While I was fortunate enough to leave college with a strong job in hand, I didn’t fully understand how to approach my newly found income and begin to set myself up for future financial success. When thinking about all of the components of personal finance, there is one end-goal in mind: become financially independent (“FI”). What does this mean?

Financial Independence is typically defined as having enough income (from investments, passive businesses, real estate, etc) to pay for your reasonable living expenses for the rest of your life. You have the freedom to do what you want with your time (within reason). Working (full or part time), hobbies which generate income, or other activities are optional at this point. At the end of the day, this means that you no longer have to exchange your time for money.

There are three fundamental inputs that control getting you to financial independence quickly. Increasing income, reducing or managing expenses, and investing. You need to earn more than you spend, and invest the difference.

• Increasing income – Forget get rich quick schemes, but increasing your income is going to be the surest way to speed up your time to financial independence. At the end of the day, you can only reduce expenses to the bare minimum of what is needed in order to survive (i.e. there is a floor on how much you can ultimately spend). However, there is no theoretical maximum to how much money you can earn. This is the reason that MFB prioritizes increasing income as the #1 lever to reaching your financial goals. There are choices each of us can make to increase our ability to generate income. Improve your education, ask for a raise, create a side business.
• Reducing expenses – Many blogs, forums, etc. will harp on reducing expenses as the primary focus area to reaching FI. While it is critical to manage your expenses so that they are less than your income, once again you can only reduce expenses to the bare minimum of what’s required to live (and this is not what I recommend). Five-star restaurants, vacation homes, and jets are generally not achievable as a reasonable financial independence goal. But if you can realize contentment with lower expenses, your ability to reach financial independence is greatly improved.
• Investing – When you’re heading towards financial independence, you need your money to work for you. While MFB doesn’t advocate for a singular investment strategy, we do advocate for long term sustainable investment returns. Money in a savings account won’t grow at the necessary rate. Money in weekly out-of-the-money call options will most likely evaporate. For most people, long-term and hands-off investment strategies focused on investment income and capital appreciation (broad stock market index funds, real estate, etc.) will carry the day.

As we explore the fundamental path to FI, we will make references to the below FIRE (Financial Independence, Retire Early) flow chart: