Financial Independence, Financial Freedom? (Part 1 of 3)
The importance of starting with and revisiting goals in your financial planning
Financial independence and financial freedom really have a nice ring to them, don’t they?
So much so that you may have even heard of the "FIRE" (Financial Independence, Retire Early) movement. The idea of being “your own boss” and kicking back after you’ve reached financial security ahead of schedule can certainly be the dream for many.
And I won’t lie, this aspiration applies to me as well. I’ve spent countless hours researching the topic and, at different times in my life, tried to apply the philosophies behind these kinds of movements with varying degrees of success (and failure).
Now, I’d actually encourage anyone seeking financial security to go for it. It’s a smart thing to do. You're forced to be knowledgeable and disciplined about managing your own money.
Where my views begin to differ is that for some, financial security and financial independence (or freedom) are sometimes seen as one and the same: a goal after which you can finally let go and enjoy life.
Let’s clarify them a little.
Financial security is really about the steps you take to be and remain solvent, that is, having enough money to pay the bills, live life, and still have something left in the bank for any unplanned or larger discretionary expenses.
On the other hand, financial independence and freedom are broad terms that can refer to both a way of thinking about money as well as having a level of income or wealth that lets you live a certain way without having to worry as much about money.
They are often misconstrued as something that can only be obtained by being rich and wealthy. While neither is easy to achieve by any means, being loaded is not a prerequisite.
We also appear to be more in love with these ideas, basking in them here and there rather than being dedicated enough to follow through. Ironically, this can prevent us from ever achieving any of them.
And finally, financial security nor freedom are fixed points at which you can just stop whatever you’re doing and ride off into the sunset. Rather, for most of us, it is a privilege just to get there, and it takes a lot more work than most people realize to stay there.
But there will always be exceptions to the rule.
For a select few, becoming wealthy enough that it is life-changing or even generation-spanning in a way that seems unfair to the rest of us does happen. It may even feel like it happens too much, to the point where we trick ourselves into thinking that the same could be true for us if we play our cards right.
Now I don’t want to comment on anyone’s circumstances, including those who appear to be living a lifestyle that some parts of society may look up to, as they say: “The grass is always greener on the other side.”
Things may look like we think they do from the outside, but we really don't have enough information to know for sure. All I know is that these occurrences are usually an exception to the rule.
Society at large, and the media narrative as a reflection of it, likes to celebrate success stories despite the literal mountains of failed attempts that often lie beneath them. This phenomenon is also known as survivor bias.
Of course, we all want to be that survivor, and who knows, maybe you will be. You may just not want to put all of your eggs into that one basket.
It’d be wiser to not expect or plan for the grandeur of being rich and wealthy, and instead focus on positive and real things in your life and begin to build momentum from there, taking one step at a time.
It starts with being motivated yet realistic about your financial goals
While it’s great to have aspirations or a vision, as these can really help you when you’ve been down on your luck, it’s important to make sure that the goals you have and the actions you take that underpin them are grounded in reality.
Goal-setting can be a tricky thing. We’re always told to be realistic and measurable, but what does that actually mean?
You end up looking this up online and copying someone else’s approach and, in effect, playing dice; if it works for you, great; if it doesn’t, well, you were never quite bought in to begin with.
In my opinion, what’s realistic and what’s far-fetched is subjective and boils down to your own situation and outlook. Only you really know what you’re capable of and willing to do.
But we can draw parallels to the experiences of others who’ve gone through similar things and have some kind of benchmark to compare our goals and actions to. This can really be helpful in supplementing our goal-setting, but they shouldn't be mistaken for our own goals.
So by all means, do the research, incorporate learnings from others, and seek advice and inspiration (from licensed professionals and real people that you trust), but at the end of the day, make sure your goals are your own so that you’re more likely to buy into them through thick and thin.
It is very much a balancing act and can be an intimidating and painstaking process.
Dreams that are far-fetched can be what motivate you to get out of bed, whereas being too grounded in reality can end up holding you back, acting as a barrier and impeding your progress.
