Financial Independence: achieving the millennial dream

It would not be surprising if this is the first time you hear about financial independence. How to manage personal finance is not something taught in school and many people don’t like to talk about their money. The net result is that too many have no idea how to handle their income, their expenses, and their savings.

Financial independence means having enough money saved or invested to live comfortably. At this stage, work is optional, it’s done for passion, instead of need and fear. It sounds like the ultimate millennial dream, but thankfully it can be more than that. Becoming financially independent is very much achievable.

The quest for Financial Independence - Retire Early

The FIRE movement (Financial Independence - Retire Early) grows day by day. Many people from all walks of life and different ages embrace it. Everyone will have their motive but most people have:

• The desire of spending more time with family: when money stops being a problem, the need to work long hours and be away from home decreases.
• The appeal of living a more adventurous life: with financial independence comes freedom, which allows you to do more of what makes you happy and focus on passions rather than obligations.
• Understanding that life is not that long after all and that by working for someone else you are effectively trading your time for money, contributing to somebody else’s dreams and not yours.
• Looking at the traditional retirement at 65 as an outdated model: why wait until old age to enjoy this world pleasures?
• The fear of becoming obsolete: Technology is continuing to automate jobs, creating a greater need for people to have multiple sources of income if they want longevity in their careers.
• Fear that retirement may become difficult in the future: more people realise that relying on the support of a State pension to cover their financial needs is not enough.

These are just some of the reasons why more and more people are embracing the FIRE movement, and why they don’t want to necessarily depend on work anymore.

The next step is early retirement

The financial independence objective changes from one person to another, depending on the lifestyle and goals of each. But it all comes down to this: you are able to afford the life you want without relying solely on a job. It means having more opportunities for quality family time, travelling, keeping up with your hobbies, and other experiences that bring you joy.

For many, all of this means building up to an early retirement. This means planning to completely stop working sooner than the traditional retirement age. After all, FIRE means financial independence - retire early.

Since your pension fund will stop receiving contributions sooner than planned, you should try to maximise the amount put into it as pension funds get some tax benefits compared to regular traditional investments.

The origins of the fire movement

The FIRE movement as we now know it began when Your Money or Your Life by Vicki Robin and Joe Dominguez was published.

In this book, they propose an alternative way of looking at finance which makes you take responsibility of your financial situation. They explain the tradeoff between money and time/energy, opening up a new way of understanding financial success.

Learning more about personal finance is a way of taking control of your life.

Since then, the FIRE movement has grown in online communities, with individuals sharing their tips and strategies to reach financial independence as soon as possible.

Everything you think you know about work is wrong

For decades, the conventional wisdom has been that the key to financial independence is to get a safe, stable employment with a good salary and benefits, and to work hard at that job for many years.

In today’s world, this path is not the best option. Many jobs that were once considered safe and secure are now at risk of being automated or outsourced. This can make it difficult for workers to achieve financial independence, even if they are dedicated and hardworking. The cost of living is increasing, and it can be difficult to save enough money to achieve financial independence on a single salary.

It is important to consider alternative ways to build wealth and achieve financial independence. These might include investing or entrepreneurship. By exploring these options, you can take control of your finances and create the lifestyle you want, rather than being at the mercy of the market.

Putting your money to work

Saving money is an important part of achieving financial independence, but simply stashing your money in a current account is not going to work towards your financial goals. You need a FIRE plan.

First of all, the value of your money will be eroded by inflation, which is the gradual increase in the prices of goods and services over time. Current accounts do not typically offer an interest rate, so your money will not grow fast enough to counter that. This means that even if you can save a large amount of money, it may not be worth as much in the future as it is today.

Explore other savings and investment options that offer higher interest rates and more potential for growth. Depending on your risk tolerance, this might include a savings account with higher interest rates, real estate or stocks and index funds. By diversifying your savings and investments, you can maximise your returns and increase your chances of achieving financial independence.

Why would you buy stocks?

When you invest in stocks, you are buying a small piece of ownership in a company. The value of your investment can go up or down depending on the performance of the company. However, if the company does well and its stock price increases, you earn a profit by selling your stocks for more than you paid for them.

Index funds and ETFs

These are similar in that both are types of investments that track a specific market index, such as the S&P500. Index funds are designed to provide diversification and broad exposure to the stock market, without the need for active management or stock picking. They can be a good option for investors who are looking for a simple and convenient way to build wealth and achieve financial independence.

How much is enough money to retire?

