FI is the new FU
Confidence through Financial Preparedness
Welcome 2 new Thinkers, we’re now 194 strong 💪
Good morning, this is Thinking Capital. A weekly mission for you to optimize your financial life. Today’s mission: Confidence through Financial Preparedness.
Did a friend forward this to you? If so, you can subscribe here:
Have you ever been in the midst of a soul-sucking meeting, asking yourself “when will this be over”? Or second guessing a purchase or social engagement because you’re unsure of your bank balance?
It’s an all too familiar story. In fact, the average American owes over $92,000. According to Bankrate. That debt breaks down as follows:
Debt is crippling. It sacrifices present self-sovereignty for past behavior. It forces us to make decisions for money instead of principals, and keeps us reliant on employers instead of optimizing our careers for our own interests.
Enter FI
For the uninitiated, FI stand for Financial Independence, and it’s often seen as the first step to FIRE; Financial Independence —> Retire Early. Whether or not you want to retire early is your decision, but I’m of the opinion that we should all aim for FI.
Ask 100 random people what “financial independence” is and you’ll likely get 100 different answers, some speaking to lavish vacations and second homes, while others just want to reset their balance owed to 0. The first misconception of FI is that it implies extreme wealth. If you’re looking for a Scrooge McDuck moment, you’re looking in the wrong place.
FI is focused on minimums, not maximums
People have different approaches to calculating their FI number, but the community generally agrees that you need two numbers:
Your cost of living
Appreciation rate (which is also the rate at which you can withdraw funds without depleting the initial balance)
Cost of Living
In an earlier issue I addressed cost of living, click through below for sample life expenses.
Appreciation Rate
Based on market appreciation assumptions combined with cash reserves and other math, most of us start with a semi-conservative rate of 4% and either crank it up if we’re more confident in our returns (perhaps buying I-Bonds at 9.62%) or lower it if we take comfort in playing it safe.
You’ll quickly realize that small changes to the percentage like going from 4% to 6% will make major changes to your retirement timeline. For example, if your cost of living (COL) is $20k per year:
4% appreciation assumption requires $500k
6% appreciation only requires $333k
8% appreciation would be $250k
And so on…
If your real estate assets are performing at 10% and will (somehow) always perform at 10% than you would theoretically only need $200k worth of those assets to perpetually earn $20k per year.
Does that make sense? Good.
So let’s assume a more modest 4%, now the only variable is your COL. Again, your numbers will vary, but it should make a light bulb go off that you are beholden to your choices. While you cannot go back in time and forego that student loan or the luxury car, you can change the choices you make from now on and you can find FI.
As you approach FI, you take back control of your life and are empowered to take back control of your time. Just like employment, everything in your life becomes “at will.” You might just find yourself quoting Fight Club.
Your mission, should you choose to accept it, is to readdress your cost of living. Whether this is on paper or in a spreadsheet, calculate your current cost of living (if you haven’t done so already) and add a second column with the COL you would need to retire now. For many of us that may not be possible, so finally add a third column with your future COL.
For some of us that future COL will be higher, allowing us to afford more than we currently have.
For others, that may involve a retreat into a lower COL neighborhood, especially if you no longer need to be close to a high-paying urban center.
Once calculated, you’ll have a starting point, and from there you can start to chart your own path towards FI and FIRE 🔥
In other news…
Markets (crypto in particular) took a serious tumble this past week. I hope everyone is holding up and realizes that this too shall pass. If you’re upset and need someone to chat with, I’m here for you 🤗
<3
Armand