My Philosophy on Financial Independence

 My Philosophy on Financial IndependenceLater this week, I’ll fly down to San Diego to attend FinCon 2016, the world’s largest convention dedicated to financial content. I’ll be on the FIRE movement panel Thursday morning and I have a little homework to do. I have been asked to share my personal philosophy on Financial Independence. That’s actually kind of difficult because I never took philosophy in college. I was busy learning how to work. (Haha, a little joke to help you get through Monday…) As a former engineer, I’m more concerned with how to do something, and I usually don’t worry too much about the philosophy.

RB40 Recap

Surprisingly, I didn’t learn about financial independence until my mid 30s. That’s pretty late considering how much I care about personal finance. I’m jealous of all the young people who learn about FI so early in their life. Starting early is a huge advantage when it comes to financial independence. Why did it take so long for me to learn about financial independence?

A decade ago, conversations about financial independence were quite rare. It was never discussed in financial magazines or the news, and blogging was a relatively new thing. There were some books on financial independence, but you had to dig to find them. These days, financial independence is becoming more mainstream. I see stories about FI all the time. Partly, it is because I’m in the content creation business so that increases my exposure. The awareness of FI is much higher than 10 years ago, that’s for sure. I think a lot more people know about FI and many people have made it their goal.

Anyway, FI slowly seeped into my conscious through reading various blogs and articles on the internet. It didn’t become my goal right away, because my life was already pretty good. I had a good paying job and we lived a comfortable and modest lifestyle. However, my job dissatisfaction slowly grew over the next few years. The tipping point was when my boss was fired a few days before Christmas in 2009. I couldn’t believe the company could be so vindictive. That was a classy move from a company that was starting to unravel. Everything went downhill after that. I began to hate my job, made FIRE my goal, and started Retire by 40 in 2010. I quit my job to become a stay at home dad/blogger just 2 years afterward. The timing was right and the last 4 years have been awesome. Could financial independence really be that easy?

Financial Security came before Financial Independence

Luckily, financial security was my financial goal when I was young.  My parent didn’t have financial security and I didn’t like the feeling that something could go wrong at any moment. I saved and invested since I started my career in 1996. Mrs. RB40 also had the same goal and we worked as a team. It didn’t just take 2 years to achieve financial independence. It took 16 years of living modestly and investing consistently before I could even consider early retirement. Those final 2 years were very useful, though. We had to figure out how to move from financial security to financial independence and it wasn’t an instant process.

Financial Security: Supporting a comfortable lifestyle with our jobs and save for the rainy days.

Financial Independence: Supporting our lifestyle with passive income and side hustles while minimizing withdrawal from our savings.

Financial independence was a big departure from financial security and we both needed time to convince ourselves that it would work. After 4 years of early retirement, we are still doing well financially and our journey toward financial independence continues. Mrs. RB40 is still working and we continue to save and invest. She plans to retire by 2020, but our journey still won’t be over. We will need to keep our cost of living reasonable and manage our investments to make sure our nest egg and income streams would last 40+ years. Financial independence isn’t just a destination, it’s a way of life.

My Philosophy on Financial Independence

Financial independence is like a superpower. You will be able to do things regular people can’t do. You can retire early, become a stay at home dad, travel around the world, start a business, work on your art, volunteer for the causes you’re interested in, and endless other extraordinary choices. Financial independence gives you the freedom to do what you want without having to worry about work. It gives you more choices and that’s usually a good thing.

Of course, being an engineer, I’ll have to throw in some hard numbers. I think financial independence starts when your net worth is 25x your annual expenses. The way to get there is to live a modest lifestyle and save as much as you can. Invest consistently and your net worth will increase over time. Everyone can get there with hard work, persistence, and a little luck.

What’s your philosophy on financial independence?

P.S. You can help me prep by asking some questions about the financial independence movement. Is there anything you’d like to know about the FIRE movement or financial independence in general?

Looking for an easier way to manage all your investment accounts? Try using Personal Capital for free to keep track of your finances. Personal will aggregate all your accounts and give you a great overview of your savings and investments.

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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50 thoughts on “My Philosophy on Financial Independence”

  1. YES! I’m always looking to get financial security. I can’t handle the stress of not being financially secure, my employer can decide to fire me tomorrow, the economy could tank, or any other 50 things that could happen that will ruin me.. Gives me the motivation to work hard and save as much as I can.

  2. Once the Mrs. retires do you plan on traveling much? And how to you keep those costs in check? My goal (Since we home-school) is to take the family on the road for extended learning adventures in the USA and maybe Canada. Also do you have any kettle dreams (bucket list sounds to close to death and we are retiring early, lol) you plan to knock out this year?

