This is the second post in a short series on Frinans. This time we will be looking into the what part, meaning what am I trying to achieve.
The introduction series
This is part 2 in a series of 4 posts written to give a basic answer to the questions of who, what, why & how of Frinans. Part 2 therefore will be about what I am trying to achieve. The more experienced reader, both of this blog and other blogs about financial independence, will hopefully either learn something new, feel comfortable in knowing they got the situaiton under control or perhaps even be able to offer me and others some great insight.
I learned once to always start with the essential, so without further ado, this is the conclusion to the question of ‘what is financial independence’, in my humble opinion:
Financial independence means not having to rely on working as a means to an income
There you have it, the conclusion in all it’s glory, or lack there of. Read on and I will dive a little more into the concept.
What is financial independence?
Type this question into google and you get a lot of hits. I would suspect that there are a lot ways to define and explain the concept, and that each of the explanations offer their own little unique insight. To me the concept simply means not having to earn money by going to work. The essential part being the ‘not having to’. The cashflow therefore needs to come from somewhere else, and of course there are the select few who are born being financially independent, but this is not the case for most people. In theory you could also rid yourself of the need for money, and thereby claim financial independence, but this is not my goal. Most people have to earn their financial independence by being smart and working hard. Usually this means investing your hard earned cash, and when enough is invested, living of off the investment. A very important part of what I just wrote is something small, that might seem insignificant, and might not be something most people recognise at first. It is the ‘not having to’ part of earning money by going to work. This is the holy grail to me about the whole financial independence concept. It means you can choose to spend that big chunk of time spent on working, on whatever you want. If you depend on the pay check but don’t like your job, you can quit. You could also change jobs to spend time working with something that provides you more joy, but might pay less. Put simply, it is liberating because it removes an ugly having-to-do-something part. In todays fast paced society it seems more and more people are finding it difficult to feel comfortable staying in the rat race, or have difficulties finding meaning in what they do. Liberating one self, in the sense of freeing up time to spend on activities that bring more joy or seems more meaningful, is therefore on the rise. I will get more into this in part 3 of the introduction series.
The magic of the numbers 25 and 4
Math often seems to be at the very center of peoples quest for financial independence, and especially two numbers appear again and again. Those two numbers are 25 and 4. What is the meaning of these numbers you might ask, why are they important? They are important simply because the number 25 is the number you need to multiply your yearly spending by in order to get your needed investment amount to be financially independent, what I like to call my Frinansnumber. the reason behind the number 25 actually lies with the number 4. Back in the day there was a study called The Trinity Study, you can read more about it here. In a short and simplified version, the study found that by applying a 4% yearly withdrawal rate, a portfolio of mixed stocks and bonds wouldn’t run out in a 30 year period. This is extremely simplified and offers the study no justice at all, but this post is not about going in depth with this. In short it means one can sustainably withdraw 4% of a portfolio of stocks and bonds and not run out. If this holds, one finds their Frinansnumber by multiplying the amount of money needed yearly, which is to say ones annual spending, by 25. I think the infamous Mr. Money Mustache post The Shockingly Simple Math Behind Early Retirement does a far better job of explaining this simply than I do, so head on over there to gain more insight.
This is all very simplified and of course these numbers are to be understood as guidelines. Within the community the safe withdrawal rate, SWR, is often discussed and the number 4 is not set in stone. For instance the simplified calculation doesn’t include any tax considerations for withdrawing in a retirement phase. Especially rules concerning taxation differ widely, not just from country to country, but also person to person. This is part of the reason why I started this blog and am now switching to writing in english, most of the informational material that exist, is very USA centric and the rules that apply there, do not apply to me.
Overall though the numbers that need to match are my spending and my withdrawals from an investment portfolio. Last year I spent about 100.000 DKK and so a rough Frinansnumber, not including taxes, would be:
Frinansnumber: 2.500.000 DKK (Use a converter such as this from Bloomberg to calculate in your local currency)
The actual figure is likely higher, but as a guideline this will work for now.
Independence comes in many forms
Independence can be many things and likewise financial independence. In reality living off of welfare means being financially independent, if the concept only applies to not having to work for a living. This is not what I’m aiming for. To be honest I don’t know precisely the type of life, post-retirement, I’m heading towards. What I know is that I don’t want to spend 7-8 hours a day in an office job in order to pay off a 30 year mortgage. I also don’t know if I would feel fulfilled not having a job at all, so perhaps a part-time job might be the answer in the long run. I spend a good amount of time pondering this, but I haven’t actually come up with a complete understanding of an ideal day for me. This also means that I am fairly certain in my understanding of the concept of financial independence, but I haven’t yet found out completely what it means to me in the sense that I am not sure when and under what circumstances I will feel financially independent. Theory and practice might not be the same. Say for instance that I had 2.500.000 DKK in an investment portfolio. This would mean that in theory I was financially independent but in practice I might worry whether this would hold true. The trick therefore is to acquire both the financial means to be financial independent, the money skills needed to operate as financial independent and the skills necessary to handle unforeseen situations. There are a lot of options and possibilities in between working fulltime and being retired. Being financially independent makes it possible to explore these options and actually provides an alternative.
What I do know and have figured out is very simply that being financially independent opens a whole lot of doors that otherwise remain closed, and I’m very interested in acquiring the keys to open them. If I were to write a conclusion, a simple answer to the question of what is financial independence, this is what I would write:
Financial independence means not having to rely on working as a means to an income
Take it in and perhaps say it out loud a couple of times. If you find this one sentence interesting, I bet you will find my journey and therefore this site interesting.
Next time, meaning next monday, in the introduction series, I will be looking more into the why I am trying to achieve financial independence.
As always comments are most welcome and I will do my best to answer all questions. You can follow or like the facebook page or follow frinans on twitter to get notified of new posts as well as interesting links and stories I stumble across. If you are interested in getting into Bitcoin you can sign up for Coinbase through my affiliate link, if you buy Bitcoin for a minimum of 100$, we both get a 10$ bonus. If you are interested in diversifying your investments further, then how about signing up for crowdlending through my Mintos affiliate link and gain an exclusive % on your investment.