Is the Path to Financial Independence Really Worth It?

Financial Independence (FI) is a growing trend in the UK as well as many other parts of the developed world; it is also commonly referred to as FIRE – Financial Independence Retire Early. In this blog post we will discuss whether the commitments, responsibilities and sacrifices required to achieve success in this space are worth the pot of gold at the end of the rainbow.

For those not largely familiar with the term the idea of financial independence is that you have investments of a size/value which generate you enough passive income to live your current lifestyle indefinitely. 

The investments used to reach financial independence are generally in the form of real estate and stock market investments. Business ownership is also a common way of reaching financial independence but the income is not generally passive so this needs to be remedied to achieve the time freedoms or early retirement which may be desired. 

“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.”

Edmund Burke

More can be read about understanding financial independence in the below posts:

• How to go from broke to financial independence – 12 steps that anyone can follow
• The 4% Rule
• 7 Steps to Invest Your First £1,000

In this post we will be covering:

• Why reaching financial independence will improve your life
  • Time freedom
  • Flexibility of life choices
  • Reduced stress, worry, concerns and reliance on others
  • Construction of generational wealth
  • A retirement with likely a younger, fitter and healthier body
• How long the financial independence journey will take
• Sacrifices you may need to make
• Benefits the path to Financial independence will give you
• Conclusion

Why reaching financial independence will improve your life

I think it is important that before we begin to discuss the sacrifices and potential restrictions involved in the path to financial independence we need to explain exactly why this is such a worthy goal for so many of us.

“More important than the how we achieve financial freedom, is the why. Find your reasons why you want to be free and wealthy”

Robert Kiyosaki

The main benefits of reaching financial independence are:

• Time freedom
• Flexibility of life choices
• Reduced stress, worry, concerns and reliance on others
• Construction of generational wealth
• A retirement with likely a younger, fitter and healthier body

Time freedom

A person who reaches financial independence gains something which many others across the world will never obtain – freedom to spend their time however they desire.

Once financial independence is reached the requirement to work disappears (although many continue to, as it gives direction and enjoyment to their life). Therefore the hours you spent creating value and money for your employer can be replaced with what brings you real happiness.

The reality for most of us across the world is that our timetables and schedules are written by others and dictated by working hours and holiday allowances. Unfortunately, most of us realise too late in life that it is impossible to buy more of the most valuable resource in the world… time.

Flexibility of life choices

By having flexibility and control over your life choices you are suddenly able to pursue your real desires and wants to live a life aimed at maximising your happiness, enjoyment whilst achieving fulfillment.

What a life aimed at fulfilling desires looks like will be unique for everyone of us, but some of the most common pursuits are:

• Additional time spent with family and friends
• Travel throughout the world
• Greater time dedicated to pursuit of hobbies and passions
• Charitable work
• Creation of a business to help and improve the lives of others and leave a lasting legacy
• Ability to slowdown, relax and enjoy the small things in life

Personally for me I plan to use financial independence to:

• Slow travel throughout the world and live in various locations (preferably the majority of the year somewhere hot and near a beach)
• See my children grow up – when I decide to have children I don’t want to be a parent who is only able to see them outside of office hours and at the weekend
• Build a business that helps others – I’m hoping this blog is the first step towards this goal

Reduced stress, worry, concerns and reliance on others

Reaching financial independence means that your investments can now passively pay you an income which covers all of your expenses. Imagine how much better your life would be if you never had to worry about paying the following:

• Mortgage/rent
• Bills – Gas, electricity, house taxes, phone, internet etc.
• Hobbies for yourself, partner and children
• Food 
• Insurances etc.

If you can remove the worries of the above then it is likely that the quality of your life will increase.

Construction of generational wealth

For those who have (or plan to have) children, reaching financial independence gives you the opportunity to pass along wealth and give them opportunities that you may never have had as a child.

One of the main principles of financial independence is that you only spend the money that your investments generate. This therefore means that the investments themselves are untouched (this will of course depend on the market and the risks you take).

Imagine the following:

• You have investments worth £750,000
• Your investments generate you £30,000 per year (plus inflation)
• You withdraw the £30,000 (plus inflation) for the next 30 years
• Your investments are still worth £750,000 (plus inflation).