    • We plan to do an around the world trip in about 5 years. Jr will finish 4th grade and we’ll roadschool him for a year. When we get back, he’ll start Jr middle school. After that, we probably won’t travel that much until he’s out of the house. Once he’s in college, then we plan to travel extensively. I don’t think the cost of travel is much higher than living at home. It depends on the location, of course. I plan to live in SE Asia and South America part time. This year, no big knock out…

  3. I have been closely following this blog for quite a while now. This is my take on the financial security and independence. Assume you that your income is 60K /Year.

    Financial Security: Finance is bartered to you in exchange of some kind of service from you (typically that service is our daily job or career).
    So, getting a full time job that promises you $60k/year ($5K/month) will get you to financial security.

    Financial Independence:
    Do whatever you want (of course, something that is legal)…. but at the end of the month you need to have the $5k in your bank account more than that of the previous month.

    Next question is, how can I achieve this $60K/year or $5K/month?
    I am following the footsteps of RB40 (one of my gurus in this) regarding this. I will split my investment into 5 buckets. Each bucket generating $12K/year or $1K/month.
    1. Rental #1 ;
    2. Rental #2;
    3. My offshore CDs (6% interest rate)
    4. Dividend income (on an average of 4% interest rate)
    5. P2P Lending (Type A , B Loans – 6% interest rate) + my travel/food blog income.

    Ok. does it mean I am retiring completely once these 5 buckets are full?
    Heck No! As I mentioned this is just financial independence.
    I prefer these buckets take care of, my daughter’s college fund ($1K/month), her day care ($1k/month); utilities+car gas+insurance ($0.6K); weekly tours ($0.5K); Food and entertainment ($1.4K/month), back-up savings ($0.5K).

    Thus, my buckets take care of my monthly recurring expenses.

    So, What about the rainy days on my investments and health?

    1. I will be still doing part time “work from anywhere” type job that gets me $24-30K/year.

    2: My better half is software engineer and will be still “working from home”. Her pay-stub will be for us to max-out on 401K, Roth-IRA, HSA, ESA and our annual International touring.

    So, when will we retire completely?
    We will retire once we have $250K in our HSA and 72t of our combined 401k generates $24K/year.
    PS: if you like your job (aka revenue generator), then it becomes a passion. There is no retirement for passion.

  4. My FI philosophy is quite simple. I just want to have a freedom to do whatever I like. There were many other things/hobbies I wanted to do but didn’t have time when I was working. Now, I am indulging into some of those things such as learning to play piano and compose music, I also like to sketch, and take some classes.

    Have fun at the FinCon!

  5. I can’t wait to “see” you in FinCon! Will there be some recording? I follow your blog and I read every post. I think my situation is similar to yours but I started later to earn software engineer’s money 🙂

    One question: what seems to be common among FIRE wannabe is that once you walk the FIRE road you start being obsessed by it and last years are very painful (I started feeling this recently), since you start fantasizing about freedom and your job starts to feel very meaningless. How did you survive? Did you consider something like semi-retirement? Like switching to part time?

    Problem is: you’re close to freedom and you can’t wait. If you wait you get full freedom in N months/years. But you’ve money aside to walk away if you’re uncomfortable right now… And that will bring the final goal far away…

    • In previous FinCon, all the sessions were recorded and attendees can watch all of them later.
      You’re right about the last few years being painful. My last 2 years were really long and tough. I just pushed through it and counted down the days. I also made it a game by giving myself rewards for % complete. That helped a bit, but it was painful. I didn’t consider part time because I want to get there ASAP.

  6. As a former engineer myself who transitioned into program management, I never quite understood why many engineers feel the need to add a qualifier “as an engineer, etc..” Other professionals don’t do this much to explain their reasons or actions and no one really cares much.

    I wouldn’t go as far as to compare FI with having a superpower, but having work as an option instead of for financial reasons is a goal for everyone. The ultimate goal for everyone would be to find something they feel intense interest in and turn that into a career. Not everyone is lucky enough to find this, but FI does give the option to allow someone to pursue their different interests and associate only with people whom they choose to.

    An interesting hypothetical scenario would be would you rather be a billionaire with limited powers beyond whatever investment/corporate ownership position one has or would someone rather have about a million dollars, but become the president of United States. I’d choose to be president probably, given that’s a lasting legacy, a chance to make profound impact to society, and the power/status that comes with the position even though it’s only for 4 or 8 years.

