Choose FI

1. Financial Independence (FI) is about freedom, not just retirement

FI is not about retiring early or retiring at all really. It's all about having the freedom and flexibility to design your life in alignment with your values.

Freedom to choose. FI gives you the power to decide how to spend your time and energy. It allows you to work on things that are important to you, at your own pace, or choose not to work at all. This concept goes beyond the traditional notion of retirement, focusing instead on creating a life that aligns with your values and passions.

Three tools for FI:

• Spend less
• Earn more
• Invest better

Stages of FI. Understanding the progressive nature of financial independence can help motivate you along the journey:

1. Getting to zero net worth
2. Fully funded emergency fund
3. Hitting six figures in investments
4. Half FI (12.5x annual expenses)
5. Lean FI (25x essential expenses)
6. FI (25x total annual expenses)
7. Fat FI (33x annual expenses)

2. Develop a growth mindset and become a lifelong learner

If you're not growing and learning, you're falling behind.

Embrace challenges. Those with a growth mindset believe that success is a result of continued learning, personal development, and persistence. They see challenges as opportunities for growth rather than threats to their abilities.

Aggregate marginal gains. Small improvements in various areas of your life can compound over time, leading to significant progress. This concept applies to personal finance, career development, and skill acquisition.

Key strategies for lifelong learning:

• Read books and articles on personal finance and investing
• Listen to podcasts and attend conferences
• Experiment with new skills and business ideas
• Seek feedback and learn from failures
• Develop a "talent stack" by combining multiple skills

3. Optimize spending by becoming a "valuist"

When you have unlocked the magic of being content and happy with simple things in life, you're setting yourself up for success over and over again.

Align spending with values. A valuist is someone who spends their time and money consistently with their values. This approach allows you to cut unnecessary expenses while still enjoying the things that truly matter to you.

Focus on big wins. Apply the Pareto Principle (80/20 rule) to your spending by optimizing the three largest areas under your control:

1. Housing: Consider house hacking or downsizing
2. Transportation: Buy used cars and maintain them well
3. Food: Cook at home and meal plan

Other areas to optimize:

• Insurance: Understand when and how much coverage you need
• Recurring expenses: Evaluate subscriptions and services regularly
• Health care: Focus on preventative care and healthy lifestyle choices

4. Leverage geographic arbitrage to accelerate your path to FI

We are some of the luckiest people in human history for getting to buy our way into all this leisure time and this time to try different stuff that just gets us fired up and makes us feel excited to get out of bed in the morning.

Exploit cost-of-living differences. Geoarbitrage involves earning money in a high-cost area and spending it in a lower-cost area. This can be applied internationally or domestically to accelerate your path to FI.

Strategies for implementing geoarbitrage:

• Work remotely for a company based in a high-cost area while living in a lower-cost area
• Move to a lower-cost city or state to reduce expenses
• Use travel rewards to explore new places at a fraction of the cost
• Consider international geoarbitrage for early retirement or extended travel

Benefits of geoarbitrage:

• Faster accumulation of savings and investments
• Opportunity to experience new cultures and perspectives
• Potential for a higher quality of life on a lower budget

5. Hack college or consider alternatives to minimize debt

There's hope for people [with student loan debt]. That person can achieve FI, and maybe they didn't think they could before.

Evaluate the ROI of education. Consider whether a college degree is necessary for your desired career path and explore alternatives such as trade schools, coding bootcamps, or entrepreneurship.

Strategies for hacking college:

• Attend community college for the first two years
• Apply for scholarships and grants aggressively
• Work while attending school to minimize debt
• Consider employer-sponsored education programs
• Utilize AP courses, CLEP exams, and dual enrollment

Alternatives to traditional college:

• Learn a trade or skill through apprenticeships
• Start a business or side hustle
• Pursue online education or certifications
• Join the military for education benefits

6. Invest in your career and build a valuable network

78% of jobs are never advertised anywhere.

Treat your career as an investment. Your ability to earn income is your biggest asset early in your journey to FI. Focus on growing your income by adding value to others and saving a large portion of that income.

