In this podcast, Motley Fool analyst Dylan Lewis and Motley Fool contributor Brian Feroldi discuss:

  • The core principles of financial independence (FI) and the different styles it can take.
  • Why a down market is a great time to check in on your financial independence and retirement progress.
  • Why it's not too late to get started.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on July 2, 2022. 

Brian Feroldi: Even if you have no interest in pursuing FI, I still think there's a lot to learn from people that are on the path that shared generously and that are saving very high levels of their income to your point, even if you could pick up a handful of tips from them for ways that you can make more, spend less without impacting your lifestyle all that much, I mean, that can be a huge win even if FI doesn't interest you at all.

Dylan Lewis: I'm Dylan Lewis, and that was Motley Fool contributor Brian Feroldi. It's Independence Day weekend. Any of you are probably grilling, watching the fireworks or hanging by the pool. Over here at Motley Fool Money, we're setting our sights on financial independence with help from Motley Fool contributor, Brian Feroldi. Brian, if listeners are anything like me, they've logged into their brokerage accounts, 401(k)s IRAs recently and see numbers that are a bit lower than they are used to. But we were talking earlier this week and you said now is the perfect time to be focusing on FI, financial independence. Let's dig into it. What is FI and why is right now a good time to be looking at it?

Brian Feroldi: Yeah, well, you just said it beautifully. FI stands for financial independence and it's most commonly associated with the FIRE movement, the Financially Independent Retire Early movement. The core idea behind people that are striving to reach FI is to hyper-focus on saving and investing early on in their career, which in many cases means saving and investing between 25 percent and as much as 75 percent of your income. The idea there is hyper-focused on saving and accumulating so that way you can retire. I put that in air quotes, decades earlier than normal.

Dylan Lewis: Yeah, I liked that air quotes there because I think FI is related to retirement, maybe they're cousins. Maybe FI is like the younger cousin to the retirement elder cousin. Just because it's not quite retirement in the conventional sense and it can mean so many different things to different people.

Brian Feroldi: Yeah, there's a really big spectrum of FI and depending on what stage you are at, people are aiming toward different things. For example, there's people that are pursuing what's called coast FI. That is essentially when you frontload all of your savings, that way you get compounding working for you later and then you can go back to spending a 100 percent of your income and know that your retirement is fully taken care of. Other people are really going after what's called the barista FI, which is when you have enough accumulated so that you can go to working a part time job to really cover your monthly expenses. Other people are after what's called a lean FIRE. That's when you've accumulated enough money that you can live a relatively Spartan lifestyle off of your nest egg. Then finally there's what's called Fat FIRE, and this is essentially accumulating so much money that you can comfortably spend a $100,000 or more per year indefinitely.

Dylan Lewis: I think to put a summary on that, that FI really is choosing how you spend your time and letting money allow you to choose how you spend your time. It can be retirement in the conventional sense where you're just kicking your feet up and saying, I'm going to be relaxing, be hanging by the beach, have maybe a lower cost of living than I do in my earning years. It can also be something where you've made enough that you're really able to choose how you're spending your time and what you're doing with it.

Brian Feroldi: Yeah, that's the real key point here, are you get to choose how to spend the rest of your life. You are no longer restricted to working at some job, 40 or 50 hours per week. You can choose to do so if you'd like to, and I know many people that are, "Retired", but still choose to work simply because that's how they choose to spend their time. But it's really about giving yourself as many options to spend the time that you have any way you want.

Dylan Lewis: You mentioned the different outcomes and the different groups that people broadly will fall into with FI. People are also totally different periods on the pathway to FI. It's a spectrum. You have some people that are very much like in their retirement savings early on still putting that money away. You have other people that are closer to actually tapping some of that money or maybe you're already accessing that money because they've reached FI. I'm sure that the last couple of months, really most of 2022, has hit very differently depending on where you are on that spectrum.

Brian Feroldi: If you are very early on in that journey and you are in hyper accumulation mode, but your nest-egg isn't that big, the decline in asset prices that we've seen over the last really year or so is a true gift. Because you're accumulating assets at better and better valuations, which means that your future returns from those assets will likely to be higher. If you're more toward the end of your FI journey, so you have a massive nest-egg saved up, well then a big decline in asset prices is a major headwind because just to throw some quick numbers on it, if you've saved a million-dollars at this point and you see a 20 percent decline in your assets, well, that's like a $200,000 hit to your net worth which is for many people in the FI movement, several years of asset accumulation. Depending on where you are in your journey, this could be either a good thing to decline or it could be something that really delays your financial independence.

Dylan Lewis: Give it all that. Why do you think right now is a particularly good time for people to be focusing on FI?