Upon your death the investment value would now pass down to your children. You could also potentially set your inheritance up in such a way that it now paid the £30,000 each year to your children.

The maths behind this is known as the 4% rule. In essence it states that you should be able to withdraw 4% of the value of your investments each year (plus inflation) and likely never run out of money (however unfavourable market conditions could affect this).

Read more about the 4% rule here.

Retirement with a younger, fitter and healthier body

For those of us who are able to reach financial independence before our state pension age (if we are lucky enough to have one) it is almost certain that we will be in a much improved physical condition when we hit retirement. 

By becoming financial independent at a younger age (whether you choose to retire completely or not) it is likely that you will have more options available to you and for a prolonged period of time.

Go through the below list and think which of these you would want to be doing at 40 instead of 70:

• Backpacking through Asia and Latin America
• Hiking through Patagonia
• Driving through Europe in a camper van
• Completing a serious, physical challenge such as rowing the Atlantic (like my friend Danny will next year)
• Riding a motorbike from the north of Vietnam to be Southern tip of Thailand.
• Opening or working for a charity building schools
• Learning to surf/dive or sail

I am absolutely not saying that it’s impossible to complete the above at a later age – just that the reality is it will be more unlikely and difficult. Also if none of the above quite tickle your fancy then replace them with some of your own imaginative ideas.

Also by reaching financial independence early you are maximising the chance that you still get an enjoyable retirement even if you unfortunately pass away earlier than most… I think we all know friends, families or colleagues who retired late and were never lucky enough to enjoy it.

How long the financial independence journey will take

The time it will take you to reach financial independence will depend on just one factor which is:

Your savings rate as a percentage of your take home pay.

The higher your savings rate percentage then the quicker you will reach financial independence as seen below:

Savings Rate	Time to Financial Independence
10%	51.4 Years
20%	36.7 Years
30%	28 Years
40%	21.6 Years
50%	16.6 Years
60%	12.4 Years
70%	8.8 Years
80%	5.6 Years
90%	2.7 Years
100%	Now…

To roughly calculate your current savings rate you will need to track your expenses over a month and average this for a year. You should also try to account for one of expenses like tax bills, insurances etc.

In order to achieve the above the money you save will also need to be invested into something like a world index fund. History suggests a fund like this can return a 7% average yearly return… this is great because the above calculator uses only a 5% average return.

It is now important to realise that the number of years required for you to reach financial independence is not set in stone as it is more than possible (and often easy) to increase the percentage which you save and invest. 

There are two ways to achieve this which are unsurprisingly:

• Spend less
• Earn more

Quick and simple ways to earn more:

• Ask for a raise at work – for this to work you need to be hard to replace and a valuable employee
  • Use sites like glassdoor.co.uk to determine salaries for your current position
  • Ask for targets that if you meet will result in a pay increase
• Move employers – Unfortunately it is rare that companies value loyalty and therefore you will often have to move if you want to command a higher wage
• Start a side hustle
  • Sell a product
  • Sell a service
  • Consultation work

The spend less part of the equation will be covered in the sacrifices section of this post

Other factors

Although reaching financial independence is determined by your investments ability to cover your current expenses, there are other factors which may cause you to continue working past your financial ‘independence date’:

• Plan to move to a country with a higher cost of living
• Have a specific goal you want to achieve that requires additional finances – maybe you want to sail an expensive boat around the Mediterranean
• Want to have children in the future or you have upcoming costs for them which are not currently part of your expenses (school, university etc.)
• Desire a higher standard of living during your retirement than you currently enjoy

Conversely it is possible to cut your time to financial independence by taking advantage of geoarbitrage and moving to a lower cost of living country – this can either be on the path to financial independence (to increase your savings rate) or after financial independence (to reduce the amount you require your investments to generate). Read more about geoarbitrage here.

Sacrifices you may need to make to reach financial independence

To reach financial independence we now know that you need to have a savings rate percentage – the higher the better. It therefore makes sense that in order to increase your savings rate you will likely need to make sacrifices within your lifestyle.

