Photo by Christian Lambert
In the depths of the US stock market plunge back in March, a variety of financial articles were written that proudly proclaimed that the upstart Financial Independence (FI) movement was finally dead. To pile on, a handful of well-known personal finance personalities echoed the sentiment that the plunging stock market was the weak link in this relatively new personal finance practice and because of this, there was no more pathway to Financial Independence.
What I found the most interesting in all of this prognostication was the joy that these individuals took in what they believed was the undoing of the practice of living below ones means, refraining from taking on debt and investing for retirement.
For some perverted reason, these individuals took significant delight that those who had followed the ways of the Financial Independence movement would now need to revert back to unfettered consumerism and an inability of having any financial options in their lives.
Can living below one’s means really be ‘out of style’?
Unfortunately for those who proclaimed that the Financial Independence movement is dead, they could not be further from the truth. They missed the point that living below one’s means doesn’t go out of style just because the stock market fades.
Nor do they understand that living a life that rejects debt is not subject to what the stock market does. In truth, they totally missed the fact that individuals who follow the Financial Independence movement are actually playing a long game that is built completely on a different set of financial premises than that of the normal consumer focused individual.
To that end, people who embrace the FI fundamentals are not subject to ups or downs in the economy at the extent almost everybody else is. Coincidentally, the principles of FI work equally as well in any economy. In a bad economy, FI principles keep practitioners from going further into debt by allowing them to live on the emergency fund that they have built and the cushion that they have maintained from what they make and what they spend.
It allows them to not have to make drastic decisions such as having to sell a house, move from an apartment or exchange a car because they live well within their means. In fact, in some cases it allows for these practitioners to purchase stocks and other assets at a significantly reduced level that will add to their wealth in the future.
Financial Independence is Recession Proof
In a good economy, FI principles accelerate the financial strength of the practitioner. It allows for a substantial savings and investment rate well beyond expenses, as well as it allows for funds being put into equities to take advantage of the increase in the compounding rate of a good stock market.
It also allows the practitioner the maximum financial freedom, especially if they’ve already reached their FI number (a mathematical calculation described as current financial funds in the amount of 25 times what the individual expects to expend annually when no longer working).
However, where living the Financial Independence principles really shine is in a bad economy. Let’s face it, no one…or at least no one I know…wants to wake up and have the stress of worrying about having enough money to be able to pay the bills.
More specifically, it’s even worse if you not only have to worry about being able to make enough money to pay the bills but also have the elevated stress of not knowing whether you’re going to have a job or not.
The ‘gap’ is what builds Wealth
An individual that has followed the FI principles and has established a monthly lifestyle cost that is well within that individual’s monthly income has created what we call the ‘gap’.
It’s the financial space between your expenditures and your income. It’s this gap that provides you and your family with the ability to survive a severe and sudden financial crisis in the event one were to occur.
In fact, this gap is what allows individuals who follow the FI principles to actually become financially independent due to these funds having been invested in appreciating assets.
It is also what allows for the accumulation of an emergency fund that is kept in highly liquid assets which can be drawn down for a period of time when no other income is coming in.
To not have this gap creates a situation with that same individual where they are living right up against their income ceiling. They are right up against their financial ‘rev limiter’ and run the risk of a small and not so long hiccup in the economy to take them out.
What’s so interesting to me is that THIS is the normal financial environment that apparently the critics of the FI movement would otherwise call as being normal. How could that be? Well, if living frugally and well within your means is supposedly a dead practice then the opposite must be what they believe is viable.
FI is a wealth accelerator
Quite frankly the FI movement and the principles it espouses are a wealth accelerator in good economic times and the best defense in bad economic times. There are very, very few financial strategies that are able to deliver such results in both good and bad economic times but FI principles do.
Critics can say all that they want about the FI movement being dead but there’s very little argument about the math that supports adhering to FI.
Due in part to a high savings rate in either a good or a bad economy, along with the simple passing of time and the magic of compound interest, these core tenets of the FI movement alone can NOT help but make those who follow them financially secure.
In fact, at a high savings rate of between 30% and 50% of a person’s income, even when performed by individuals of modest income, savings and investments accumulate quickly.
Even an investment of $25,000 a year in the S&P 500 Index Fund that otherwise would provide an annual return of 7% compounds to approximately $395,000 in just 10 years. How can ANYONE, let alone someone in the personal finance space, find fault with that kind of strategy?
More importantly, how can that type of strategy that creates that type of wealth be something to criticize?
Conclusion
It’s hard to believe that there legitimately can be an argument against the FI movement, let alone the announcement of its death. If an individual were to follow financial independence and “not succeed” the worse they’re going to do is have saved some money, made some investments and changed some bad money habits along the way. Is that REALLY a bad thing?
From where I stand, in these troubling economic times seeing all those individuals who practice FI very much still with their underlying principles and wealth practices intact, along with the freedom of their financial options preserved, I think Financial Independence is just coming of age!