Brian Feroldi: Well, the typical number that most people in the FI movement throw out is that they want to save about 25 times their annual spending so that they can achieve financial independence. There's no doubt that asset prices post-COVID were inflated. The stock market was at all-time highs and was raging, real estate prices has gone up and a lot of people saw their net worth just absolutely skyrocket. There's no doubt that that took many people up to their FI number earlier than they would have predicted beforehand. If they were assuming that they had hit their FI number at that level, perhaps they weren't being appropriately conservative with their assumptions and now is a really good time to really revisit that calculation. Because if you can withstand a 20 percent hit and you can still hit your FI targets, that is a much better time to do so.

Dylan Lewis: I like that line of thinking. I mean, the way that I will generally approach anything that I have, what I would see as an elevated level of risk to is to make the numbers as hard as possible. I would say quitting, especially a high-paying job and deciding to move into something that is more of a passion or just something that you'd rather be spending your time doing and maybe make some money along the way, I consider that something that's reasonably risky. You're giving up the certainty of a paycheck to something that's a little bit less known. Knowing all that, I think this is an opportunity for people to have a built-in margin of safety forced on them rather than have to imagine it themselves.

Brian Feroldi: Yeah, most people that I know that are in the FI movement are pursuing FI are actually really conservative with their assumptions anyway. Nobody wants to pull the plug and then have to go backwards. A lot of people that I know say, I'm not going to pull the trigger on FI until I have, say, 30 times my spending rate and I also want to be completely debt-free.

Brian Feroldi: Like you I like to make really conservative assumptions. If I was on the path to FI, and the times that we've gone through over the last year really show why that conservatism can pay off because you have no idea what's going to happen to asset prices over any given stretch of time. The more conservative you can be with your assumptions, the more you can withstand shocks that we've seen in the markets.

Dylan Lewis: You mentioned that 25-30 times number and the asset prices affect the numerator of it. But we're also seeing things that affect the denominator of it, which is what you'd expect your expenses to be. There are a lot of things that have soared in prices recently, but I think now is another particularly good time to be checking in on where you stack up with FI if that's something that's a priority for you because it's a reminder that things may cost very different amounts in the future.

Brian Feroldi: Very much so. To your point, we've seen the price of housing skyrocket, of food skyrocket, of energy skyrocket. Even if you're very focused on keeping your expenses low, many of those expenses simply have to go higher given what we've seen with the inflation rate. Hence why it's an even better time now to recalculate your FI number based on a higher spending level to see if you can truly make it.

Dylan Lewis: If you're sitting on a fixed mortgage, you're probably feeling pretty good, especially if you refinanced during the past two years, and if that's part of your plan where you're going to be aggressively paying that down, having zero debt. Your housing costs are going to be relatively locked in. If you're renting, maybe you're not feeling so awesome about the current state of things. But I think even if you have a vision of FI as you're traveling the country and you're spending a lot of time on the road, whether it be at a camper, a van, an RV. Gas costs have proven that it's maybe a little bit more expensive than it's been over the last couple of years and that might be worth bringing into the modeling that you're putting out for your financial future.

Brian Feroldi: A very much. But we should say as pushback to what we're saying right now. The whole point of the 25 spending rate was based on the four percent withdrawal rate. In theory that four percent withdrawal rate was designed to be so conservative that it could withstand really any economic environment including the one that we are going on now. Perhaps we're being overly pessimistic by saying people should be even more conservative.

Dylan Lewis: We're adding conservatism to conservatism there, Brian. I think if we want to take a slightly more optimistic note, for people that are earlier on in their FI journey this is in a way a do-over opportunity for them if they haven't been aggressively investing for a long time.

Brian Feroldi: Yeah, stock prices are where they were back in 2020, so it essentially allows you to rewind the clock and invest as if it was a 2020. We should also say that COVID has created some new opportunities for people that are pursuing FI. Lots of companies out there are willing to hire people remotely, which frees up people to live wherever they want and they can still take a high paying job in a different part of the country. COVID has been a challenge to people in the FI movement, but it's also presented new ways of moving forward.

Dylan Lewis: For folks that maybe are hearing all this and saying This sounds pretty interesting. I'd like to spend a little bit more time digging into this and I was familiar with it. What are the things that people should be focusing on and what resources would you point people to?

Brian Feroldi: Well in truth the people that are interested in FI now and previously, should be focused on the same things that they've always should be focused on. That is things that are firmly within their control. If pursuing FI or FI interest you at all, you should focus your time and energy on things you can control, which is; how hard you work? What you work on? How much you spend? How much you save? And how you invest your savings. Those things are always within your control and what assets prices do over any given period of time or with the inflation rate is, is not within your control. But if you focus on the things that you can control, you should be able to reach FI within your timeframe.

