Monday Night Finance- Volume 60

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What Is Financial Independence? A 9-Step Guide to Financial Freedom- Wallet Hacks

Perhaps you have heard of the FIRE movement. I’m sure you’ve seen a headline shouting about a 30 year old who worked in tech and now plans to live off of $10k/year by eating food he pulls out of the garbage. But is that what financial independence is?

What if I told you that financial independence isn’t about depriving yourself?

What if I told you financial independence was for everyone?

How much is enough? A popular guideline is 25X your current income, sometimes referred to as the “4% rule” or the safe withdrawal rate. (In theory, if you withdraw 4% per year, a balanced portfolio of stocks and bonds will last the rest of your life.)

With that in mind, let’s say that you project that you’ll need $60,000 per year to live without working. Using 25X $60,000, you’ll need a portfolio of $1.5 million to generate that income on an annual basis.

Assuming you’re broke now, how can you reach $1.5 million in, say, 20 years?

In this article, Wallet Hacks explains the basics of financial independence. They talk about how FIRE means different things to different people. Perhaps you might want to have an emergency fund large enough that you feel comfortable walking away from a toxic job. Or perhaps you plan to get seasonal jobs and spend the other half of the year pursuing recreation. The first step in the path towards financial independence is to define your vision. The next step is saving enough money to achieve these goals. A general rule of thumb is that you should save 25x your annual expenses so that you can withdrawal 4% of your portfolio per year. Not sure how close you are to achieving this goal? CountAbout has a FIRE widget to track how close you are to meeting these goals.

When Speculation Costs You More Than Money- A Wealth of Common Sense

Speaking of headlines, I’m sure you’ve seen a crazy headline in this past year of someone getting rich from speculation. Like this warehouse worker who went from broke to millionaire after investing in a dog themed cryptocurrency. Which is great. We all want to become overnight successes. But what these articles fail to discuss is that for every success, there are numerous failures.

My problem with these stories is the sheer amount of survivorship bias involved. For every winner we learn about who made a killing on options or meme stocks or shitcoins, there are thousands and thousands of people who got crushed or lost it all trying to get rich quickly.

In the Instagram world of only sharing the best parts of yourself, there aren’t nearly as many stories on the downsides of speculation.

In this article, Chris from A Wealth of Common Sense shares the story of someone who lost everything investing in options for a single stock. The protagonist of the story lost $400,000 on call options he placed on Alibaba before it tanked. He lost his entire life’s savings. But what stung more was not only the loss of money, but what he sacrificed to get the money. The protagonist worked hard without taking breaks or enjoying life to save up the $400,000 he invested. Losing this money meant that he also wasted so much of his life that he could have spent doing other activities.

Look how far we’ve come- Indeedably

Do you have a “magic number” when it comes to money? For example, would you be happy once you are a millionaire? I remember my big number. When I was in high school, I wanted to make $100,000 per year when I “grew up”. While I eclipsed my high school dream nominally, $100,000 today is the same as $64,000 was for high school me. When “Who wants to be a millionaire” first aired in the US, millionaires were a rare class. Now the average American will need more than that just to retire. If you haven’t sat down and thought about your financial magic numbers for a while, you might feel like doing so after reading this article from Indeedably.

Losing a few thousand pounds was just an inconvenience. When had that happened?

I remember a time, not so long ago, when such an outcome would have been life-changing. An unmitigated disaster. Instigating a spiral of hardship, homelessness, and eventual deportation.

But what was once true, is no longer.

Some combination of good fortune, good management, elapsed time, and compounding had allowed me to weather this storm with little more than a bruised ego and an expensive reminder that life happens.

In the article, the author reflects upon loosing a few thousand pounds as part of a business transaction. They note that this loss doesn’t sting or bother them. However, they remember a time, years ago, when losing a few thousand pounds would have had serious consequences for their day-to-day life. Not only do they reflect about the change in their personal wealth, but they also compare it to the economy at large over their lifetime. I found the author’s graph of their hourly rate as a function of the median wage over time especially fascinating. We like to think that we are on a linear trajectory of slow and steady wins, but in actuality, our employment situation can change overnight.