Financial independence: the most neglected way to become happier

August 6, 2016

You might strive to make lots of friends, to meditate every day, to have a successful career, or to become extremely fit. And for good reason: those things tend to make people happy. But there is one straightforward way to become happier that most people neglect: achieving financial independence.

Financial independence means having enough money not to have to work again for the rest of your life. It means having enough money invested so that with reasonable investment returns, your money will probably never run out if you continue to spend what you spend now.

Financial independence does not mean never working again. It means you can provide for yourself even if you don't work, or if you work part-time, or if you work a job that pays less than your current job. Being financially independent gives you the freedom to do what you want without worrying whether it pays the bills. Financial independence improves your odds of becoming happier because it buys you freedom.

People who are financially independent don't have to work jobs they don't like. They don't have to work jobs far away from home that require a long commute. They don't have to work jobs requiring them to check their work email in the evenings. They don't have to put up with cranky coworkers. And they can work jobs that line up with their values.

Financial independence allows you to find a better job, but also allows you to choose to work less. When you work less, you'll have more time for the other things that make you happy.

For example, I think that being in good health and having good friends is more important to happiness than being financially independent. But it can be difficult to stay healthy when you're working full time. You might not have enough time to cook healthy meals and to exercise frequently. You might not have as much time as you'd like to spend with family and friends. When you're financially independent, you'll be able to see them as often as you'd like.

So financial independence dramatically improves your odds of becoming happier precisely because it allows you to do what directly makes you happy.

I said that achieving financial independence is a straightforward way to increase your chances of becoming happier. I didn't say it's the best way or the easiest way; you'll need discipline to achieve financial independence. But it is straightforward because it is simple to understand and to do. Becoming financially independent requires that you make a plan, follow it, periodically check on your progress and, if necessary, adjust.

How, then, can you achieve financial independence? You spend less than you earn and you invest the difference.

That's not what most people do. For example, consider a couple looking to buy a house. Such a couple will often add up their salaries and figure out how big of a mortgage they could get. Then they go shopping for a house they can just afford with that maximum mortgage.

It's all right to want to buy the most expensive house you can afford, but when you do, you're making a choice. You're choosing to commit yourself to not having any savings unless your pay goes up or your other spending goes down.

If you wanted to achieve financial independence, you could instead ask yourself: "What's the smallest house I need to be happy?" Maybe you'll realize that you would be equally happy in a smaller, less expensive house. If so, your mortgage payments would be substantially less than your income and you could invest the difference.

As another example, think about what you'd do if you got a pay raise. When people's pay increases, they often quickly find a way to spend the extra income. If you wanted to achieve financial independence, you could save and invest most or all of the increase. You'd be buying future freedom.

I only want to introduce you to the idea of financial independence now, so I won't list all the ways in which you could save money or earn more. Suffice it to say that if you want to save more, you probably can. Search the Internet for "financial independence" and you'll find lots of examples of people who've achieved it telling you how.

A quick word, though, on what you should do with the money you save. I recommend you buy stock index funds, which is easy to do and will produce a solid rate of return in the long run. It's not the sexiest way to invest, but it's the most sensible way.

Now, a common complaint I get when I spread the gospel of financial independence is that the idea sounds nice, but that clearly only people with huge salaries can achieve financial independence and so it's not worth trying for average people. I understand this response. It's difficult to build up enough savings to become financially independent. And when you're not used to saving and investing, you may not realize how quickly money grows with time.

Consider the following, though: if you were to save 25% of your pay and get reasonable investment returns, you would be financially independent in 32 years. That means that if you were to start saving when you're 25, you would be financially independent at age 57—ten years or so before the traditional retirement age. If instead you were to save 50% of your pay, you would be financially independent in 17 years. If you were to save 75%, you would reach financial independence in 7 years! So even if you're fifty years old today, if you try hard enough to cut your spending and increase your income, you could retire ten years earlier.

I've only sketched the plan you'll need to follow to achieve financial independence. If you want to get there, you'll need to read much more about it and do some simple calculations about your own situation. You'll also need the right attitude. The best way to build that attitude is to read Mr. Money Mustache's blog. And the best way to learn how to invest in stock index funds is to read JL Collins's stock series articles or his new book The Simple Path to Wealth. You should also peruse the Bogleheads wiki.

Finally, I want to stress that striving for financial independence is not an all-or-nothing proposition. Being 50% financially independent is still awesome. It means that, while you couldn't stop working for the rest of your life (yet), you could work part-time. Or you could stop working altogether for a while, maybe for a year or two, and then return to work.

Financial independence is the idea that has most changed my life in the past years. I'm telling you about it because I think it can dramatically change your life too, for the better. I know it can sound like something you'll never be able to achieve. That's what I thought too, until I ran the numbers. You can become financially independent if you want to. And if you do, you'll have so much more freedom to do what makes you happy. Think about it.

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