Building A Strong Financial Independence Mindset

“Ugh. Another waste of a day, all because of this,” you think to yourself as you pour out your home-brewed coffee for breakfast. 

You are not alone.  Millions of Canadians wake up each weekday and dread the thought of working. A place where you spend more time with your co-workers during the week doing a job you might not even like. 

The worst part is, it is at the expense of spending time with your loved ones. 

In your adult work life, it’s startling when you realize that you might work a dull job for three decades before retiring. 

What can you do to change that?

The answer is to achieve financial independence (FI).  This is the point that your passive income matches or exceeds your regular everyday expenses.  At that point, you don’t need your job. 

To attain something like FI requires you to lead a different life than a lot of your friends and family.  It requires a huge mindset shift.  You cannot magically reach FI out of thin air and your current lifestyle will probably need some changes.

This article will help you get in the right financial independence mindset.  You need goals, determination and a deeper understanding of what matters to you in life, amongst other things. 

At the heart of financial independence, you must save.  There are two ways to accomplish this:

1.   Earn more income

2.   Reduce your expenses

Once you’re able to create savings, you can invest and let your investments compound to help you reach your goal.    

You will need to make sacrifices along the way.   The first step is to reduce your expenses.

Your friends may be out buying luxury cars, or expensive homes, but you will have to follow a different path. You may have to stay in a smaller house or keep the car you just bought for 15 years.  Remember, you have to live differently than everyone else to attain the future you desire.  

Financial Independence Mindset: Money is Actually Time

Now, you probably believe that the only thing you lose when you buy something is money.  If you spend $50 to buy a lamp, it’s obvious that you gave away 50 dollars to gain light in your home office.  Is that all you lose? 

No.  You lose your valuable time, which is irreplaceable.   

Editor’s note: I am not suggesting that you forego purchasing a lamp to achieve FI.  You need light to see what you’re doing after all.  But you could purchase a cheaper lamp.

You need to understand a core concept from the book Your Money or Your Life by Vicky Robin and Joe Dominguez. 

When you work, there is also an exchange that occurs. 

You exchange your time for money.

Suppose you earn $20 per hour.  You give up 8 hours of your life to your employer and earn $160. 

That means $160 is equivalent to eight hours of your life.  You cannot get those 8 hours back.

Ever.   

Imagine that you go to the mall and buy a $160 pair of sneakers.  You spent $160, but since you traded eight hours of your time at work to earn that $160, you really spent 8 hours of your life to purchase those sneakers.  It is impossible to rewind time.

All of your bills are still due. Now you have to go back to work and re-earn that $160 because you spent it on shoes instead of your rent. 

The only way to break this cycle is to save money and invest it to earn a passive income that can eventually pay all your annual bills.

That is not all, though.

You can file this under the “I hate to break it to you” column, but the $20 per hour you earned in the example above is really much lower.   You haven’t factored in the time to get ready, commute, take your non-paid lunch hour, etc.  So you’re, in fact, bringing home far less than $20 per hour and that’s before taxes.  

This is not to stop you from buying anything, ever.  For instance, your shoes might be tattered, forcing you to buy new shoes.  

You need to be more intentional about your spending because you’re also spending your finite time too whenever you purchase those shoes.

Why Do We Retire When We Retire?

Most people retire when they are 65 because that’s the social norm in North America.  Other reasons could be exhaustion, a realization that other things are more important than work, or declining health.

Others retire in their mid-to-late fifties because they have a defined benefit pension plan, and possibly because they are tired of working too. 

So what allows people with pensions to retire earlier than most others?  Money. 

For most other people with no pensions in Canada, you can only receive your Canada Pension Plan (CPP) and Old Age Security (OAS) government pensions at age 60 and 65 at the earliest, respectively. 

The point is, you can comfortably retire once you have a stream of income coming in via withdrawals to help you offset your retirement lifestyle expenses. 

People who subscribe to the FIRE (Financial Independence Retire Early) lifestyle figured out that if you can amass a large stockpile of savings and investments, you can retire far earlier in life than in your mid-sixties. 

If you like the idea of FI, you need to know that you are basically self-funding your own early retirement (although you can keep working if you want to).  Rather than wait for your employer or the government to give you money at a later stage in life, you take it upon yourself to save everything you need. 

The more you spend, the longer you have to work.  Unless you find reliable ways to increase your income.  It’s that simple. 

What do you really value?  

One way to make your spending more intentional is to align your spending with your values and goals.  The goal here is to achieve financial independence.  

