We bang on about financial independence a lot at Money School. It features heavily in our blogs, and it appears in our education for kids.
But what does it actually mean, and why should you care?
What does financial independence mean?
We define financial independence as being able to support your lifestyle without having to work.
In money terms: you don’t need a wage to meet your costs. You’ve got enough income (rent, dividends, interest etc) coming in from your assets (cash, shares, bonds, property etc) that you can feed, clothe and house yourself in the style to which you have become accustomed.
These are technical definitions and can seem a bit nebulous. Here’s what financial independence really means (in my personal experience):
- Not having to panic about unexpected bills,
- Not having to return to work after having kids until you’re ready,
- Being excited about a redundancy instead of worrying about losing your home,
- Being picky about when and where you work, what role you do, and who you work with and for,
- Having time to volunteer for causes you care about,
- Knowing your children will be provided for – financially at least – if you pass away,
- Not having to panic about a slow month – or quarter, or year – in your own business,
- Treating your superannuation as cream rather than essential means of survival,
- Being blasé about government changes to superannuation rules or pensions and allowances because they won’t affect you much,
- Sleeping soundly at night because you’re not worried about your financial situation, and
- Being able to take some risks – like quitting your job, moving country, launching a start-up – without losing quality of life.
But most of all, financial independences means more choices and more options are available to you.
Why should I care?
Plenty of people tell me they don’t care about financial independence. They tell me they’re quite happy working, or money isn’t important to them, or that they get a great cash-flow from their business so they don’t need to worry about assets, or they’re not good with money so it will never happen.
If you relate to any of those, this next part is especially for you:
Reason #1 to care: Shit happens
Epiphanies come in the most inconvenient forms sometimes. Death, divorce, disease and reDundancy (often called the Four D’s, hence my peculiar capitalization) are frequently the financial wake-up call you didn’t want.
Redundancies and lay-offs are going to continue. Industrial 4.0 has the potential to wipe out 40% of known jobs in the next decade – starting NOW. Your partner may drop dead or leave you for someone else. You might get cancer.
We don’t often see the warning signs for these events – if in fact there are any at all. We all think we’re invincible and we’ll somehow work it out.
But there’s no time to squirrel away more cash when these things actually happen. They arrive, and you have to deal. Right here, right now, with what you have.
This is why many people end up in debt. One of the Four D’s arrived and they simply weren’t ready. They have no choice but to trash their immediate and medium-term financial future just to get through their ‘D’ without losing their homes.
Some find that future is still trashed decades down the track.
I am not immune. You are not immune. Your family is not immune.
When the proverbial hits the rotating blade, financial independence means you at least don’t have to worry about supporting your basic lifestyle costs while you deal with it. It gives you some space. It also gives you assets to draw on instead of debt if the proverbial is beyond your income levels.
Reason #2 to care: The future of work is uncertain
There may come a day in the next decade when you’re given the DCM (Don’t Come Monday).
We tend to think of this happening to factory workers dressed in dirt-covered overalls during depressions.
Guess what, white collar workers and professionals: the lay-offs are coming for you. If you do work that is repeatable – even if it’s in your head or on a computer – your days are numbered.
A few current examples:
- Bankers are being laid off around the world in their thousands. Now. Thank you, blockchain.
- Machines that can diagnose and advise with more accuracy than expensively trained humans are slowly replacing lawyers and doctors. Thank you, artificial intelligence (AI).
- What lies in the future for architects when you’ll be able to print and assemble your house without a professional? Thank you, 3D printers.
Even those professions that don’t see a major headcount reduction will be revolutionized by the changing nature of work. I just hope Rutger Bregman is right and we get the universal basic income and 15-hour work week he suggests in Utopia for Realists.
You may love your work, but that does not make you immune to losing your job. Financial independence does not mean you have to give up working, it just means your working income is not essential to sustain life.
Reason #3 to care: Governments
Picture this: you’re 65 years old. You have very little superannuation and you don’t own a home. You are unable to work – either you can’t find anyone who’ll employ you, or you are not able to do the job you used to anymore and don’t have the capacity to retrain.
