After introducing myself and Lazy FI Mum, it’s time to introduce our goal- achieving financial independence.

The whole reason for starting this blog is to share information that will help other parents reach financial independence while raising kids.

But what is financial independence?

Different people define FI (Financial Independence) differently.

Some people define it as being current on your bills and debt payments. That means you can pay them without borrowing money.

Some define it as being debt-free. However, even there it splits to people who include their mortgage and those who exclude it.

The definition I prefer is:
Having enough passive income to cover your expenses.
This essentially means that paid work becomes optional.

“Wait, what’s passive income?”

The typical person has a job, let’s say 9-to-5, I and Lazy FI Mum fall into that category. What we do here, essentially, is “sell” our time (8 hours a day in this example) in return for money, which takes the shape of a monthly salary. That is active income as you have to actively work and sell your time in exchange for that money.

Passive income, on the other hand, frees you from the need to sell your time. I’ll explain:
Passive income is income that keeps coming in with little or no effort from your end.

A few examples are:

  • Interest on savings
  • Dividends from stocks
  • Rent payments from a property you own.

What do all of these examples have in common?
Money will come in with little to no effort required from you (after a certain amount of time or initial money investment).

Now, imagine having enough passive income to cover all your expenses.
Yes, I know that sounds nice but ask yourself this:
Do you still HAVE to work?
Of course you don’t, you don’t need to sell your time anymore, you can do whatever you want.
Complete FREEDOM and control over your time and your life, that’s what FI means to me.

Photo by David Simmonds from FreeImages

Don’t get me wrong, you don’t have to quit your job, it’s just about having the option.

In fact, many people who achieve FI go part-time, start new businesses or go and work for a non-profit that advocates for a goal they believe in.
Some of them actually keep their old job. I think this is what Lazy FI Mum will do as she enjoys it so much.

All of the above still means selling your time for money. The difference is that this time it’s because you WANT to, not because you HAVE to.

My plan is to go back to tutoring once I achieve FI. I enjoy sharing knowledge, helping students learn and build their confidence. The fact that tutoring comes with a very flexible schedule and allows more time with the family is a bonus 😉

I am also playing with the idea of teaching young students financial education lessons at schools once we move back to Israel as it is not (or rarely) taught in schools over there.

“OK, so I know what passive income is but how much money do I need to reach FI?”

There are 3 methods to calculate your FI number, which is how much you need to reach FI:

Method 1- The 4% rule

Based on a lot of academic research, the consensus today is the 4% rule. I aim to cover the 4% rule in a series (yes, a series) of posts in the future. In short, it means you need to have investments that are 25 times your annual expenses to reach FI.

I don’t know about you but I tend to think of my financial life in months rather than years. That’s why I call it the 300 rule. It also sounds cooler.

Imagine you have £300 and you plan on spending 4% of it a year. This means £12 a year, which (shockingly) equals £1 a month.

Therefore, for each £300 you have invested, you can spend £1 a month. Alternatively, for every £1 of monthly expenses- you need to invest £300.

This gives you two interesting math exercises:
1. You can calculate how much you can spend a month if you retired today- just divide your investments by 300.
2. You can calculate how much you need to invest in order to reach FI. Simply multiply your desired monthly spend by 300.

Method 2- Cash flow

While the 4% rule is great for people investing in stocks and bonds, some people have a steady cash flow. For example, people who own rental properties.

For those people, it is much simpler- once the cashflow from your investments can cover your expenses, you’ve reached FI!

Warning- Your monthly rental income is not 100% steady. Let’s say you rent a property for £1,000 a month, you cannot count on it to cover £1,000 of expenses. You need to account for tax, additional expenses like service fee, random fixes, taxes and periods where the property may remain unoccopied. Most people take a certain percentage (usually 50%-75%) of the contracted rent in order to account for how much will be left after all these items.

Method 3- Mix

There are no rules in how you define or calculate your FI number (the amount you need to retire). It’s your life, you can come up with a 3rd method or mix the two methods above:

Let’s say you have £3,000 of monthly expenses and one property that gives you a cashflow of £500. £500 is covered by the cash flow method and now you need to invest another £2,500*300= £750,000 in stocks and bonds.

This is actually the method I use as I have both steady cashflow investments and low fee tracker funds, where the 4% rule is more appropriate.

Then what is “FIRE”?

Now we know what FI is all about, let’s look at the “RE” in FIRE?

The RE stands for “Retire Early”. This means that some people reach FI in an early age (you can define “early” for yourself) and then quit their job.

This does not mean lying on the beach (or sofa) all day. Most people actually take on new projects, some are income producing.

If you think about it, it takes quite a lot of determination and drive to achieve FIRE, and this kind of people are not the type to sit down and do nothing. In essence, the “RE” part is for people who quit their job once they reach FI.

What do you plan to do once you reach FI?