Think, though, why do you want to achieve financial independence? 

  • Do you want to retire right away to get out of the rigid corporate 9-to-5 schedule? 
  • Do you want to spend time with your young children? 
  • Do you want to go on long vacations whenever you want? 
  • Do you want to spend more time with family and friends?

The pandemic has likely helped you realize that spending time with family and friends is one of the most important things in your life.    

Once you know what you value, you can easily align your values with your spending.  For instance, if you value financial independence, then how do you justify your $200 jeans purchase?  It depends. 

If you feel that nicer garments give you more confidence and you feel you can attract the right life partner by looking your best, then it may be worth the price. For others, they can get away with purchasing $40 jeans.  Either way, you have to know what you value most.

Types of FI

There are a few types of FI (RE), lean, fat and coast.  You may value one type more than the other.   

Lean FI(RE).  You subscribe to modest living and frugality, which will continue into your retirement (if you choose that route) all the while stacking away a healthy six-figure retirement amount.   Your household expenses are generally south of $30,000 per year as a household, and material goods don’t mean much to you if you fit in this category.

Fat FI(RE).  You save a tonne of money, several million, and you can afford to live a life of luxury in retirement. 

Coast FI(RE). You save and invest a relatively modest five or low six-digit amount by the time you are in and around 30-35 years of age. At that point adding to your investments is optional.  You “coast” to your ideal retirement amount without adding a single extra dollar thanks to the magic of compound interest. 

Think About What You Will Do Post FI

You have to think about what your post-FIRE ideal life will be like.   If you want to live a life of luxury and vacation in Monaco and Barbados for several months a year you will need substantially more money than if you want to live quietly in the countryside two hours from your current home.    

You could choose to chill all day, every day.  Or you can work a few months a year on something you are passionate about.

Think about what you are going to do when you reach FI. 

  • Will you work part-time? 
  • Volunteer?
  • Travel the world?
  • Visit family and friends four or five days per week?
  • Find a hobby?

For all its drawbacks, going to work gives you a purpose.  When you don’t have a purpose in life, that is when trouble can creep in.  You may get hooked on gambling, take up drinking, or you may find yourself lonelier than before because you don’t have as much social interaction.     

How you spend your time once you reach FI is very important. Stay busy.  Promise yourself that you won’t sit around aimlessly all day every day.

Focusing on your Financial Goals

Those who write their goals down are generally more successful than those that do not. 

To solidify your commitment to FI, you need to write down your goal. Put your goal on a wall if you need to, inside your desk drawer in your home office, or make the goal the lock screen on your phone.

It may be worth it to discuss your goals with a fee-only financial planner along your journey.  Or you can do all the planning on your own. 

Whenever you have a long-term goal, it is always best to break it down into smaller financial goals.  You cannot set a goal for twenty years down the line and expect to be motivated every day of the year.

Ensure all your goals are SMART goals.  This means each goal should be specific, measurable, achievable, realistic, and time-based.  

If you expect to have an investment portfolio of $1,000,000 in five years and you are only saving $10,000 per year, then that is not a realistic goal.  

Having that same goal and saving $18,000 per year for 25 years would be more achievable. 

Suppose you decided you need $1,000,000 to achieve financial independence.  If you’re in the second month of your journey with $2,000 to your name, you’re likely to get sidetracked because it seems so hopeless to accumulate $1 million.  As a result, you may purchase an expensive watch or book a luxury vacation. 

It is important to set smaller financial goals to keep you focus and motivated. 

Examples of sub-goals on your way to financial independence are: 

  • Paying off your student loans
  • Increasing your income by 10
  • Increasing your savings rate to 20%, 30%, 40% etc.
  • Reaching investing milestones of $10,000, $25,000, $100,000, $200,000, etc.

You should celebrate when you hit these smaller sub-goals.  Even if you want to go out for a restaurant dinner with your spouse, do it.  You need to enjoy your life and celebrate when you reach a new financial milestone.   

Then get back to work on your goal after that. 

Financial Independence Mindset

Financial Independence Backup Planning

Remember that no matter how good your plan is, life will inevitably throw you a curveball and it will knock you down.  The key is how you get back up. 

Having a backup plan in place is always good.

Altering your household finances is a must if you lose your job for six months.  How would that change your financial independence plan? 

Make sure that you review your plan every year.  Be willing to make the necessary changes based on what has happened in your life. 

If you had to buy a new vehicle unexpectedly, then update your spreadsheets and figure out if you’re willing to cut back on anything else temporarily until you can bolster your monthly investments again. 

