Coronavirus - Get the latest updates and resources from MyWalletHero - Find out more.
Advertiser Disclosure
What does financial independence mean?

What does financial independence mean?

By: Harvey Jones | 29th May 2020

Financial independence, who doesn’t dream of that? Imagine not having to work, no money worries, and all your time your own.

FIRE walk with me

It sounds perfect, but as always there’s a catch. To achieve that blissful state, you have to slash your spending to the bone and invest every single penny you can, as early as you can.

If you do that, you can retire years or even decades earlier, according to a new movement called Financial Independence, Retire Early (FIRE). It claims anybody can achieve financial independence without winning the lottery, setting up a multi-million-pound business or making a fortune from crypto-currencies.

All you have to do is spend as little money as possible and save the maximum you can. Of course, a good salary helps – doesn’t it always? – but that won’t give you the independence you crave unless you display plenty of discipline too.

I want to break free

We are all for sound financial management at MyWalletHero, but the FIRE movement takes that to the extremes. The target is to build up a pension pot equivalent to 25 times your estimated annual living expenses. Once you have done that, you are free to retire, whatever your age, FIRE says.

It seems incredibly ambitious. In fact, the phrase that springs to mind is ‘wishful thinking’, but I can also see the temptation: the freedom to retire in your 40s or 50s rather than 70s or 80s.

Work to rule

The calculation is based on something called the 4% rule. This states that if you keep your nest egg invested and draw no more than 4% each year, the money can effectively last forever.

You never need to work for money again.

All of which is wonderful and has plenty of advocates, especially among the naturally thrifty. They are happy to cycle to work with a packed lunch, live in a shared flat in an uncool part of town and drink tap water down the pub (until they’re thrown out).

It’s good old-fashioned living within your means – but turned up to full.

Don’t spend, spend, spend

I’m naturally thrifty myself and find this appealing. I admire the growing backlash against mindless consumerism as millennials, in particular, favour experiences over things. However, I can also see a few downsides.

First, you might come across as a bit stingy. Your social life could suffer horribly. Plus you need a decent salary in the first place; you can’t do this on the living wage or a zero hours contract.

If you have kids, forget it (unless you’re a super-high earner as well).

FIRE followers attempt to save at least 50% of their income. If you can manage that, you can hit the 25 times living expenses target in just 17 years.

Lift that to 75% of your income, and you could do it in seven years, according to calculations by Mr Money Mustache.

It will help if you save in a Stocks and Shares ISA for tax-free returns.

State of financial independence

Critics say this is self-indulgent and who wants to retire at 45, anyway?

FIRE members rebut this by saying it’s not about putting your feet up and watching daytime TV (although you can if you want). It is about liberating yourself to do something more rewarding than being a wage slave. Start a business. Write a novel. Follow your dream.

There is a lot to like about FIRE, even though it is clearly unrealistic for most of us. That said, everybody should be saving as hard as they can for retirement, even if 50% is pushing it.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.