Strategies for career growth:

• Continuously develop new skills and knowledge
• Seek opportunities for advancement within your company
• Negotiate salary increases and promotions
• Consider switching companies for better opportunities

Network authentically. Build genuine relationships with people in your field and beyond. Offer value to others without expecting immediate returns.

Networking tips:

• Attend industry events and conferences
• Join professional associations and online communities
• Offer to help others without expecting anything in return
• Follow up and maintain relationships over time
• Seek mentors and be willing to mentor others

7. Master low-cost index fund investing and understand the 4% rule

Don't look for the needle in the haystack. Just buy the haystack!

Embrace passive investing. Low-cost index funds provide broad market exposure and have consistently outperformed actively managed funds over the long term.

Key principles of index investing:

• Diversify across the entire market
• Keep costs low with low expense ratios
• Avoid trying to time the market
• Rebalance periodically to maintain your desired asset allocation

The 4% rule. This guideline suggests that you can withdraw 4% of your portfolio in the first year of retirement, then adjust that amount for inflation each subsequent year, with a high probability of not running out of money over a 30-year retirement.

Considerations for the 4% rule:

• It's a rule of thumb, not a guarantee
• Be prepared to adjust withdrawals based on market conditions
• Consider a more conservative withdrawal rate for early retirement
• Factor in other income sources and potential lifestyle changes

8. Consider real estate and entrepreneurship to diversify income streams

You can manage risk so tightly in business, even when I fail, I usually profit.

Real estate investing. Property investments can provide passive income, appreciation, and tax benefits. Consider strategies like house hacking, rental properties, or real estate investment trusts (REITs).

Benefits of real estate investing:

• Cash flow from rental income
• Potential for property appreciation
• Tax advantages through depreciation and mortgage interest deductions
• Ability to use leverage to amplify returns

Entrepreneurship. Starting a business allows you to create equity and potentially unlimited income. Consider starting a side hustle or transitioning to full-time entrepreneurship as you build your skills and savings.

Entrepreneurship strategies:

• Start with low-cost or no-cost business ideas
• Test your ideas before investing significant time or money
• Focus on providing value to customers
• Leverage your existing skills and network
• Reinvest profits to grow your business

9. Optimize tax strategies to keep more of what you earn

If I thought you could put in a little bit of work, or even a lot of work, and get better results than index investing . . . I would certainly be doing it.

Understand the tax code. Learning how taxes work can help you make informed decisions about saving, investing, and retirement planning.

Tax optimization strategies:

• Maximize contributions to tax-advantaged accounts (401(k), IRA, HSA)
• Consider Roth conversions in low-income years
• Utilize tax-loss harvesting in taxable accounts
• Explore real estate investments for tax benefits
• Structure your income to minimize tax liability

Plan for retirement withdrawals. Develop a strategy to access your retirement funds in a tax-efficient manner, such as building a Roth conversion ladder or utilizing the 0% long-term capital gains tax bracket.

10. Enjoy the journey to FI, not just the destination

You have to recognize that not everyone starts at the same place, and you're going to have bad things happen to you. But when the bad things happen, you have to have the resilience to say, OK, yeah this happened. It sucks, but I'm going to move forward and here's how I'm going to solve it.

Find balance. While pursuing FI, it's essential to maintain a healthy work-life balance and focus on personal relationships and experiences that bring joy.

Strategies for enjoying the journey:

• Celebrate small wins along the path to FI
• Practice gratitude for what you already have
• Pursue hobbies and interests that don't require significant spending
• Cultivate meaningful relationships with family and friends
• Focus on personal growth and learning new skills

Embrace flexibility. Recognize that your goals and circumstances may change over time. Be willing to adjust your FI plan as needed to accommodate new priorities or opportunities.

Remember:

• FI is a tool for creating a better life, not an end in itself
• The habits and skills you develop on the path to FI will serve you well regardless of your final destination
• Finding purpose and fulfillment is just as important as achieving financial goals

Last updated: November 7, 2024