By Stephen Buller
For better or worse, money plays a big role in our lives – I would argue for better, as the concept of money was a brilliant invention that allowed individuals to store the value of their efforts and exchange the fruits of their labor to better their standard of living.
The term financial independence can be a little misleading because it doesn’t mean an absence of money in your life but rather abundance of it. Specifically, it refers to an individual reaching a point where his “passive” income covers all his living expenses. The need to work becomes a thing of the past, and that quarter of his life opens up to new possibilities.
Maybe it should be called work independence.
The author of “Rich Dad Poor Dad,” Robert Kiyosaki gets to the heart of this when he says, “The rich don’t work for money.” A confusing statement until you learn what he means. The rich work for assets, the distinction being that money is gone once spent, but assets generate more money over time. With an asset, your money works for you.
As an accountant, I like Kiyosaki’s definition of an asset more than the academic one – an asset is something that puts money in your pocket: Stocks pay dividends; bonds pay interest, businesses earn income, real estate generates rental income, intellectual property can be licensed …
There is risk inherent in any asset, and “passive” doesn’t necessarily mean it requires zero hours of your time to manage. But acquiring assets over a life of work is a much more appealing means for retirement to me than hoping my social security check will clear (and purchase something meaningful) when I’m 65.
That’s where the independence comes from, a reliance on the assets you’ve accumulated over your life instead of the whims of government, the winds of change, and the charity of your fellow man.
How do you get there? Assuming you’re starting from scratch, you must first live within your means, earning more from your labor than you spend on essentials. (This is no small task today.) You invest your excess income, and over time your assets grow.
Which assets do you choose to invest in? This will vary greatly depending on your skills and knowledge, and diversification is also important. Instead of pitching investments, I’ll simply draw a distinction between “income” of any kind and “capital gains.”
If you bought SpaceX stock at the initial public offering, you’re probably hoping the stock will be worth much more in the future, so you can sell at a gain. The problem is that’s uncertain, both in likelihood and timeline. In general, price appreciation is guaranteed through inflation, yet unpredictable for many other reasons.
A dividend, on the other hand, from a company like Proctor & Gamble is all but guaranteed. It may fluctuate some, but unless the 180-year-old consumer staples company goes out of business, that stock will keep paying dividends. Similarly, unless the United States government defaults on its debt, treasuries will continue to pay interest.
In the wake of the Great Financial Crisis, the FIRE movement gained a lot of traction. This stands for Financial Independence Retire Early and taught people to live frugally and invest aggressively to build a nest egg of 25x their annual expenses, suggesting the passive income from this portfolio would sustain one’s lifestyle in retirement.
My two major concerns with this movement are 1) as someone who worked many hours early in my career, I would argue there is much life to be experienced in your younger years other than slaving away for some abstract retirement, and 2) the movement seems to rely heavily on traditional investment portfolios which lack transparency and control by the individual.
As an entrepreneur, my favorite asset is obvious: Leverage your skill and knowledge to create a product or service others value, and build a business, an asset which you can direct and control, put as many hours into as you see value in, and bring your genius to the world.
Few people will ever reach complete financial independence, but that doesn’t mean you shouldn’t try. Living below your means and building assets in your younger years means you can at least slow down as you age, and that’s something we should all plan for.