  7. I’m still working, but reaching FI gave me a better negotiating position with my employer. I now have a better life balance. They realized they need me more than I need them. I don’t have a union, but FI gave me leverage. That alone has made the financial and lifestyle moves to reach FI worth it. I’ll still leave the full time work in a year or so, but the past two years have been much nicer with the better work balance.
    Not a question, but an observation – much of the FI information I read online seems to be slanted to purely financial, or unending “frugal” tips. Your blog is nice since it goes into many different aspects of your lifestyle choice.
    Much of the information I read from commercial sites seems slanted to advertisers. None of them tell me to pay off my mortgage, or say “no” to nonstop consumption. Bowing out of needless consumption is my best step to being content, and it’s leading me to FI every day.

  8. Like you Joe, I wished I had known about financial independence earlier in my life! I was fortunate that I always spent less than what I earned and did not adopt lifestyle inflation with the promotions and raises as I progressed in my career. My philosophy on financial independence is something I recently read on a FI blog: financial independence = paid work optional. I love it because the definition is so broad that it can encompass anything and everything you want to do in life (as amply described in the comments on this post) without having the specter of having to work fulltime.

  9. Financial Independence can be thought of kind of similarly to Retirement: you can be working toward it at all times, but you have to know what you want to do once you get there. And it’s a process – achieving financial independence is likely easier than *maintaining* financial independence.

    Wish I could be there. Here’s a question that I think may be on many people’s minds: how do/will you teach your kids the value of hard work and a career when they won’t have any significant memories of mom and dad doing either one of those? How can they achieve work to achieve financial independence?

    • That is a tough question. I’d tell him that our lifestyle is the reward of working hard early on. I’m also showing him the alternative way to live. I take him to our rentals to do minor work and meet the tenants. He sits with me sometime when I work the blog. Early retirement doesn’t mean stop working completely.

  10. My philosophy on financial independence is very similar to yours, basically comes down to having more freedom and choices in my life. We can gain so much freedom by not stuck in a 9-5 job 5 days a week.

  11. My general philosophy on FI parallels yours. There’s a lot of benefit to becoming financially secure well before you hit full financial independence. Having an emergency fund that will support you for several years, for example, should provide all the peace of mind you need! It certainly helped us navigate the scary markets of 2008-2009 knowing that we could sell everything (even at the painfully depressed prices) and live for many years.

  12. I’ve been a regular reader of your blog for many years, for those at FinCon you may be up against some folks who haven’t read your blog as much.

    I think the ability to take international trips, try out new restaurants, and camping at national parks, getting more fit/going to the gym more often, which you highlight are all great. However, I feel that most people should be able to still accomplish those goals while still working. So, what I think would be interesting for you to focus on is how your life has really changed since you quit your day job and what insights you have gained. The pros and cons – spending more time with your son vs. such as possible isolation/disconnection from the community at work that you no longer have.

    • That’s a great question. For me the pros outweigh the cons.
      Pros – I get to spend a lot more time with my kid. When he was in daycare, I spent just a few hours per day with him. I’m glad I had the opportunity to help raise him.
      – I feel more healthy now. I was very dissatisfied with my job and it was affecting my mental and physical health.
      Cons – We’d probably be better off financially if I kept working. That’s not a huge deal because we’re doing well financially.
      – Isolation/disconnection is a real problem. I have a lot less human interaction now that I’m at home most of the time. That’s fine with me because I’m an introvert. I’m sure if you’re an extrovert, you’d find some ways to get out more.

  13. I have pretty much the same philosophy as you: financial independence is all about freedom. The ability to do what you want, when you want is incredibly powerful.

    Most of us don’t realize how much of our freedom is taken away by our careers. I’m pretty sure real freedom isn’t weekends off and two weeks of vacation a year.

  14. I think the value of financial independence is obvious to anyone who dislikes their job, or who is yearning for the chance to spend their time doing something else and needs the income from their job, but what I rarely see discussed is how financial independence is just as great an idea for those who want to and plan to work for the rest of their lives.

    That’s what I learned firsthand when my job, which is probably true of most, involved a mixture of fun parts and not-so-pleasant parts. Overall the package was “maybe OK”, as I figured the painful parts were just a cost of doing business. Still I wasn’t looking forward to the push to get me into management because I’m fundamentally not a people person. Once I hit FI and decided to ER, my employer chose to work around my quirks and custom fit my job parameters to suit my needs (and wants). It’s a win for them because I’m pretty good at the corners I enjoy, plus I don’t need a constant stream of raises and promotions, unlike the kids I’m mentoring. The only ‘age discrimination’ I see, is that my seniority plus FI status gets me off the hook for all sorts of administrative headaches, plus whatever else I just don’t feel like doing.