Accountability Partners

Your friends, family, colleagues and social media may tempt you to spend your money on your way to FI.  You may even feel like giving up.  That’s why it is important to have at least one accountability partner.

The best partner would be your significant other.  If you both want to achieve financial independence, your relationship becomes much easier to manage as you are both have the same goal.  If you feel that you’re in a FI funk, your partner can remind you why you’re doing this. 

If you are sharing your life with someone who likes to spend, then your goals are not aligned and it will take you longer to achieve solo FI if it’s even possible.  Remember, your partner’s debts are also yours. 

Worse, if things don’t work out and you need to part ways, then divorce is a wealth-destroying life event and will probably make your FI goals a distant memory. 

Who you decide to spend the rest of your life with is perhaps the biggest life choice you can make financially.  So choose your partner wisely.  It doesn’t get a lot of coverage because it ruins the narrative of “love conquers all”, but you need to be smart. 

If you’re a natural saver, and your spouse is not, then odds are that you’ll be in for a bumpy ride no matter how passionate things are otherwise.

Other accountability partners include friends, family or members on personal finance forums. In real life, you can reach out and talk about your financial issues with your friend.  If you don’t feel like anyone you know is on the same path as you, then you can turn to online forums in order to receive advice.  But you should always tread carefully, going online to get information and do your own research.

Investment Amount Needed for Retirement

How much do you need for retirement? 

An easy retirement amount rule for FI is based on the 4% safe withdrawal rate that is calculated by taking your annual living expenses and multiplying them by 25 to arrive at the amount you would need to retire. 

Formula:

Financial Independence Amount = annual expenses * 25

If you withdraw 4% from your portfolio every year, your portfolio has a very good chance of lasting for twenty-five years.   If you have $400,000 in your retirement accounts, then you would only take out $16,000 per year (4% of your portfolio value) to live on. 

Whether that’s enough is for you to decide after running the numbers and considering your risk tolerance.  In Canada, most citizens will have access to two government pensions which are the Canada Pension Plan (CPP) and Old Age Security (OAS). 

You may not need as much money as you think if you have lived and worked in Canada for a long time. 

The main reason the 4% safe withdrawal rate works is that it caps you from withdrawing too much money each year.  This gives your investment portfolio a chance to self-sustain itself by earning market returns to keep the supply of income coming each year.

If your annual expenses are low, you will need less money in order to reach financial independence, provided you don’t want to live an upgraded lifestyle in the future. 

If your annual expenses are $50,000 per year, then you would need $1.25 million for a 25-year retirement.  If your annual expenses totalled $30,000, then you would only need $750,000 to achieve financial independence.

These rules are more like guidelines and you should consult an investment advisor or a Certified Financial Planner who specializes in Retirement Income Planning if you want accurate numbers. 

If you want to retire earlier than sixty years of age, then you’ll need far more than just 25 years’ worth of your annual expenses.  If you retire at 35, you risk outliving your investment portfolio, which is known as longevity risk. 

For FI (RE) members, the equation may need to be bumped up to:

Financial Independence Amount = annual expenses * number of years expected in retirement

So rather than multiplying by 25, you may need to multiply by 40 years just to be safe.  If you have annual expenses of $50,000, and you expect 40 years in retirement, you may need $2 million ($50,000 * 40  years). 

Once again in Canada, you will qualify for some sort of government pension, so these numbers may be too high.

Other Retirement Guidelines

Other general guidelines are you may need 70% of your current expenses to retire or even 100% of your current expenses.  As you can see, the numbers vary depending on which guideline you follow.

One thing you should realize is that your spending will probably drop significantly when you are in your early seventies, which is why these broad guidelines may not be the best estimators. 

Try to get your retirement number pretty close to where you need it to be.  It can obviously be hard to predict your future expenses 30 years out from retirement, so consult with a professional advisor if you have questions.  

Financial Indpendence Mindset Conlcusion

Building a financial independence mindset takes planning and doesn’t happen overnight. You need to think about what you value in life, what amount you need to achieve FIRE and think about what you want to do once you reach financial indepdence. After that you need to focus on your goal.

If you are looking at trying to achieve FIRE, which type do you want? Lean, Fat or Coast? Let us know in the comment section below.

Financial Independence Mindset FAQs

What is a financial independence mindset?

A financial independence mindset is valuing your time and becoming aware of what you want out of life and how your money wil help you achieve what you want.

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