The amount of money you need in your retirement savings and be financially independent depends your desired lifestyle and the cost of living in your area. Having at least 25 times your annual expenses saved is a common rule of thumb.

Under this rule, you withdraw 4% of your savings each year, keeping the remaining part invested. This should allow you to have enough income to pay for your needs without ever running out.

Depending on how much you plan to spend in your retirement, different styles (and communities) of FIRE might suit you best.

For example lean FIRE followers aim at retiring as soon as possible, at any cost. In lean FIRE you would plan of spending less than the average person. For example, in France, your target might be to spend less than €20.000 as a couple in a year. With the 25x rule, this means saving €500.000.

We have fat FIRE followers, planning to retire to an abundant lifestyle. The aim is not exact, but a common target is €100.000 in expenses per year, meaning €2.500.000 in net worth.

In the US, barista FIRE is another model. In this style you reach your saving goal, but you keep working a part-time job. For many, this is being a barista. The point is to get health insurance. In Europe barista FIRE isn’t really helpful.

Start with your living expenses I can imagine your thoughts right now. How on earth are you going to put together €500.000? Let alone €2.5m. Does FIRE involve winning the lottery?

No. While it can surely help, getting there would bankrupt you way sooner.

FIRE is achieved through a combination of planning, bold career decisions, wise investments and a bit of magic (actually, it’s math).

Are we in this together? First of all, define your setting. Being in a couple helps. Do you have kids? Do you think this will change?

Then, imagine how much will you pay every month. Is €1.500 enough for you? Now, account for inflation with this formula:

$$ actual=expected*1.02^{years} $$

This considers a 2% inflation rate. If you retire in 20 years, and imagine of spending €1.500 of today, you will actually need €2.230.

You now know you need about €27.000 every year. If you plan of being alive for the next 40 years, that is €1.080.000 you need to save. Wrong. You actually only need €675.000, under the 25x rule.

This amount is to be invested, producing at least 6% after-tax profit.

If your money is in real estate, your rental income is paying for your retirement. Don’t forget to save for maintenance, renovations and taxes.

If you decide to start investing in stocks/ETFs, every year you can sell 4% to 6% of the value (to account for inflation), knowing that during the following year the assets should appreciate again. You will have good years and bad years, and must be able to stomach that.

As a third, riskier alternative is running a side business(es) that contributes to your income, allowing you to reduce the total amount of savings required. Just make sure that:

• they don’t take up all your time (otherwise you have not retired at all!)
• they can survive for a long time.

The stock market: the FIRE shortcut to achieve financial independence

Say you earn €2.500 per month. You spend half of it on your life and put the remaining 50% in your retirement savings. This is known as your savings rate.

Investing this in a decent ETF, with 8% returns, you will have saved €15.540 in a year. In 5 years €91.180. In 10 years you have €225.155.

Finally in 14 years you have saved €376.356. Note that you only have invested into saving €210.000 and the rest is compound interest doing its magic.

If you haven’t noticed, you are actually done now.

You were spending €1.250 before retirement If you take 4% from your savings every year for the rest of your life, you will be able to spend €1.254 every month. You can maintain your lifestyle without working. You are in early retirement.

To become financially independent, invest in yourself first

You’re probably wondering if €1.250/month is enough. Maybe you are not making €2.500 right now, how on earth can you possibly save that much.

I cannot stress enough how important it is that you start your investment on yourself and your education. Make a career change, specialise, learn to read and speak in English. Talk to a therapist about your stresses and anxieties. More money is not going to help if you are too upset to enjoy it.

Open up your future to new opportunities and a renewed mindset that will let you take on this challenge.

Build up your monthly income

If you are already cutting all corners and not making enough to save, you must look in increasing your income level. The first step, is making yourself more desirable. Get certified, work harder for a bit, or change employer to a better paying one.

You will need that extra income to reach financial freedom and retire early.

Build an emergency fund

Before you start investing, make sure to build up 3 to 6 months of essential expenses in a cash current account.

This way, in an emergency, you don’t have to touch your money-making machine to cover your costs.

The sooner you start investing, the sooner you’ll become financially independent

If you’re dreaming of a future where you can retire early, it’s important to start working towards that goal as soon as possible. The earlier you start, the closer you can move your retirement age. With more time, your savings will build up more compound interest. It’s never too late, so why not start building your wealth today? It won’t happen overnight, but with time and effort, you can make steady progress to decades of passive income and retirement.