Dylan Lewis: I always feel like tough periods, particularly in the market are a little bit easier if you can give yourself the feeling of taking action. I think it can be so hard to just sit there and watch things happen. Maybe giving people a sense of control over things they can exert. What steps right now do you think people can take that are actionable to maybe put themselves on a better path to FI?

Brian Feroldi: Well, one thing that is always within your control is upskilling yourself, learning and taking on new task within your organization or where you work can lead to new opportunities for you down the road, which could potentially increase your income. That can also put you in a better position to negotiate when it comes to your job performance review and perhaps a winning arrays in time. Focusing on yourself and focusing on your skills is always something that's a bright idea.

Dylan Lewis: I think focusing on the top line in general, if you're looking at yourself as a business Brian. Your salary or your hourly wage, or however you're collecting your money, that's basically your sales figure. Upskilling is a way to put yourself in a better position for that. We have seen there are some stories coming out about layoffs happening at some companies, but broadly we're still looking at what seems like a pretty tight labor market and what looks an awful lot like a workers labor market right now, which is also good if you're trying to expand that top-line figure.

Brian Feroldi: Yeah, very much. Employers are very willing, I think more willing than ever to work with employees on either flexible terms or on their pay or on their compensation because the hiring market has been very hard for many months. I actually have a friend of mine that recently negotiated working part-time while still maintaining her benefits and salary simply because she basically said I'm going to quit otherwise and she meant it, but her employer knew that finding and replacing her was going to be very challenging. If you are a highly skilled person and you are in-demand at your employer, there's no doubt that you do have some power to negotiate.

Dylan Lewis: I think another thing to keep in mind as we're looking at what the future of work might be. We've seen so many things change over the last couple of years. One of the things, particularly as it relates to the FI movement, that has become more approachable, is the idea of where you work and where you live. We're seeing some of the folks who typically had to be in coastal cities or places that were hubs sprinkled throughout the country where the cost of living tended to be quite a bit higher. We're seeing that change pretty dramatically. Really your living costs, the house that you live in, is one of the biggest costs for most people that isn't as set in stone as it used to be and might be an opportunity for people save some money.

Brian Feroldi: Very much the work-from-home trend has been a boon to people that can find jobs in high-paying areas of the country like New York, Chicago, and San Francisco, while simultaneously moving to rural parts of the country that are lower cost. That is a major win for people that are pursuing FI.

Dylan Lewis: I'd say that as someone who lives in Washington DC and [laughs] has no intentions and moving. I'm sure that this may seem a little hardcore for some people. I know personally I can't sustain a 60 percent savings rate or 70 percent savings rate. I know myself well enough to be able to say that. Brian, the way that I tend to look at FI and the way that I think about the movement is pretty similar to times that I've done diets in the past where I've tried to diet for a couple of weeks. It wasn't that I had to stick to the letter of that diet going forward it was that as I did it, I learned the things that I should be paying attention to, learn the substitute behaviors, things that were a little bit healthier than maybe the default decision I would've made before. With that background on a daily basis and as you're planning out your months, it's a little bit easier to make some of those healthier choices.

Brian Feroldi: I totally agree with you, even if you have no interest in pursuing a FI I still think there's a lot to learn from people that are on the path that share generously and that are saving very high levels of the rink come. To your point, even if you can pick up a handful of tips from them for ways that you can make more, spend less without impacting your lifestyle all that much. That can be a huge win even if FI doesn't interest you at all.

Dylan Lewis: Brian, you were one of my favourite follows on Twitter and it's because you're always dropping nice little wisdom nuggets and giving it in nice plain English for people that follow the finance world and you tweeted something recently. It wasn't necessarily related to the planning of the show, but I thought it was helpful. You said small changes that dramatically improved my life. The things that did not make that list were watching the news and really paying attention a ton to minute by minute what's going on. The things that did daily walks, volunteering, writing my daily goals on paper, and planning time with friends and family. I think especially as we're heading into this holiday weekend, I want to leave people with that because the whole point of this movement and the whole point of being able to set your money up so that it grows for you is that you have the opportunity to spend more time doing those things that you enjoy.

Brian Feroldi: Very much sure. Those are the things that ultimately bring you happiness in life. It's not necessarily maximizing a number on a spreadsheet. It's really affording yourself the opportunity to spend your time how you want, and if you're after happiness, which many of us should be, a lot of that involves spending more time with friends, family, and on activities that you can enjoy. If you get that by setting the FI movement, that is a massive win.

Dylan Lewis: Brian, thank you so much for joining me.

Brian Feroldi: Thank you, Dylan.

Dylan Lewis: As always, people on the program may have interest in stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back on Tuesday with the new episode.