JL Collins defines financial independence as having enough invested wealth that returns cover your annual expenses using the 4% rule. FU money, a smaller sum, lets you make bolder choices. His first FU money was $5,000 in his mid-20s.
Questions this video answers
4% rule
$40,000 per year (4% of $1,000,000)
About $5,000 in his mid-20s
But yeah, how do you define fi?
Well, so first of all, with the caveat that this is just my opinion and other people define it differently. So this is not the definitive definition, but I think of financial independence as that point where you have enough money that you don't have to trade your time or your labor for money. You have enough money that the money that that money earns is enough to pay all of your bills. FU money, on the other hand, in my mind, and again, other people define these things differently, is simply having enough money that you can make bolder choices in your life, but not necessarily enough money that you're never going to work again. Now, as to the formula as to what financial independence looks like, I think I referenced a little bit early in the conversation the 4% rule. And that simply suggests, and it's more a guideline in my mind than a rule, that if you have enough money that 4% of that is equal to or greater than your annual expenses, you are by definition financially independent. So if you have a million dollars, 4% of that is $40,000. If you are spending $40,000 or less, you are financially independent. If you, if you are spending more than $40,000, then you are not quite there yet. Although you have a very nice pile of FU money.
Yep. Assuming you're invested efficiently with low costs and kind of getting average market returns for the last, whatever, history.
That's a great point. All of this is dependent on investing in low cost index funds. If you're investing in something else, then these parameters may or may not work.
Got it. And how did you define FU money for yourself? Like, what was the threshold?
So the very first time I had what I considered FU money was in my, I guess, mid-20s, and I managed to save the princely sum of $5,000. Now, of course, $5,000 was worth more back in those days than it is now, but not that much more. But $5,000 was enough that I could have quit my job and gone off and traveled in Europe for a year. $5,000 certainly would have lasted a year in Europe at those days and probably would have given me a little cushion when I got back to find another job. So as they say, it was just permitted me the opportunity to make a bolder choice than it had then. If I had been living paycheck to paycheck and worrying how I was going to pay the rent.
And it sounds like you've taken sabbatical, so you kind of deployed your savings to free up your time then early on.
Exactly. Again, remember, I had no concept of retiring early or even financial independence as a goal. I just knew I wanted to have enough money that it provided to me. It represented freedom. And I knew the more I had, the more power I had, if you will, the more freedom I had, the bolder I could be in my choices. But I actually achieved financial independence without even being aware of the concept. But that allowed me to periodically step away from jobs and take sabbaticals. And I always liked working. My goal was never to retire early. And I think even if I'd been aware of that concept, I don't think that would have appealed to me. I liked my career. I enjoyed it. I just didn't want to have to do it all the time. And I think because I didn't have to do it all the time because I could step away whenever I chose, that's probably one of the reasons I enjoyed it as much as I did.