These sacrifices will vary hugely from person to person due to our different desires, wants and needs. 

Potential sacrifices:

• Don’t become house poor – make sure the home you buy is affordable and doesn’t hoover up the majority of your income.
• Learn DIY – if you can do the basics yourself then expect to save large amounts of money over the coming years.
• Eating in restaurants – instead invite friends/family to your house for dinner
• Expensive holidays – replace using budget flights and cheaper resorts/hotels. Personally I find backpacking far more interesting, exciting and rewarding whilst costing far less. It also has the added bonus of teaching me new skills and allowing me to meet great people.
• Rent a bedroom – read here how I cover my mortgage using house hacking
• Avoid new cars – this alone will make a huge impact on your journey to financial independence and therefore I have dedicated an entire post to it here.
• Nights out – make sure you still go out and have fun with friends but drink less and try to stay away from £10-15 cocktails. Your body will also thank you
• Minimise alcohol consumption – try not to drink beer, wine or spirits when at home unless you are celebrating.
• Shop at cheaper supermarkets – you can usually find the same food but for less
• Hobbies – never give up what you enjoy unless you have no other choice but be sensible – do you really need a new £4,000 mountain bike or £900 camera lens?
• Walk or cycle more – you’ll be fitter, healthier and look much better. Even bigger savings will come if you can avoid taxis and a second family car.
• New clothes – the more you can minimise this the better (and don’t be afraid of the second hand market). If you want to be shocked at the dreadful impact fast fashion is having on this world then I can highly recommend this podcast episode (and the entire series which focuses on the biggest issues facing humanity and the world). 
• Own an older mobile phone and have a cheaper contract

Easy to make optimisations:

• Cancel subscriptions you do not use
• Shop around for better deals on bills such as energy, internet and phone.
• Remortgage your property if suitable
• Avoid impulse purchases that you don’t really want/need and will just gather dust in a cupboard. 

Financial independence is not an easy goal to reach and therefore if you do not make some sacrifices now it is highly unlikely you will ever reach and achieve your objective.

Use cost effective substitutes

Luckily there are nearly always substitutions that can be used to gain a large percentage of the benefits at a fraction of the costs. E.g. Cheaper holidays, second hand gadgets/appliances/furniture. 

Personally I feel that the step of reducing your expenses should be taken before you look at options to earn more. Unfortunately most of us are susceptible to lifestyle inflation which ironically means that earning more may not speed up your path to financial independence.

You can learn more about lifestyle inflation here.

The benefits the path to Financial independence will give you

As we have spent the previous section of this post outlining sacrifices and restrictions that following a FI lifestyle might have it’s only fair that this one should outline the benefits that just being ‘on the path’ can have on your life.

Some of the most common and powerful affects are:

• Emergency fund – those following a FI lifestyle will almost always have an emergency fund (usually 3 to 6 months expenses, sometimes 12). 
• FU money – by not living paycheck to paycheck you are much less at the mercy of your employer/boss. If they bring in a new rule or treat you poorly you have the means to say FU, leave and look for somebody more deserving of your talents
• Ability to take a mini retirement – see this post for the huge benefits
• Position of bargaining power – having a net worth behind you gives you the confidence to discuss pay increases and personal development with your employer.
• Avoidance of high interest debt – you will likely never need to worry about the ability to pay off your credit card at the end of the month
• Open to business opportunities – maybe starting your own business has always been a dream and ambition of yours. By being further along the path towards FI the risks of this will be lessened. Especially if you have to support a family.
• Reduction in stress, worry and alarm – the thought now of living paycheck to paycheck genuinely scares me. I am lucky enough to know that if I have an emergency (car breaks down, roof leak etc.) then I can cover this easily without having to go into short term, high interest debt.
• Increased confidence and feeling of self worth – knowing that you are in a strong financial position can give you the confidence to do something you never thought possible. Personally I have used this to begin backpacking throughout the world (so far I’ve spent multiple months on SE Asia and am currently in Mexico).

