FI But Not Finished

I had an amazing opportunity to connect with some folks this morning and they’ve fully energized me. One of the topics that came from our discussion, though, was this concept of FI as Freedom. In the same respect that we think about the starting point and persevering through struggle (Kiersten and Julien over at Rich and Regular did an awesome post about being Broke but not Broken a while back), this conversation offered a moment to think about the finish line. 

We think of the FIRE journey as a journey to freedom– the freedom to retire early, refocus your energy or otherwise be completely free to determine your day-to-day. What we haven’t done in really explicit terms, however, is break out the levels of financial independence and freedom.

What’s hilarious in this is that I’ve done a lot of thinking about this topic recently. To be clear, Financial Independence is the state in which your net worth (your investments) can reasonably pay for your day-to-day lifestyle. If you’re thinking in terms of the numbers, where your net worth (your assets minus your liabilities) is equal to or greater than twenty-five times your yearly expenses. Once you’ve hit that number, you’ve reached FI. For example, if your yearly expenses are $40,000 per year, then you would reach FI when your net worth is twenty-five times that, or $1 million. 

But if you’re looking for the freedom to leave a job, that number may or may not be enough. Let’s say you’ve invested in your home and do not have a mortgage. For the purposes of this conversation, that number would be included in your assets or investments. But, if you were to retire tomorrow, you might need the value of your home to be included in that $1 million net worth in order to ensure that your money lasts through your retirement. If you live in a high cost of living area, this may be particularly true– your home may equal $300k, $500k or more, which could be a significant portion of your portfolio.  So what does this mean? Have you not actually reached FI, or is it that there’s something else after FI?

What do you mean FI doesn’t mean Freedom?

I think part of what we’re talking about is that there’s more to the conversation of pursuing freedom.  There’s something after FI.

There are many folks who’ve extended beyond net worth millionaires, and who’ve reached FI but are not financially free. That is, their money is set up so that they can’t leave the hustle yet. This is when someone is financially independent, but not financially free, and definitively not living in financial abundance. 

What’s become apparent over recent reflection is that my husband and I are financially independent. That is, if all of our investments were liquid and accessible, our investments could reasonably pay for our lifestyle using the 4% rule. Taking tax and emergencies into consideration, our current net worth will cover a 50% increase in our annual expenses.  In other words, our net worth is more than twenty-five times our annual expenses– it’s a little under 38 times our annual expenses. In an emergency, we’d be fine– we could move to a lower-cost part of the country (or a lower-cost country), and never have to worry about money. But, in considering how our money is set up, in order to do that, we would have to go through some steps to liquidate our money (sell our assets) in order to access it. As a result, we consider ourselves FI but don’t really consider ourselves financially free. 

So we keep pushin’.

We are set on reaching Financial Freedom, so while we may have taken risks we wouldn’t have otherwise been able to take (i.e., starting businesses), for the next five years, we press on, pushing to increase our more liquid investments (cash, CD’s, stock investments in non-retirement accounts) so that the interest we earn can be used in our retirement. In retirement, this means that we wouldn’t have to sell our assets (like our home or our rental property) in order to leave the grind without worry.

So what does Financial Freedom look like?

For us, it means that we will reach Financial Freedom when our liquid and semi-liquid net worth (aka our net worth minus all of our real estate altogether) will pay for our current day-to-day lifestyles and be flexible enough to also pay for lifestyle enhancement. So for us, this milestone can also be defined as the point when our total net worth (including real estate) equals or exceeds twenty-five times 1.8 times our yearly expenses. In real life, because I’m super conservative and like to have money in little holes in case life happens, I’ll likely round up and stop grinding quite as hard when our total net worth equals two times (2x) our current annual expenses. In other words, I’ll be comfortable considering us Financially Free when we’re able to double our yearly budget– to cover extra travel, a healthcare emergency, or to fulfill my deep-seated (and trauma-related) need for security– and still be able to stay in retirement.

Because there have been some recent changes to our household income (both my husband and I started businesses and no longer work for anyone else), we have some new financial uncertainty, but I anticipate that we will reach that number within three years. On my old salary, we’d be able to reach it in a little over a year.

Because we are interested in having kids in the future, this method also makes particular sense for us: that financial freedom is our next milestone. This is particularly true because, for me, “retirement” is just a shift in energy for me– one where I stop scrambling in someone else’s professional maze and create my own work. I will never stop grinding, I’ll just shift my grind to better align with the work I want to do and self-direct my work. 

As a quick note, there’s some debate in the FI community as to whether to include real estate in your financial independence number. I include the primary residence in my thoughts on FI because I want to acknowledge two things: first, the hard work and incredible accomplishment of obtaining such an asset is a big deal, and second, creating a net worth that’s not only positive (read: not negative) and large enough to cover you if you needed it to is at the core of the approach. If you needed to sell everything you owned and live on your cash, you could do it and not run out of money. I do acknowledge, though, that there’s something even greater. Here’s where you get the big kicker.

There’s more. What happens after you reach Financial Freedom? 

Whether you choose to continue hustlin’ or not, there’s a milestone that some people push for after reaching financial freedom. This is where Financial Abundance becomes a realistic goal.  That is, where you stack your coins enough so that you can live as you’d like. If you choose to incorporate your wealth into your estate plan rather than use it in your lifetime, this is when your kids or even your children’s children don’t need to worry about money. You determine when you stop collecting dollars, and you do it out of your own intrinsic or personal motivation. This is what real wealth looks like. 

Do you see yourself stopping at any of these steps? Which one and why? 

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