5 Dangers on the Path to FI
It’s been more than a year now since I discovered the financial independence (FI) movement. Obviously I was pretty excited about everything I was learning, excited enough to start my own blog. Since stumbling onto FI, I have been devouring every book, blog, podcast, and YouTube video I can find on personal finance, financial independence, and investing to become better educated.
After having jumped headfirst into the pursuit of FI for the last year, I am still fully committed to pursuing financial independence. While timelines may differ, I strongly believe that everyone should be pursuing FI. After all, whether you plan to retire in your 30’s or at the traditional age of 65 or even later, we all ultimately need to become financially independent.
However, as I have learned more about the FI movement and made many of these changes in my own life, I have also identified some tendencies and dangerous behaviors to be aware of. Here are 5 dangers we all need to avoid on the path to FI.
Pushing FI Onto Others
Discovering the concept of financial independence can be life changing. It was for me. Suddenly the standard financial paradigm of “get a good education, work for 40 years, and retire at age 65” had changed. I had never really thought much outside of this box. All of the sudden, new possibilities and life paths were on the table. It was the really the freedom behind all this that appealed to me. Freedom to control your own destiny rather than be a slave to your financial circumstances.
When you find something that is new and exciting in your life, especially something that makes your life better, you naturally want to share it with others. In the case of financial independence or the FIRE movement, these concepts are received with mixed responses. Some people latch onto these ideas, just as I did. But others may be very skeptical about these concepts, or even somewhat hostile.
I think there are at least a couple of reasons some people are not quite ready to hear the concept and strategies behind financial independence. First, in our society, money tends to be a taboo subject. It gets lumped right in there with religion and politics, so we rarely talk about it with family members or friends. Second, the path to FI can be quite different than the traditional path most people take. When you suggest a different approach, someone might interpret that as an attack on the way they are currently doing things. No one wants to hear that their entire financial plan or whole life strategy may not be the most effective way of doing things. It is important to be sensitive to this.
Probably the most important person you need to be sensitive to is your spouse or significant other. Don’t force or push the pursuit of FI onto him or her. Rather, talk about it together. Instead of coming up with a plan all by yourself and saying “here is what we’re going to do,” talk about why you want to pursue FI and make a plan together. Try to listen to what concerns your partner may have and make compromises together, so you are both on board with the plan. I think this is absolutely crucial because if you are in a committed relationship, there is no realistic way you can reach FI alone.
As you pursue financial independence, no matter how excited you may be or how much more freedom you feel you are gaining along the way, I think it is important to remember that others may just be at a different stage in their lives and may not be ready right now to hear this message. Those of us pursuing FI need to be willing to share the knowledge we’ve gained with others. At the same time we need to be careful not to push FI onto those around us and definitely make sure we aren’t pointing out anyone’s financial mistakes.
Not Living For Today
Many people begin to pursue FI because they are looking to make changes in their current circumstances. It started that way for me. I was feeling trapped by my situation and was looking for a way out. Fortunately, for me, that was just a temporary phase and things significantly improved over time. For many people, however, this may not be the case. They may feel trapped in their day to day life and are desperately looking to FI as their escape.
People in this situation tend to only look toward what they perceive as their eventual freedom from the prison that has become their life. Financial independence becomes a life preserver to keep them from drowning in the woes of today. The problem with falling into this trap is that we don’t live our lives to the fullest today. If you only look towards the future, you miss out on all of the important people and events around you in the present.
I think the Happy Philosopher, a physician personal finance blogger, hit the nail right on the head during his interview on episode 48 of the ChooseFI podcast. He was suffering from career burnout and described his job as a prison cell. One day he decided that he only had 5 years left that he could tolerate work. He discovered financial independence and made a plan that would accommodate this timeline. However, even after his plan was complete giving him and exit strategy, it didn’t solve the problem of him being miserable in the present. He said, “I made my prison sentence shorter, but I didn’t make my cell any more comfortable.” He still had to find a way to be happy now. He ultimately found this by making other life changes, learning about happiness, and finding purpose in what he was doing.
So as you pursue FI, make sure you still live your fullest life today.
Losing Focus of What Really Matters
This is somewhat related to the above point but a little different. By definition, the pursuit of financial independence is primarily a financial endeavor. You have to learn to maximize your income, reduce expenses, increase your savings, and invest wisely. If you make these financial changes, you will ultimately become financially independent.
Embarking on this journey can be very consuming. There is much to learn in order to perform each of these tasks effectively. If you’re not careful, you can start to become so wrapped up in all things financial that you start to lose focus on the things that really matter to us. After having spent time exploring the FI blogosphere, I believe that for some this can even become an all consuming obsession.
In the pursuit of FI, it is still imperative to maintain a balanced life. While that likely means something very different to everyone, I would argue that no one, or at least very few, start this journey with the primary goal to just have an astronomical net worth with a bunch of commas and zeroes in it. Most people pursue FI because reaching financial independence will allow them to reduce the amount of time and energy they have to sacrifice on earning a living, and use that time and energy on more important things, like pursuing passions, strengthening relationships, having meaningful experiences, and serving others in need.
