(FI) The Why Behind FI
Revisiting financial independence for the second time in our short series on that subject today we discuss the why behind FI. By detailing the reasons behind the pursuit of FI we hope to better frame
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Welcome to Episode 38 of the show. Today we will again discuss financial independence (FI) in a continuation of our short series on that topic. As discussed previously, we will label these episodes with an FI logo and add the FI prefix to all of the show titles so that you can decide which topics you want hear about and which you don’t. The emphasis of the podcast will remain on special situation investment write-ups, but we thought that our listeners might appreciate a separate but related series within the overall topic of finance and financial planning.
Although this is our second FI episode it would have made a better first episode than the one I recorded on cost savings though cycling. This is because the cost savings episode highlighted a useful tactic to achieve FI without explaining why a person might want to pursue FI in the first place. It’s always useful to start with the why behind a thing before digging in to the tactical level applications and that’s exactly what I didn’t do with my first podcast in the FI series.
With that bit of housekeeping out of the way, lets jump into the why behind FI. What is the purpose in pursuing passive income such that you can stop working for a month, a year, or even decades? Why not spend all of what you earn on whatever you enjoy most?
Well, several reasons come to mind. First, we all age out of work, meaning that your need for financial independence will arrive one day whether you plan for it or not. At some future date you won’t be able to work anymore and your comfort will then be determined by the preparation you put in leading up to that date.
FI can also give you peace of mind, knowing that your life has a financial buffer against hard times. How many people do you know who’ve experienced financial stress resulting from to much month at the end of the money? Or how many times have your experienced that stress yourself? Even a limited amount of passive income and debt reduction can go a long way towards reducing this type of stress.
FI can also allow you to switch from one job to another more easily. Are you in the job you love now, or would you prefer to change careers, and to what extent does the income of your current job play into that decision? In other words, if money weren’t a factor, would you still be doing what you do now, or would you mix it up and try out a new occupation?
Beyond just changing careers, FI can empower you to pursue non-work activities for an extended time, or even permanently. It can allow you to block out your days activities based on what you deem important to accomplish and not on what somebody else tells you must be accomplished.
Let’s explore each of these sub categories more thoroughly beginning with peace of mind via a financial buffer. I don’t think it takes much convincing for most of us to understand the stress relief that goes along with moving from paycheck to paycheck to months or even years of expenses covered. Reflecting back to Maslow’s Hierarchy of Needs, the bottom two layers of his pyramid, our most basic, physiological and safety needs, can both be met or acquired using financial means. These needs, such as, food, shelter, water and safety can be purchased allowing us to then move up to more esoteric needs. But to the degree we can’t provide for our basic needs we experience stunted growth and see our progress grind to a halt.
Thinking beyond ourselves for a moment, FI can afford us the ability to help others in difficult times. Most of us would love to step in and help our friends or family members when trouble comes and financial independence can do that by both ensuring we have the monetary means to assist and by giving us the free time we need to roll our sleeves up and do the work ourselves.
FI can make it easier to switch jobs and pursue what interests you and not “just” whatever pays the most. Of course, if what interests you and what pays the most are one and the same that’s great, but often times we’re faced with the choice between what we want to do and what earns more money. Too often we reluctantly chose the higher wage because we need it.
Many people think they’ll work in their chosen field for years, decades or even their entire life (think doctor, lawyer, or professor), but many different factors can drive a job change you didn’t expect. For example, you may have gone to school for and started down a certain career path only to realized you hate it. Or in a less drastic scenario, you might realize that you’ve simply gown out of that career and need a change.
Alternatively your employer could begin to make demands of you that conflict with who you are or who you’ve become. People change over time and that includes your co-workers and yourself. You can’t be sure that your present co-workers will always be the group that you want to spend a majority of your waking hours with.
You may decide you want to live somewhere else and the job you have doesn’t exist in the new place. If you want to be in that dream location bad enough it might warrant a career change and that change is definitely going to be smoother if the financial piece is taken care of.
A less pleasant, but still valid reason to plan your financial independence might be that you’re aging out of the job you’re in, i.e you still like it but the demands are too much for you physically. Construction, military, and pro-athletics all come to mind as career fields where your age or injury status can dictate a career change you might not have planned or hoped for.
On the other hand you might be physically able to keep up with work but still want to reduce your workload to part time. In this scenario you can live a partially FI or partially retired lifestyle where you earn a bit of money, get some social interaction, and find purpose on the job but take summers off or work 20 hours per week. This can be a very appealing option for folks who want the best of both worlds but it too will take some degree of FI and savvy financial planning to achieve.
Many twenty somethings think they’ll work full time in their chosen field for years to come, but haven’t fully considered the numerous factors that could change their situation (and perhaps change it very quickly). Here are just a few of the reasons you might want to pursue FI so that your ready for life’s ever changing demands.
You may want to take a year or more off to focus on parenting, raising a family, or to go back to school. Or perhaps you’d like to take time to care for an aging relative yourself instead of paying for their care in a less personal way.
Many of us would like to pursue activities that you can’t do when your older, things like summit the seven highest peaks, row the Atlantic, or compete in your sport of choice. It would be silly to work all the way to your 80th birthday and then take that backpacking trip to Nepal. I’m all for staying fit at any age, but perhaps some financial planning to include a break in work when you’re 30 makes more sense if summiting K-2 is on your bucket list.
Writing a book or starting your own business are just a few more potential dreams you might long to pursue someday. Pursuing these dreams, or any of the others listed, will be much easier if you’re already FI, or at least a good way down the path.
Basically, being financially independent can allow you to better adjust to unforeseen life events. These life events are unforeseen by most of us individually, but they’re highly predictable across humanity. Health issues for you or a loved one, shifting interests, and bad economic times, are as old as history but of course they’re never going to happen to us individually because we each see ourselves as the exception, or simply fail to take the time to reflect on the myriad changes that lie in wait in the future.
By implementing some processes in your life and sticking to a plan, a person can store up financial reserves and smooth out the bumps in the road. Whether that’s saving up 25 times your annual spending and creating enough passive income to live on forever, or just building up a one year or one month reserve to get you through a transition point, any level of FI is valuable. Your financial independence is sliding scale from zero (paycheck to paycheck and in debt) to independently wealthy on the opposite end. Just getting yourself 20% of the way to fully independent will yield massive benefits in your life.
In closing, many of the tactics we cover in this series can help accelerate your savings and investments without negatively impacting your life. In fact, we and many others have found that pursing a lifestyle of financial independence can produce countless benefits that have spill-over affects into every part of our lives. In other words if a tactic or technique proposed in this series has no downside, but benefits you financially when implemented, then you might as well adopt it and reap the asymmetric benefits.
With that, I hope you enjoyed Episode 38 and I hope that I’ve better framed the why behind FI. Perhaps seeing the benefits of financial independence will peak your interest and start you down the path of creating FI in your own life.