The definition of financial independence is the ability of an individual to support his lifestyle without having to work. Financial independence therefore rhymes with early retirement.
From a strictly financial point of view
From a strictly financial point of view, this means that you no longer need to receive a salary paid by an employer to meet your daily expenses. You have enough income (rent collected, share dividends, investment interests, online business, etc.) from your assets (cash, stocks, bonds, real estate, website, etc.) to be able to to feed, to dress and to lodge as you wish.
Financial independence is the “why” of this blog. Indeed I created this blog in order to achieve financial independence in order to take my early retirement.
Yes exactly ! FIRE means in English FINANCIAL INDEPENDENCE RETIRE EARLY is literally “Financial Retirement Early Retirement”.
This movement, because it is now a movement or a lifestyle because more and more people are joining, was born in the United States. One of the precursors is Peter Jonathan Adeney best known by his blog mrmoneymustache.com . Peter Jonathan Adeney has retired at age 30 and is now living off his financial rents. If you speak English I invite you to browse his excellent blog.
How to achieve financial independence?
That is the question. Well, there are two main ways to achieve financial independence.
But above all let’s get into the basic equation that allows us to understand the fundamentals of this way of life. I say lifestyle because, in my opinion, it is not possible to achieve financial independence without changing your lifestyle. Becoming financially free can quickly become your main concern if you adhere to the idea.
On one side is your income, which you earn every month. On the other hand there is your expenses, which comes out of your bank account to allow you to live. The difference between the two is your rest to live, your savings.
Financial independence therefore consists of:
- Or to optimize / increase the rest to live in order to save it. The goal is to achieve sufficient capital that once placed on the stock market, can withdraw a monthly income covering your expenses.
- Either to create constant income other than your income from the wage earner to cover your expenses.
So to reach your financial independence and retire early, you can
- Increase your income
- Reduce your expenses
- Create alternative income, also called passive income (which between us not anything passive most of the time)
Ok it’s fine financial independence but is not it a little far fetched?
Yes and no 😉
It all depends on your motivation, your standard of living, your initial capital, your passions (which can become a source of income), your age unfortunately, your loved ones, etc.
Personally I take financial independence as a philosophy of life. A goal to achieve that allows me to be motivated every day to act and create.
How to calculate your capital needed to be financially free?
This rule is known as “the 4 percent rule” and is based on a study called ” Trinity Study ” by professors at Trinty University.
Attention this rule is based on financial studies conducted in the United States so we must take into account the difference in economic and fiscal regimes between our two countries.
However for the sake of simplification let’s start by applying the calculation rule as it is.
In short, you can withdraw an annual annuity corresponding to 4% of the invested capital without ever being ruined, whatever the inflation. To calculate the capital required for your financial freedom, simply divide your annual expenses by 0.04 (or multiply them by 25)
Financial freedom capital = total annual expenses / 0.04
I am Erwann. In my thirty, dad of two beautiful children, happy husband and engineer with a full time job. All this leaves me little free time. I optimize every minute of this free time to train for investment.
My discovery of the FIRE movement opened me to the world of investment. Good financial management is the first step towards financial independence. I invite you to follow me in this adventure.