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Once you pay your accommodation, you’ll still have some standard expenses (e.g. electricity, contents insurance), although the ongoing costs are higher for home owners due to things like council rates, building insurance, maintenance and repairs, etc. But these expenses are usually a fraction of what you’d otherwise spend on mortgage repayments or standalone rent.

The Three Levels Of Financial Independence: Because Money Is Only Part Of The Equation

Reaching financial independence is the holy grail of personal finance. But what does financial independence really mean? In this post I’d like to determine the three levels of financial independence.

That’s right. Even in financial independence there is no one size fits all since everybody has a different desired standard of living. Some people are happy living a solo life on a boat. While others want to start a family.

What is financial independence?

Financial independence (FI) is when you are no longer dependent on the income from a main job to be able to meet your household expenses and reach your financial goals.

You can be financially independent if you have such low expenses that you just don’t need much money coming in. Another way to achieve FI is to have streams of passive income like real estate income, investment dividends/growth, or an online business.

Whether your goal is financial independence or early retirement, you absolutely have to have a plan! Where there is no vision, the people perish! So, let’s talk about some FIRE strategies, straight from the physician who achieved retirement at age 43.

What is financial independence to you?

Figuring out your own definition of financial independence is part of the journey. It’s the first step in a long process that requires commitment and intention. But it’s one of the most important steps as it’ll provide you with clarity and direction.

What are my hopes and dreams? These might include big goals like expanding your education, pursuing a new career, starting a family, building a business, or moving to a new area. But they might also include more simple hopes and dreams, like reconnecting with loved ones or providing a stable environment for your children.

If you’ve never given yourself the opportunity to think about your hopes and dreams before, today is the best time to begin. If you’re finding it difficult to nail down, try imagining what you would like your legacy to be, what you’d like to be known for, or what you love about the people you admire the most.

What hobbies or interests would I pursue if money were no longer a concern? Many of us dropped or ignored our true interests in pursuit of jobs that paid the bills. Think about what hobbies bring you happiness and how you could build a life around those activities.

Following your passion isn’t guaranteed to be a path to financial independence, but it could lead you to interesting discoveries. For example, who knew that so many people would make a comfortable living from playing video games, an activity considered frivolous by parents of teenagers everywhere?

If your passions and skills coincide with something people need and are willing to pay for, your path is clear. A few will use their passions to convince the world that a new need exists.

But if your interests lie outside marketability, consider what you need to do to arrive at the moment where you have the financial wherewithal to pursue them without concern for earning more.

What habits (financial or other) are causing stress in my life? Unhealthy habits like making late payments or doing excessive online shopping bring more anxiety than joy. Pinpoint which habits have gone unnoticed or unchecked over time.

Facing the unexpected

If you’ve reached full financial independence, this does not mean you must retire and stop working by any means! Early retirement is our goal. But it’s not everyone’s cup of tea. So full financial independence means that you have freedom to choose what to do with your life.

But what happens if your boss leaves and they’re replaced with a clown who makes your work life miserable? What would you do if your company underwent a restructure and your role changed, or the company shifted its core business focus? All of these scenarios might be fine – you’re still earning money and can pay your bills (even if you’re a bit unhappier at work).

Or what if you were no longer able to work due to injury or illness – your own, or that of a close family member who you want or need to look after full-time?

While it might seem unlikely, people unfortunately do face these situations every single day. So whether you aim to reach that level of financial independence is up to you and your risk appetite. But we know what we’re aiming for.

What Are Some FIRE Variations?

Within the FIRE movement are several variations. Fat FIRE is a more easygoing attempt to save more while giving up less. Lean FIRE requires devotion to minimalist living. Barista FIRE is for those who want to quit the 9-to-5 rat race and are willing to cut back their spending while working only part time to do so.

Naturally, more traditional financial advisors have been willing to jump in with their own variations on a FIRE retirement goal and how to achieve it. One strategy requires a FIRE investor to include both U.S. and international stocks and bonds in their portfolio, potentially increasing their success rate by 20%.

References:

https://www.financialsamurai.com/three-levels-of-financial-independence/
https://www.thescopeofpractice.com/10-smart-strategies-to-achieve-financial-independence/#:~:text=Financial%20independence%20(FI)%20is%20when%20you%20are%20no,you%20just%20don%E2%80%99t%20need%20much%20money%20coming%20in.
https://plutusfoundation.org/2021/what-is-financial-independence/
https://hishermoneyguide.com/what-is-financial-independence/
https://www.investopedia.com/terms/f/financial-independence-retire-early-fire.asp

Gemma

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