Our government will give you – at best – $445 per week. With that, you’ll need to feed, clothe and house yourself. You better get good at making that $445 stretch, because that’s all you’ll have for next 15-30 years.
Whether you’ve made a valuable contribution to society is irrelevant. Whether you’ve raised healthy, happy, well-adjusted children matters not a jot. The time you’ve given to the community groups and charities your support is ignored. You’ll get the same pension as a lifelong dole bludger if you’ve got the same balance sheet at age 65.
There are no medals for financial sacrifice. There is no benevolent group waiting to bestow a small fortune on you in recognition for your good works.
It is this rude shock that hits people approaching retirement. They spend their last working years scrambling for a way to buffer the shock, which often means huge lifestyle sacrifices at an age when you should be enjoying yourself.
Now for the kicker: pensions aren’t going up. Australia ranks 33 out of 34 OECD countries for our pension and modern governments show no inclination to rectify that. Superannuation was brought in so pensions could go. Your elected officials will not be doubling the pension any time soon. In fact, people of my generation (I’m on the X/Y borderline) likely won’t have any age pensions. It will all be self-funded through superannuation.
If that’s eased your mind, don’t forget the government controls the rules for superannuation – what defines retirement age (it recently rose from 65 to 67) and what tax rates apply to money going in and coming out. These rules are not getting more favourable.
Fancy leaving the power to affect your quality of life for ~25% of its duration in the hands of the government? That’s what you’re doing if you’ve got a retirement on the pension in mind.
Reason #4 to care: Being female
Ladies, your vagina is costing you. Big time.
You face a gender pay gap that widens as you rise through the ranks. Adding insult to injury, your earnings diminish when you give birth.
We’re seeing more and more Marys (from Jane Gilmore’s ‘The Cost of Womanhood’ – a sobering read). This is in part why women over 55 are the fastest rising demographic for seeking homelessness support.
Women start behind the 8-ball in a big way. And, unfortunately, the power structures that caused this problem are not changing swiftly or decisively. While we (society in general) love talking about it at length and will convene costly breakfast functions to discuss it, we are decidedly lackluster in doing anything about it. For example, why isn’t a gender pay gap survey and correction compulsory for every medium to large enterprise? If Australia Post can do it, surely the rest of them can.
In the workplace in the past, we needed to be better than the best man in the same job just to get a chance to do a particular job. (It’d be nice to say those days are behind us, but I don’t think we’re there yet.) In the same way, we’ve now got to be that much better with our money than our male counterparts. We’ve got to make less go further. We’ve got to take this into our own hands.
The good news is: this is not like the workplace. Money doesn’t care if you’re or female. You won’t get a lower dividend because you’re a woman. There’s plenty of evidence to suggest women make excellent investors, so there’s no reason you can’t close your own personal pay and retirement gap with a bit of practice and tenacity.
Reason #5 to care: It makes life more awesome
For all the scary/sad/depressing stuff I’ve just covered, there’s a powerful motivation that can trump it all:
Financial independence can make your life more enjoyable.
The freedom that comes with not being tied to your job is indescribable.
You can choose to
…quit that awful job when you want to.
…make that sea-change or tree-change a reality today, not when you’re old and grey.
…spend more time with your kids when they’re little.
…launch a business without fear of losing your home.
…whatever you want!
That’s the point.
Wage slavery is normal. We don’t realise how much we’re sacrificing by subscribing to that way of life until we’re not anymore.
I hope you get to experience it.
You can do it!
Financial independence is not the exclusive domain of rich, old, Anglo-Saxon dudes. Fran and I have done it, and we’re pretty average.
We just followed a few simple rules: save, buy assets, avoid bad debt.
The rules are simple. The hard part is putting them into practice consistently. If you want to learn how, you can take our course.
But that’s a topic for another post 🙂
We teach adults how to get on top of their finances so they can stop work sooner and stop losing sleep over money. We also work with schools and kids directly. Money School is not affiliated with any financial products, services or institutions and we relentlessly defend our independence. If that sounds good to you, check out our course on Achieving Financial Independence.