The truly powerful benefit of the path to financial independence:

One of the final (and possibly most important) benefits of being on the path to financial independence is that your investments will be working for you from the moment you first invest. This can be seen in the below example:

• 1: saves £20,000 per year and has no investments.
• 2: saves £20,000 per year and has £100,000 in investments
• 3: saves £20,000 per year and has £250,000 in investments
• 4: saves £20,000 per year and has £500,000 in investments
• 5: saves £20,000 per year and has £750,000 in investments

For the purposes of this example we will assume the investments increase by 7% each year (an average historical return for a worldwide index fund).

Total savings per year for each person:

• 1: £20,000 
• 2: £20,000 + £7000 = £27,000
• 3: £20,000 + £17,500 = £37,500
• 4: £20,000 + £35,000 = £55,000
• 5: £20,000 + £52,500 = £72,500

The secret here is that the further along the path you get the quicker your net worth will grow as your investments begin to do the heavy lifting. This is the power of compound interest.

Your first £10k will be hard. Your first £100k will seem impossible. Get past this at it will all suddenly seem achievable.

Conclusion

Hopefully this post will have given you an open and honest look into what a financial independence lifestyle will look like. Personally I think it is pointless to ignore reality and paint it solely as a picture of sunshine and rainbows and therefore I have made my best effort to be genuine and fair.

The three key takeaways should be:

Is Financial Independence a worthy goal?

Absolutely, especially if you value:

• Time freedom – the ability to spend the worlds most valuable resource however you choose
• Flexibility of life choices – pursue your real goals and dreams 
• Reduce stress, worry, concerns and reliance on others – financial independence will remove (or minimise) money related issues from your life
• Construct generational wealth – reaching financial independence will allow you to pass on life changing wealth to children and those left behind that you truly care about
• Retirement with a younger, fitter and healthier body – too many people are no longer physically able once they retire… or they pass away only a couple of years after finally taking their freedom.

What will the sacrifices and restrictions look like?

Those who are not lucky enough to earn crazy amounts of money (most of us) will likely need to make sacrifices in order to reach financial independence. Optimisation in many parts of your life will likely to be required.

Potential sacrifices include:

• Eating often in restaurants
• Expensive, resort type holiday
• New cars
• Nights out at expensive cocktail bars
• Upmarket supermarkets
• Hobbies – never stop doing what you love but consider not always using the newest and best equipment.
• Drive less (especially if you can manage to have one car for your household).
• New clothes

Optimisation in other areas of your life which will not be sacrifices include:

• Cancel unused subscriptions
• Shop around for better deals (energy, insurances etc.)
• Remortgage if possible
• Avoid impulse purchases

It is critically important to remember that not every one of the above sacrifices have to be followed and you can pick and choose as you please. Don’t forget that minimising does not mean never – just be intentional.

What are the overlooked benefits of just being on the path to financial independence?

The road to financial independence is often viewed as a hard slog, but the reality is that there will be ongoing and powerful benefits which will usually grow larger and more forceful the further down the road you travel.

Some of these include:

• Emergency fund – those living paycheck to paycheck will often find their financial lives derailed by an unexpected emergency expense (car breakdown etc.)
• FU money – Having a net worth in combination with your emergency fund allows you to say FU to an employer or person who believes they own you and treats you as such. 
• Bargaining power – being in a strong financial position makes it far easier to agree salary raises or to look for new, higher paid roles
• Avoidance of high interest debt
• Opportunity to start your own business with less risk
• Reduction of stress, worry and alarm that comes with living paycheck to paycheck
• Increase in confidence and self worth
• Compounding effect of your investments – the money you have already invested will generate you more money throughout the path to financial independence.

Final thoughts

I believe that financial independence is a hugely worthwhile goal and believe that education about this subject could benefit millions of people throughout the world. 

The main criticism levelled at it is that you are deferring all enjoyment in your life to a later date when you finally achieve financial independence. This absolutely does not have to be the case and if you spend internationally on what brings you enjoyment then you can still live a hugely fulfilling life whilst on the path.

In case you don’t believe that an exciting life can be symbiotic with the path to financial independence then be aware that I am currently writing this from a sandy white beach in Mexico as I enjoy a month away from my current workplace. Possible because I am on the road to financial independence.

Let me know what sacrifices have had a big impact on you and your journey in the comments below.