    Sprinting towards financial independence is also very useful if you work in one of those high-risk/high-reward areas like finance or technology, where the payoff can be enormous, but the downside can come swiftly and with no warning. I have a relative who got swept up in one of those tech bubbles and unfortunately became addicted to their rapidly rising share price. Once they started falling back to earth, their workers paradise slowly devolved into a cutthroat race to the bottom with accusations of age bias and favoritism towards foreign workers. He now regrets not hunkering down when the sun was shining a couple of decades ago; if he had, he’d be watching the current drama with popcorn in hand.

    So I guess my philosophy on FIRE is that it’s two independent pieces that may be linked for many but not for all. I think the FI part has universal value, but the RE part depends on your attitude and options. In my case I credit FI with saving my career.

    • That’s what I learn from you and other readers who are still working. FI can be great even when you choose to continue working. It gives you more choices. I think anyone who starts on the path to FI will be better off. At least, you learn a lot on the way.

    • I wish there was a ‘like’ button — I agree w/ freebird here. I love my job and the work that I do; however, I also love that I don’t need to ‘hang onto’ the job — I can walk away at any time to do something else if I wanted.

  15. For me personally, it’s all about freedom to do whatever I want and whenever I want. It is simple, right? As others said, we can never predict the future. But this should never scare anyone to not retire early. Having said that, everybody’s comfort level is different and 30X surely would make more people comfortable about their early retirement.

    “…but in this world nothing can be said to be certain, except death and taxes.”
    ? Benjamin Franklin

    And please try to minimize your taxes if your goal is early retirement.

  16. Great article Joe. I think you nailed the definition of FS and FI.

    If you are not already there yet, to truly understand how to get to FI, you have to think about your expenses over a long period of time. The change from being single, to married, to children, to college, to ……. is hard to plan. I created a detailed spreadsheet, thinking about all the income and expenses on a yearly basis from now (actually about 16 years ago in my case) until I am 90. When you plot the graph of income, expenses and your savings that generate income over time, it becomes pretty clear when you are FI.

    Good luck in San Diego. I live here, so make sure you enjoy all the attractions if you have time.


    • That’s a very detailed spreadsheet. Nice job. I’ve been to FinCon before and there is no time to do anything extra. It’s too bad, I won’t be able to visit the attractions this time. Oh well, we have to leave something for next time, right?

  17. I didn’t learn about the concept of FI until later in life but like you I was always a good saver. I don’t understand why the banks avoid talking about FI and keep their focus on “retirement”.
    To me FI is about lifestyle. To get to FI I had to give up control of my life to others in order to make money, but once I got to FI my whole world changed. Once again I’m back in charge and no longer have to chase after financial security. I can create a great low stress lifestyle for myself and work not for money anymore but instead I work for fun. FI is the tipping point and a game changer but you still need to have a plan for post FI and that takes some effort.

    • Right! It’s only recently that you hear/read anything about FI. Previously, the bigger companies focus on retirement. I guess it’s tradition and it’s hard to change. Thanks for sharing your definition. I agree that maintainng FI is just as difficult. You need to be vigilant.

  18. I try not to think of financial independence as 25x expenses. As you mentioned in a previous post, expenses can change over time. For example, you could have another baby, a child could leave expensive daycare and go school, a mortgage may get paid off. These aren’t trivial things. So you are looking to have 25x some range of numbers that may be big or small.

    Additionally, you (Joe) and I have investment properties and blogs that can bring in income and can reduce the expenses number off the top. It’s hard to predict how much, but it isn’t steady.

    So now you looking at 25x some mystery range that has been reduced by another mystery range. And then that 25x number isn’t set in stone either as it comes from the 4% guideline that seems to have been reduced to 3.5% in recent research. That makes the 25x more like 30x.

    So maybe 25x is a starting point, but there’s so much uncertainty with the rest of it.

    I’ll see you at FinCon.

    • I don’t think 25x is set in stone either. It’s just a good starting point for most people. It’s already difficult enough to achieve 25x so I hesitate to give a bigger multiple. See you soon!

  19. Joe, I wish I could sit in in your panel! I don’t have any questions, but I’d like to build on your idea that financial security comes before financial independence. I think you are right! There is a financial continuum, perhaps it goes something like this:

    – day-to -day financial security
    – ability to retire at traditional retirement age (67)
    – ability to retire at traditional early retirement age (55)
    – ability to retire before 55 = financial independence

    • That’s a great way to look at it. FI is a progression for most people and it takes time to get there. The more difficult it is, the more we’ll appreciate it, right?

