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What’s This Episode About?
A look at the foundation of the Financial Independence movement. Learn what Financial Independence is and what are the biggest areas of your financial life that you can address to start your journey towards F.I.
Meet Today’s Guest
Brad Barrett is the co-host of the ChooseFI Podcast. He’s a CPA who left the corporate world in 2015 thanks to 15 years of diligent savings and the passive income he earns from his websites.
For more of Brad’s thoughts on financial independence checkout Episode 21 and Episode 38 of ChooseFI, the Pillars of FI and the Why of FI. Also check out the Choose FI Facebook group with over 35,000 members!
Fear of FIRE
When I first heard about financial independence, I thought “this sounds great”, but it also sounds intimidating because it’s a big concept and it’s hard to know what you are supposed to do? How do you even get started?
And that’s when I came across ChooseFI and episode 21 all about the Pillars of FI, the foundation of financial independence. I know that there are many pieces to it, but I wanted to have a chance to talk with you about some of some of the bigger components of those pillars.
Your Financial Independence Number
The biggest starting point, and I’m not sure that this was an explicit pillar, is know your F.I. number. So, for me (Brad), F.I. comes down to controlling what you can control. And for most people that’s the expenses side the gap.
The gap is your income minus your expenses. That’s the money that you have leftover. So, there’s two ways to approach that. You can lower your expenses, or you can raise your income.
I don’t like to go after things that are going to be impossible right from the outset. Small wins matter to people. Getting those small wins at first where you can create a little momentum. Psychological momentum is huge. You’ve seen a retirement calculator. They ask what’s your current income? But to me that is a BS metric because your current income has a savings component built into it or you can’t reach retirement. You’ll never stop working if you’re saving zero, right?
The 4 Percent Rule
Instead of income as a starting point go with expenses. And there’s a very famous study called the Trinity Study, which is far beyond the confines of a short podcast. But basically, there the four percent rule of thumb as we call it. If you have a pot of money, you can take out roughly four percent of it every year and that money should last you at a minimum of 30 years. Hopefully many, many years longer.
There’s like a 96 plus percent probability that this will work. Obviously, I’m not sitting here guaranteeing this, but we use that as a metric. Let’s say your yearly expenses are $40,000 and you’re applying this four percent rule. You would need $1,000,000 to make this happen because four percent of 1 million is $40,000. It’s just the inverse of that 25 times rule.
This is truly a guideline, but it at least takes the uncertainty out of it. For so many people, you go to that online calculator and they say you need $7 million to retire. What do you do? You shut off mentally, right? Who could possibly save $7 million? But what can you do? You can control your expenses? You can start on that tomorrow.
Maybe you’re not going to sell your house and sell your car and do all this other nonsense tomorrow, but you can start controlling your expenses. You can get a sense of where your expenses are whether it’s early retirement or traditional retirement.
Financial Independence Pillar 1 – Buy a Cheap Car
We (Brad and his Wife) drive old cars. We both have 2003’s. I’ve got a Honda. She has a Toyota. We’ve driven these cars have well over 100,000 miles. We haven’t had car payments for 7 to 10 years, that’s $500 to $600 a month, minimum.
Financial Independence Pillar 2 – Invest in Low Cost Index Funds
You can take this money and invest it in low cost index funds. We (Brad) believe in low cost index funds generally. (Brad) I’m a CPA, but even still, I don’t have the time to beat the market. I control what I can control which is the fees on my investments. So, I don’t go to an expensive advisor. I don’t buy mutual funds with a 1.3% expense ratio.
I buy low cost index funds, generally from Vanguard, but Fidelity and Schwab have very comparable options as well. I believe if I matched the market over a 50-year period, I’m a very, very happy man.
Going back to the car, that’s enabled us to save probably over $100,000 compounded over a 10 plus year period. I mean that’s astronomical for one change. And I still have these wonderful cars that look great and drive perfectly. I don’t care if I have a Mercedes or my 15-year-old Honda, it gets me where I need to go.
I think when you embrace what financial independence is and you say, well I would really like a nice car, but I would also really like to not go to work. It starts to shift your mind and you say, a nice car is great and all, but I’m going to get much more enjoyment out of spending more time with my family, getting to travel and do these things that I couldn’t do if I had to work.
Financial Independence Pillar 3 – Buy an Affordable Home
I (Brad) retired from my corporate job at 35 after 14 years. It was living in a house that was just not that expensive, albeit we had a beautiful four bedroom house in the nicest part of the Richmond Virginia Metro area. But we didn’t buy the mcmansion even though we could “afforded it”. Our mortgage was $1,100, which is nothing in the grand scheme of things. It was having these low-cost cars, these older cars that we had no car payment for years.
It’s like you’re trading, you’re trading one thing for another. You have a finite amount of resources and you can choose where it goes. You can put an importance on it and say, hey, this right here is way more important to me, so I’m willing to give this other thing up because I can live without it. There are workarounds.