I recently listened to a podcast episode of Radical Personal Finance. In this episode, there were two guests talking about financial independence (FI). The two guests have their own podcast called Choose FI.
One of the guests was talking about how he paid down a big student debt (in the six figures) and casually acknowledged that his higher-than-average income helped. Luckily, the host of the show – Joshua – stopped him and basically said that having a higher income is a big piece of the puzzle in paying down debt and/ or achieving financial independence. It is something that some may take for granted.
This interview took place at Camp Money Mustache. For those who don’t know, Mr. Money Mustache is a famous blogger within the FI movement (if that is what it can be called) who advocates frugal living.
I am not a Mustachian. I think being frugal is positive up to a point. Even though I don’t watch a lot of television by American standards, I still like to watch cable television. I also like having a smartphone for accessing the Internet practically anywhere. My guess is that most self-identified Mustachians do not have cable, and a higher-than-average percentage probably don’t have smartphones.
In terms of becoming financially independent, I think it is important to figure out what you want. Achieving financial independence is great in terms of reduced stress. You generally don’t worry about unexpected bills because you know you have more than enough to cover them.
I find that many people who achieve FI status at a relatively young age continue to work and make money. In this sense, I don’t think they really could retire for the rest of their lives with a decent lifestyle. There are a few, but I don’t think there are many 40-year olds who really could afford to never work for money another day in their life.
The key here is that they have flexibility. Some call it “F-You money”. A more polite way to say it is that it is freedom money. If you have very significant savings, it makes it easier to quit a job you don’t like. Maybe you still have to get another job or source of income, but you could go for a couple of years or more without much worry.
One thing that Joshua (the host of Radical Personal Finance) has spoken about is living the life you want to live now. This doesn’t mean not working. It means finding work that is fulfilling. It means doing things in life without necessarily having a huge retirement fund built up.
There are many people, particularly Americans, who have the mindset that you work for 40 years and then you retire and enjoy life. They think you have to wait until retirement to travel and enjoy life.
Ask yourself what you would do if you were financially independent. In many cases, you could do those things now while still working.
I don’t advocate seeking a job that you always love, because most people do not like some aspect of their job. Even a professional golfer may get tired of going to the practice range. The key here is to find something that you are content with, but with the realization that most jobs are going to have certain aspects that may not thrill you.
If you already have your dream job, I think it gives you more flexibility just to enjoy life, both inside and outside of work. Still, even for the rare person in this situation, it is still a good idea to save some money and look towards financial independence, even if you do it at a slower pace. You should have emergency money. Plus, you never know if your dream job will one day go away.
In order to save money to achieve financial independence, there are really only two variables: how much you make and how much you spend. The difference (accounting for taxes) makes up your savings. If you want to become financial independent, you need to spend less than you save. This means that to increase your savings, you need to spend less, earn more, or some combination of the two.
To break down the income side into more detail, you can also earn investment income. This could come from financial investments, real estate, a business, or something else. In order to get to this point of having significant investment income, you first have to start a business or save money to invest.
The spending side of the equation and the earning side of the equation are both important for financial independence. There are people who earn well into six figures who save almost nothing. This is more of a spending problem than an earning problem.
Still, I think the answer for most people is to earn more. I know it is easier said than done, but you are limited in how much you can cut your spending. You still need a place to live and food to eat and clothes to wear.
You are not limited on the upside of earning money. You could double your income, or you could increase it by 2,000% if you are creative enough.
If you are earning $55,000 per year (close to the median family income) and you are managing to save $2,000 per year out of that, then it will probably be hard to cut spending more. And when you do, it isn’t going to add up to much. If you are only saving $2,000 per year, you are going to take a long time to save up for a decent retirement. It is better than saving nothing, but it still isn’t that much in today’s world.
The one good thing about someone in this scenario is that he is accustomed to living a simple lifestyle. If someone else is earning $150,000 per year and saving $2,000 per year, then he is farther behind in a sense. He has more luxuries in his life than the other guy, but he is going to need to save a lot more money in order to fund his current lifestyle. The one good thing about this person is that he could possibly have a revelation at some point and start to save some of his high income.
The person making $55,000 has an upside though. Perhaps he has a better chance of earning a higher income than the guy already earning $150,000 per year. If he is able to get a higher income, he can more easily maintain his current living standard and save a lot of money.
We know the reality is that most people who earn more money are quick to move into a higher lifestyle. If you always do this, then you will never save any significant money.
In the podcast episode I reference above, there was another throwaway line by the guest. He said there are better ways to earn a six-figure income without going into debt. I wish the host had asked him his thoughts on this. It is interesting to get someone’s take on how to earn a six-figure income (without college) considering that the large majority of people are not earning this much.
It is important to not box yourself in. If you are earning, let’s say, $50,000 per year, don’t assume that increased savings means having to lead a ridiculously frugal lifestyle. Consider if there is a better job out there for you. Consider if you can start a small side business or do some kind of freelance work on the side. Consider other avenues in making money.
Nobody can tell you how exactly you should make more money. But assuming you don’t already have a really high income, this is something that you should consider. The way to achieve financial independence is by earning a high income (business or salary) and to live a middle-class lifestyle. Then you can still enjoy life while you work, while also making progress towards your ultimate goal of being able to claim financial independence.
There is no secret formula other than making more than you spend. For most people, it is actually easier to make more money than to spend less.