What is Financial Independence?

What is Financial Independence?

What is Financial Independence Retire Early?

Financial Independence Retire Early, or FIRE for short, is trending and hitting the media. but what is it?

FIRE is the status of living in that you are devoid of any financial obligations. It is enjoying life without having worry of a job or bills. Generally it’s the rich and wealthy individuals who have financial freedom. They can go day to day without ever stepping into an office. Wake up whenever they want, sleep whenever they want. They can eat as soon as they want, go to the bathroom whenever they want, and they are the ones who have complete control over nearly every little aspect of their life. Their biggest problem on a daily basis is deciding where to eat.

So how can they live so freely without having to worry about work? Well that’s because they own assets, enough to generate an amount of income every month which is sufficient to cover any financial expenses. The easiest example I can provide (and something I thought about as a little kid, although now that I’m older, I realize it’s not feasible) is imagine that you have a savings account offering a 3% return in interest. If you had a million dollars in your savings account, you would accrue a couple thousand dollars per month off interest alone. That money could then be used to pay off any and all of your monthly bills including food, rent, utilities, and debt with some change leftover. Because your necessities are paid for every month automatically without a requirement of a job, you are financially free.

How is Financial Independence Retire Early Obtained?

So how do I obtain financial independence retire early?

There is no one straight answer to this question. You could, as mentioned in the example above, accumulate large amounts of money into multiple savings accounts and live off interest. However, savings accounts today are unable to keep up with the rates of inflation so you would be bleeding money out every year without even realizing.

You could also win the lottery and then be paid on a periodic basis, whether monthly or yearly, and then that money would automatically go towards covering your bills. Although this is a very unlikely situation.

The basic way to obtaining financial independence, as Robert Kiyosaki’s Rich Dad stated, is to buy assets. What is an asset? An asset is anything that puts money into your pocket. This is the strategy of the rich and this is how the rich literally get richer: because their assets bring in more money every month after month after month…

The majority of Americans do not have assets. Instead they unknowingly burden themselves with liabilities which causes many of them to live from paycheck to paycheck in an effort to pay off the expenses that the liabilities produce.

The Balance Sheet of Someone Does Not Have Financial Independence Retire Early

Take a look at the balance sheet below. It represents the lifestyle of an average middle-class worker:

middle class balance sheet
How a middle class person’s cash flows

 

As you can see, the majority of the traffic flows from liabilities to expenses. Mortgages, loans, and credit card debt are the most common forms of liabilities. These people have only one source of income: their job or jobs. And only as long as they continue to work these jobs would they continue to have a source of income. If they were to lose their job, there would be no source of income left to pay for these monthly expenses and then they would be required to dive into their one asset, their savings account, if they even have one.

The balance sheet below shows the lifestyle of someone with Financial Independence Retire Early:

 

FIRE financial statement

Notice the drastic difference in the boxes. Instead of a large amount of liabilities, there is a large amount of assets. That is because the rich do not put money into purchasing things. Instead they pour their money into assets that compound. Because of this, they now have enough assets generating money for them that they do not need to worry about working a job in order to put food on the table. That is because their assets do that for them. They sleep sound at night without fear of job security or going hungry.

Take my friend Ken for example. He currently owns a condo and is living in a 3-bedroom townhouse which he has a mortgage on. He has to make monthly payments on his townhouse on the amount of $1700. His condo he completely owns so he pays a few hundred dollars per month on utilities and fees. He rented out his condo to a single family who pay $1500 a month for rent. That’s $1500 that Ken pockets which he then uses to pay almost the full payment on his town house. He has two roommates living with him at his townhouse who pay $500 per month for rent.

Ken’s townhouse generates $1000 total and his condo generates $1500. Each of these forms of income recur every month. And because of these assets generating income, he is able to sufficiently use that money to cover his townhouse payments while having $800 leftover for food and bills. Ken might not even know about Financial Independence Retire Early but he certainly has it.

In addition to that he also does trading on the stock market, generating between $500 – $1000 per month. Another asset bringing in more money.

Ken’s FIRE Balance Sheet

kenshiro balance sheet

Because of these money generating assets, Ted does not need to work a job. He has all of his necessities for living paid for by his assets. Thus, Ted is living, financially free.

Financial Independence Retire Early

In conclusion, Financial Independence Retire Early is a slow emerging concept. As this economy turns for the worst, more people finding ways to escape this disaster. Many turn to investing, to real estate, and few turn to the journey of obtaining financial independence. Keep in mind this is no quick fix. This is a long-term solution which may potentially change the life of your family forever. But once you’ve obtained financial independence, never again will you be required to work a 40+ year job until your retirement, living paycheck to paycheck. It is the knowledge of how to obtain financial independence that will sustain your family generations to come.

Move over people, this has become the new American Dream.

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