This is why I think “defining your why” is so important at the beginning of this journey. It gives you perspective. It helps you remember what is most important in your life. Remember not to lose focus of these things as you work to reach financial independence.
Oversimplification
The concept of financial independence is not overly complicated. The money you have saved and invested must produce enough income to cover all of your expenses. Once you reach that point, you no longer have to work and trade your time for money; you are financially independent.
Sounds simple, right? Well, the broad principles are simple. But as they say, the devil is in the details. There are a huge number of things you must understand to develop a competent financial plan that will not only help you reach financial independence, but also be robust enough to weather large market swings and life’s storms as they come. You need to have a sound understanding of financial planning, retirement plans and accounts, investing, the stock market, the bond market, tax laws, the insurance industry, and government subsidies just to name a few. Most people lack the time and/or interest in all things personal finance to become an expert in all of these areas.
My worry is that given the surge in popularity of the FIRE movement, many people will cut their expenses to the bone, save all that they can, invest it aggressively in a passive stock index fund, reach their small FI number (because they cut expenses) quickly given the raging bull market, quit their jobs, and then be devastated when the market inevitably crashes or when there is a catastrophe they weren’t properly insured for. All this because they thought pursuing FI was so simple and didn’t consult experts.
This begs the question, do you need professional advice while pursuing FI? My answer may surprise you, but I would say absolutely YES!!! As the disclaimer in my blog states, I am not a licensed professional in any of these areas, so anything you read on my blog doesn’t count.
When you are making major financial decisions, you usually need to get at least some professional advice. Despite all of the knowledge I have gained on my journey, I still consult with a financial advisor (which I am able to do through work for free), an accountant, and an attorney about important financial decisions. And if I do, considering I am kind of a freak and love learning about this stuff, then most people need to even more.
The important thing is that you do not pay more for professional advice than you need to. A financial advisor or planner should not be keeping 1-2% of your assets year after year for 3-5 hours per year of their time in advising you. I will write a post in the future about what to look for in a financial advisor, but for now just remember that they shouldn’t get a percentage of your money every year, but rather a fair hourly rate.
So be wary not to oversimplify your financial plan to reach financial independence. Learn all you can to educate yourself and pay professionals a fair rate for their advice when needed.
No Plan for After FI
So much attention and energy is placed on what you need to do to reach FI, that few people have a plan for what to do when they get there. This includes having both a financial plan and a life plan.
After you have reached the peak of FI and have enough money saved and invested such that it exceeds your income, how will you spend down your assets over the next 20, 30, 40, or maybe even the next 50 years? Most people simply state they’ll just spend 4% of their assets or less and they should be fine by the 4% rule. Again, this is dangerously oversimplistic.
There are a huge number of factors to consider. Your money is likely in a combination of tax-deferred retirement accounts, post-tax retirement accounts, taxable brokerage accounts, and standard bank accounts. How much do you take out from each account and when? How do you avoid extra fees and penalties and play by the IRS rules? Do you change your asset allocation? If so, in which accounts so you aren’t hit with tax bills for capital gains? Are you going to quit your job? How will you find health insurance if you aren’t employed and not old enough to qualify for Medicare? How do you withdraw money so it is in the most tax efficient manner? How can you minimize your required minimum distributions at age 70 1/2 and thus your tax bill? The list of issues and questions can go on and on.
This is why you must have a detailed financial plan for how you will use your assets in the future. I think the draw down strategy is in many ways more complex than the plan to reach financial independence. Again, this is an area where competent professional financial advice can be well worth what it costs.
In addition to a financial plan after reaching FI, you need to have a plan for your life. I have read many stories of people that finally were able to reach FI, only to quit their job and find out they were still miserable because they didn’t have a purpose or a plan. This goes back to “define your why.” You need to have a plan for what meaningful endeavors you will pursue that will bring true value to your life once you finally reach FI. Don’t be the person who decides to go back to work after they retire because there is nothing else meaningful to fill their days.
Conclusion
In conclusion, the pursuit of FI is a great thing, and I think everyone should be on that path, regardless of their stage in life or endgame. However, we have to be careful to watch out for a number of pitfalls along the way. Here are some take home points to consider:
- Be willing to share the knowledge you learn on your path to FI, but don’t force it onto others.
- Don’t be so consumed with pursuing financial independence that you don’t live for today or forget the things in your life that are so much more important than money.
- Realize that there are many complexities in reaching and maintaining financial independence, and we can all benefit from enlisting some professional advice along the way for a fair price.
- Have both a sound financial and life plan for after you achieve FI.
Thanks for reading. I hope you are doing well in your progress towards reaching FI. If you have any questions or comments that might help other readers, please list them below. In the meantime, keep working towards Freedom Through FI!
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