so you're no longer dependent on a paycheck. If you're making 75,000 a year and saving 10% of your income, that's twenty less total years that you have to invest. Now that is a goal worth shooting for.
This little puzzle got me thinking. Homeless people are closer to being financially free than most of us in the middle class. Their assets generate no wealth ($0 at 0% per year = $0) and suppose their daily consumption is very little ($10), so if they could find a way to generate 3650 a year in passive income, they would be financially free. They currently generate that $3650 actively, by panhandling, which can be viewed as a "job" I suppose.
Where am I going with this? After pondering on that last thought for a while about the hobos, I came to the realization that the quickest path to financial independence is to sacrifice a lot up front. Then when you achieve financial independence, you can choose to continue working for someone else - but at that point, the work you put in and the money you contribute to your investments directly correlate with an positive benefit in your life, and an available increase in your monthly spending. What a cool concept! Practically speaking, $1000 a month is an ambitious target to shoot for - but it could be a great starting point for achieving financial independence in a very short time frame. Earning consistent 7% interest on an investment (the post-inflation running average of the American stock market), You would have to have $178,429 in an account for it to return 12,000 a year - enough, in that situation, to cover your utmost basic living expenses.