  20. I really enjoyed this article. It was fascinating to learn how FI came up on your radar. I’m actually surprised to learn it wasn’t until your 30s (although as you said your emphasis on financial security was definitely a good start)!

    I’m still some ways away from my passive income covering my living expenses, but I’m working on it consistently. And the progress feels good. Stories like yours are nice inspiration to keep pushing. 🙂

    Enjoy your time at FinCon!

    • It’s a lot easier to learn about FI now. There are more awareness than ever before. Good luck on your journey! I’m sure you’ll be there soon.

  21. Great post and good luck on the panel!

    In response to comparing Financial Independence to a super power: a wise man once said that with great power comes great responsibility. Do you feel that the super power of financial independence comes with any moral responsibilities to the community? Is there anything that we should be doing once we hit that point? Should we be teaching others how to achieve financial independence? Using our time to help charities? Joining community groups to help our neighbors?

    Thanks! And have a blast at FinCon!

    • That’s a great question! I think you need to do something to improve the world after FI. Life is busy and everyone has to figure out their own way to give back. I think spreading the knowledge of FI is one great way to do it. A huge percentage of the population doesn’t understand personal finance. They need all the help they can get. Giving back in other ways is great too. Hopefully, I can do more in the future. Thanks for the thought provoking question.

  22. Sorry, no questions to ask you. Can’t wait to hear about FinCon upon your return. Love your line-“I never took Philosophy in college. I was too busy learning how to work”-perfect!
    Thanks for all your great posts!

  23. Wish I could sit on your panel, Joe. I’m sure it will be a great discussion. I like how you differentiated between financial security and financial independence and it is interesting to hear what triggered your first approach toward FIRE. Given you were part of the early crowd in discussing FIRE on blogs, I’d be interested to hear your thoughts on how you think the narrative has changed at all (or the perception of FIRE) as the FIRE community has grown?

    • I think the community is much more accepting of part time work now. Some people are still sticklers, but more people accept that FIRE can coexist with side hustles. That’s probably the biggest change in the narrative.

  24. I equate FI to “I can do what I want without letting money dictate my decisions”

    I don’t know if that counts as philosophy, but in the simples terms: FI is freedom to choose

    Have fun at Fincon!

  25. This is a GREAT line Joe – “Financial independence is like a superpower.” That’s so true! I have a hard time explaining to people how financial independence works with our pension system (since many of my peers get them). They simply think “work until you can retire” and then quit and enjoy life. It is a total mindset shift to think they might be able to leave early if they save/invest enough or have other hustles. Have fun at FinCon!

  26. For me it’s all about freedom to choose what you want to do, when you want to do it. All within the constraint of a withdrawal rate that is compatible with your liquid assets.

    A question for the panel is as follows. Is 33x the new 25x? Not that we can predict the future, but many are projecting lower returns over the next decade or two.

    • I still think 25x is fine as long as you’re flexible. If the stock market crashes and your assets dipped below 25x, then you might need to work a little longer. Most early retirees I know are flexible.

  27. Philosophy on Financial Independence? I never thought of it in terms of philosophy….

    For me, Financial Independence is what happens to good allocators of capital. For those who allocate capital smartly (and don’t waste it), we end up having more than we need.

    Society rewards the good allocators of capital with even more capital….and of course our habits for good allocation of capital continue….resulting in even more rewards.

    Eventually our portion of “ownership” in society grows over time. We become Owners, instead of the Workers.

    How’s that for philosophy?

  28. I’m looking forward to listening in on your panel, Joe! Thanks for always being a thought leader in this space. It is interesting to learn you were only really immersed into personal finance in your mid-30’s. Apparently, you’re a fast learner!

    One question that I’ve always had about the FIRE, is FI generally considered supporting your lifestyle completely with passive income WITHOUT drawing down on any principal? I don’t consider myself FI yet, but I see the definition tossed about loosely. Just curious on your take, vs. how you think the PF community understands it?

    • Hey Michael, the typical “4% rule” (which is where the “25 times your annual expenses” comes from) does not say you can’t use the principal. Actually, the rule assumes that things work out as long as your wealth is more than 0 by the time you die.

      I don’t think there’s anything about financial independence saying you should not erode the principal.

      • Since I retired so early, I’m playing it safe and I’m trying to put off withdrawal for now. But, I think it’s fine to draw down principle.


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