“To see things in the seed, that is genius.” – Lau Tzu
In this three part series, we will lay down the foundations for you to build a bridge between your current circumstances and Financial Independence (FI). We will get back to first, universal principles to help you move through the often needless complexity of finance and investing.
We will do this in three steps. First, we will help you understand precisely what FI means and get you thinking about the ultimate objectives of finance and investing. Second, we will sketch the finance industry and related landscape through which you will need to find a path. Third, we will give to you a simple wealth formula anyone can apply. The thread running through this series is simplicity and practicality.
What does Financial Independence (FI) Mean?
Lets start by asking an important threshold question: ‘what am I hoping to ultimately achieve with my finances and investing?’ Answers here are best broken down into financial and non financial objectives.
Financially, we ultimately are striving for Financial Independence (FI). This is simply having enough money or capital to support at least our basic needs for a fixed or indefinite period. Many people either do not know the size of the capital needed, let alone have a simple and realistic plan to get there. For most people it is a figure somewhere between $1m and $2m, let’s say $1.5m. It will naturally depend on your basic living requirements projected forward and allowing for inflation, the length of time you intend to be financially free, and your starting net worth. We have spent several years now creating simple, practical tools that can easily crunch these numbers. By knowing the size of your ultimate capital base, you can then work out how to get there.
FI then gives you freedom to choose, to design a more intentional life. A purpose filled life. This gets us thinking about higher, non financial objectives. Simply ask yourself, ‘when I achieve financial independence, then what?’ This simple question is confronting. It gets us to think early about things beyond finances. So, what are the ultimate things that have the highest meaning for you? When you have clarity here, you have a powerful long term motivator to creatively design a dynamic life.
People Still Struggle
A lot of finance and investing is made to appear complex, needlessly. This is perhaps due to the industry and other people seeking to maintain value. However, the internet is democratising knowledge, and digital technologies are making it easier for anyone to do, or manage things themselves.
Nonetheless, we have a gap between what is possible, and what most people are actually doing financially. There is sobering data in Australia and the US that shows a continued, widening wealth gap. In the United States the CFSI in its 2018 survey report found 93% of people are unable to pay all of their bills on time in the last twelve months (CFSI 2018, p.4). In Australia, ACOSS reported a person in the highest 20% lives in a household with five times as much disposable income as someone in the lowest 20% (ACOSS 2018, p.16).
Causes of increasing inequality are multi-layered. However worsening financial literacy, particularly about basic financial and investing principles are a key cause. For example, ASIC in its annual Financial Attitudes survey found only two in five Australians understood the investing principle of diversification, and only 27% of women understood the concept (ASIC 2018, p.6). It remains uncertain how many people knew how to apply the principle.
In the US and elsewhere, there are a number of new movements evidencing significant change. Perhaps the most well known is the Financial Independence Retire Early (FIRE) movement. It started in about 1992 with the best-selling book Your Money or Your Life by Robin and Dominguez. In subsequent years, many people, particularly Millennials are walking away from large mortgages, ‘safe’ corporate or government jobs, and are building tech enabled processes to achieve FI within about ten or fifteen years.
When they achieve FI in their thirties or forties, they have the financial freedom to design better lives. Characteristics here include more life-work balance, a return to the importance of family, and a clarity of purpose. This purpose is usually philanthropic in nature- giving back by working on pressing social or environmental causes.
The FIRE and similar movements are creative and intentional. Life is not something that happens to us, life is what we design it to be. These movements abandon completely the 20th Century model of work for about 50 years in a safe, secure job and then retire for a few years. Millennials and others know safe and secure jobs are a thing of the past. Creative financial and life design that is adaptive is key.
This had led me to create a variation of the FIRE idea- Financial Independence for Legacy and Lifestyle (FILL). As we have seen, people are now moving away from retirement as the ultimate objective of FI. Purpose filled outcomes are the ultimate objectives of FI. These can be summarised in two sets questions-
- Lifestyle. What type lifestyle do you want to design when you have financial freedom?
- Legacy. What ultimately do you leave behind? What has the most meaning for you in your life or work? What is your legacy?
Wealth and Water
The broader principle of FILL ushers in the analogy of water. Money or true wealth is similar to water. It is critical to our lives, yet something, if we are not careful, can slip through our fingers. It must be appreciated, channelled, and is best shared for all of us to lead fuller, purpose led lives. Like nature, it reminds us of our inter-dependence.
By Lee Spano, CEO of Creatness International www.creatness.com
Australian Council of Social Service (ACOSS) and University of New South Wales 2018, Inequality in Australia 2018, viewed 2 September 2019, < https://www.acoss.org.au/wp-content/uploads/2018/07/Inequality-in-Australia-2018.pdf >.
Australian Securities and Investments Commission (ASIC) 2018, Australian Financial Attitudes and Behaviour Tracker, Wave 6: March 2018, viewed 2 September 2019, https://financialcapability.gov.au/files/afab-tracker_wave-6-key-findings.pdf.
Center for Financial Services Innovation (CFSI) 2018, U.S Financial Health Pulse, viewed 2 September 2019, <https://s3.amazonaws.com/cfsi-innovation-files-2018/wp-content/uploads/2018/11/20213012/Pulse-2018-Baseline-Survey-Results-11-16.18.pdf>.
Robin, V & Dominguez J 1992, Your Money or Your Life: Transforming Your Relationship With Money And Achieving Financial Independence, Viking, New York.