There is a lingering danger in being “too realistic.” You do need to ensure that there’s some challenge in the road ahead that’ll push you to grow.
Whatever you set for yourself, try to think of it as something you can work towards over time, making sure that it isn’t impossible to achieve.
Once you’ve contemplated and settled on your long-term aspirations and goals, you can then begin to work backwards.
This starts with being honest and open about your current financial status and health, which we’ll be covering in more detail in subsequent posts in this series (see my note at the end of this article).
You will want to revisit and adjust your goals accordingly.
Working through a process, in which you’re periodically reviewing your goals, actions, and progress, is a critical step in being able to move forward consistently.
While you should commit to working through a such loop, it’s also worthwhile mentioning that your goals and actions can, and even sometimes should, change.
As life goes on, your circumstances, needs, and wants are likely going to change. Therefore, your goals and plans need to reflect these changes to remain relevant.
Working through a feedback loop consistently is hard, but don’t let it discourage you.
There will be setbacks, compromises, and tough decisions that need to be made, but you should also keep in mind that there could be new opportunities and unexpected windfalls as well. Perseverance is key.
At the end of the day, goal-setting is about trying to find a balance that works for you, where you have goals that motivate you and that you can keep track of, but that you are also aware of your progress and environment, remaining agile enough to be able to course-correct as your journey is unlikely to be a linear path.
How I approach my financial goal-setting
These are just my own opinions based on my own experiences. If you find any of this information interesting or useful, I would strongly encourage you to do more research to come to your own conclusions.
Due to the nature of my upbringing and the variety of environments my career has taken me to, I've perhaps become too comfortable with, even gravitating towards, keeping my options as wide and as open as possible.
That is, when I think about my life and therefore my financial goals with my partner, we tend to view them as the choices we’d like to be able to make at any particular point in time. The illusion of choice in this case is more about perspective.
We understand that it's unrealistic to plan for all possible scenarios and that plans often don’t go as planned. So no matter what stage of life we are in, we try to maintain as much flexibility as possible. This includes the ability to make a drastic change over the medium-term if required.
This could entail something like moving countries or needing to substantially alter the way we live, for better or for worse. Something of this scale inherently requires us to have additional financial buffers to be able to absorb such costs, on top of already having savings set aside in the event of any short-term cash flow issues.
As an example, we have an investments in place that are less risky in terms of capital preservation and being more liquid (i.e., lower growth but less volatile) for the medium term should we ever need to liquidate.
This allocation is in parallel to investments with a larger risk appetite to capture the tailwinds associated with compound growth over a longer time horizon.
All of this may sound a bit vague, but it is intentionally fluid, as our circumstances have regularly changed in the past and are likely to do so for the foreseeable future.
Would I call this a sound approach? No, I wouldn’t recommend our approach to anyone. It’s a balancing act that has evolved over time to work for us, and how we approach goal-setting today could very well change in the future.
Do I have a magic number for my savings and investments? Not quite, I have a range in terms of savings or drawdown rates that we try to stay within, and an overall target range that we hope to achieve over time.
When the times are good and stable (which seem rarer these days), I consistently do what I can to increase our ability to absorb a drastic change as well as improve our ability to keep our options open for the future. And when the times are bad and more volatile, that’s when we draw down.
Everyone’s own life and financial situation are different and complex. There’s no one approach that works for everyone.
But sure, there are common and pragmatic steps that everyone can take that will help, but at the end of the day, you need to figure out what works for you, stick with it, and adjust as you go.
Anyone who tells you otherwise may likely be hiding something, and this could work against you. So make sure you always have a healthy amount of skepticism before following any kind of advice.
For the remainder of this series, we’ll be taking a simplified approach to go over some common practical steps that are usually available for most people to get started on taking control of, or even just adjusting, their personal finances:
Part 2: Knowing your financial status in terms of cash flow
Part 3: Focusing on financial health in terms of equity
While these are covered in separate posts, they're closely connected. The closer you are to each of these, as well as your familiarity with how they influence each other, the more control you will have over your personal finances and in reaching your goals.
Best of luck with your goal-setting.
See you in the next one!