I quit my full-time job last May after I hit my financial independence number, a goal I’d been working on for over 10 years. I haven’t talked a lot about Financial Independence (FI) here, but given the current economic downturn, inflation, and general instability, I believe FI provides a set of tools that no one can afford to ignore anymore. Despite our retirement accounts falling nearly 20% since Trump took office, now is an excellent time to be pursuing FI or to be financially independent. Here’s why.
What Is FI?
Financial Independence is the state of having enough money to live on for the rest of your life. It’s far easier to get there than most people think. There is a simple formula for FI that was first laid out in a hugely influential article by Mr. Money Mustache (Pete Adeney) in 2012.
[Your annual expenses invested in low-fee index funds] x 25 = Financial Independence
So, if your annual expenses are $50,000, then you need $50,000 x 25 = $1.25M to be financially independent.
In that article, Pete proves why this formula works. Generally, you should be able to sell +/- 4% of your stock each year and that should approximate your annual expenses for life. The stock market may go up and down over that time, but over the long-term, it always goes up and your 4% will increase with inflation so you can rest assured that you really can live off of your savings. There’s a whole community of people pursuing FI and succeeding in reaching FI. I won’t say that I’m not glossing over some nuance here, but that’s FI in a nutshell. If you’re new to the concept, I highly recommend you read that article and JL Collins’ The Simple Path to Wealth as a decent starting place.
The Upsides of FI During An Economic Downturn
People pursuing Financial Independence typically have a very high savings rate (we shoot for 50% or more), which means over time you build up quite a bit of money and you aren’t living paycheck to paycheck. This is important no matter what’s happening economically, but it’s especially important now. There are a few reasons why it’s a great time to be FI or be pursuing FI.
- Your cash reserves will protect you. If you lose your job (or don’t have one), you have money to live off of until you find another job.
- Stocks are on sale. With a high savings rate, you’ll be able to buy more stocks while they cost less, which will be worth more down the line when you want to cash them in.
- You have flexibility. If prices go up, you can afford to keep buying the essentials.
- You can leave. If you have enough money to either 1) not be working or 2) take some time off, it’s easier to move if you decide your current location is no longer a great place to live.
- You won’t be laid off. If you’re already living the post-FI retirement dream, you won’t be laid off. It’s nice to know that no matter how bad things get, your employer (no one!) will never kick you to the curb.
The Downsides of FI During An Economic Downturn
I’m not going to lie. It’s a little disconcerting to be sitting here without a full-time job, watching my hard-earned savings melt away and knowing that if I want to go back into the job market, it’s going to be hard to find a job. But there are a couple of things I keep in mind.
First, on day one of my high school economics course, Mr. Carpenter at good ol’ Brown Deer High School told us about the economic cycle. While businesses and governments would love to keep finances moving up and to the right, the reality is that there are always economic downturns and we haven’t had one in a while. We’re due. The good news is that the stock market always recovers, no matter how bad things get.
Secondly, in preparation for my semi-retirement, I not only put money in low-cost index funds, I also built up a cash reserve in a high yield savings account so I could live off of that for a few years without pulling money out of the stock market.
Third, even if prices get really high and I decide to go back to work, I’ll only need to make a fraction of what I was making to make up the difference.
These three pieces of information keep me sleeping ok at night. My only regret is that I don’t have a ton of money to pour into the stock market right now. Like I said above, stocks are on sale and it is a great time to buy.
What If I’m not FI Yet?
Most people aren’t, but if you’re on the path, keep on keeping on. If you don’t lose your job, put as much money as you can into the stock market and maybe beef up your savings account as well.
If you lose your job, use that cash (that’s what it’s there for)! Also, use the time you were just gifted to go do something you’ve been meaning to do, but didn’t have the time for while you were working. Take a trip, spend more time with or spouse or kids, or learn a new skill. You were smart and started this FI journey (or will start it after reading this!), reap some of the rewards early and know that things will work out in the end.