We all build careers for two reasons: (1) We have a strong passion for a particular cause and wish to devote our time to it, or (2) We need to obtain money to sustain our families and living standards. I would suspect that the majority of us in the workforce belong to the latter category. Most people work to build income to establish a certain standard of living. Some people have lifestyles that exceed that of their earning ability. Others try to save during their working careers to have enough to retire.
Financial Independence is a term that has been circulating in the online finance community to loosely define a favorable financial situation that allows one to be free from the typical career.
Financial Independence = Early Retirement?
Financial Independence Early Retirement, or FIRE basically means that if you quit your day job or other conventional means of income, you still have enough to survive. There are many different interpretations to this rule, but for most of the “FIRE” online community, this means retirement. Income to sustain a living can come passively through investment vehicles like dividends or through other income like real estate rentals or asset appreciation. Those who are in the FIRE category base their financial status on the Trinity Study, which projects a certain sustainability of living based on your assets. In the broadest sense, you can withdraw approximately 4% of your investable assets each year and expect to have enough to last 25 years. Without going into the flaws and shortcomings of that study, you can also extrapolate that in bear markets or down economies, you may wish to withdraw less to sustain the longevity of your income, and vise versa in good economic times.
The first step in calculating how to achieve FIRE is to know how much you spend annually. There are online forums and calculators (like the FIREcalc) that help give you a sense of where to start and when you should be able to achieve Financial Independence.
This magical number is going to vary widely depending on your spending habits. If you send your kids to private school, take luxury vacations, or buy organic groceries at full price, you will need a larger nest egg to achieve FIRE.
Financial Independence = F-You Money?
What if FIRE is not achievable given your income, investment percentage, and spending habits? Perhaps you could define Financial Independence as having enough net worth to be able to walk away from your job without having to starve your family. That amount is F-You Money. Your nest egg is substantial enough to sustain a happy living arrangement for a certain period of time. You can’t walk away from everything yet, but you have the luxury to explore alternative means of income. This can be from consulting, managing side projects, or even per diem jobs.
How much do you need to have F-You Money? A year’s worth of living expenses? Five years? There’s no magic number, but I would still consider this number to be big. In my case, I am still trying to reach my peak earning potential for my career and build up savings that I should have accumulated during the lost years of medical training. I do not have kids yet, so I expect that my expenses will continue to rise over the next decade before I can scale back my spending.
If 25x your annual spending, as defined by the Trinity Study equates to Financial Independence, I would consider F-You Money to be at least 10x annual spending, maybe 15x. This is a good number to strive for.
How Does Financial Independence Relate to Doctors?
On paper, every doctor should be able to achieve financial independence given their earning potential. I would expect all doctors to be financially independent, even with a moderately lavish lifestyle, by the time they retire at 65 years of age. Unfortunately, that is not the case, and this is one of my motivations to operate this website. Doctors are traditionally bad at business and investing. They have been programmed to focus singularly on their profession and nothing else. Moreover, I have met plenty of doctors who are disgruntled with their profession, but begrudgingly continue because they don’t have a choice.
We do have a choice. Doctors should be able to obtain F-You Money and FIRE if they manage their income, investments, and savings appropriately. Yes, we’re a decade behind our peers, but as long as we are capable of practicing our profession, we can catch up. By achieving Financial Independence, we provide ourselves with the option of practicing medicine the way we wish to, and without the burden of having to worry about getting our bills paid or uprooting our family when our hospital fires all of their doctors.
Take Action Now
Assess what you can do to get one step closer to Financial Independence. Does that mean taking an extra ER shift at the hospital and putting that towards your debt or investments? How about finding ways to grow your net worth without increasing your income? Make a list of goals and what you can do to achieve them. Tackle that list day by day. I’m certainly doing it. And I plan to get that F-You Money and achieve Financial Independence.
What steps have you taken to achieve your financial goals?