Recently I announced my imminent departure from IBM noting that I was embracing the “independent” part of being “financially independent.” To that end, I received a host of very heart-warming e-mail notes and discussion forum postings.
One such e-mail posed this question in it: “Does ‘financially independent,’ come anywhere close to ‘independently wealthy’?”
Interesting question, as when my financial advisor first said to me, “You are either already, or ‘on the verge’ of being, financially independent,” my response to him was, “I know, in general, what financially independent means, but is there an official financial definition of it?”
His response, paraphrased, was this, “Well, to us (meaning the financial company he works for), it means that you have enough money (or enough money to continue to generate enough money) to live a lifestyle with which you’re comfortable until you’re about 95 or 100 years old.” (In other words, well beyond your average life expectancy.)
That’s an interesting definition, because if you think about it, one can clearly be financially independent without being independently wealthy.
Which is basically the case for me. While I won’t say I don’t have a good nest egg, I am not a millionaire. (In the interest of full disclosure, though, I would say that I am within striking distance of it, and even with a somewhat conservative, continued portfolio growth, I’ll probably hit it eventually.)
So, how did I become financially independent at age 50, albeit not independently wealthy? Here’s how it occurred for me:
- As “they” promised me, compound interest has been my friend. From the day I walked into IBM 28 years ago in 1980, I started contributing more than the maximum amount matched by IBM in their 401K savings plan. Although IBM matched only 6% of contributions; I always contributed 10% of my income.
- I am a person who is very clear on the difference between wants and needs, and I cater to my needs, not my wants. I won’t say that I didn’t go through a (relatively) short period of “consumerism” in my life, but I quickly found out that “things” aren’t what make me happy.
- I was married for 16 years, and my wife and I had a “big” house. But, we paid $110,000 to have it custom built, and sold it about 12 years later for about $225,000.
- I did drive a BMW for a while, a car with which I had a love-hate relationship. Loved driving it; hated paying to have it serviced. Three cars ago, I bought my first used car, the previous year’s model, with very low mileage on it, and saved $10,000 on it. I’ll never pay full price for a brand new car again.
- Instead of getting ourselves into debt on a lot of things that depreciate in value, my wife and I got into “good debt,” by buying two rental properties, one in 1985 and the other in 1986. My wife got “the big house” in our divorce, and I got the two rental houses, one being the townhouse I currently live in (see next item), and the other being a three-bedroom house, which is completely paid for and which I have since actually given to my niece and nephew, so no longer own.
- I live well below my means. And because I do, I have been able to put away almost 40% of my income over the last 10 years. My only debt is my mortgage, whose monthly payment is $379 a month, and whose balance is around $25,000. My car is paid for. I have no credit card debt. (I haven’t paid a finance charge in over more years than I care to remember.) I charge everything that I possibly can every month (including any bills that I can), but pay the credit card bill off every month, which of course is easy to do when you don’t spend more than you make. I use my credit card to pay for everything I can for two reasons:
- I get frequent flyer points for every dollar I charge on my two cards (averaging at least one free round-trip flight per year), and
- The credit card companies provide a nice summary at the end of the year, which basically documents my expenses.
All that is to say, as you can calculate, it doesn’t take that much money to be able to cover my monthly expenses. Which in turn means that I don’t need that much money in my portfolio to generate enough income to do that. And that’s how it’s possibly to be “financially independent” without being “independently wealthy.”
And a couple of final notes:
- I’m quite clear on the fact that my choice of not having a spouse or partner that I have to support and my choice to not have any children to have to feed, clothe and put through college are great contributors to my relatively low monthly expenses.
- I don’t feel at all “deprived” living well below my means. I still do the things I love to do, and I have a few things I’m not willing to “settle” on, one of them being traveling. With that said, however, I am a Quality Inn and Hampton Inn kind of guy, and a stay-one-street-off-oceanfront-for-half-the-price kind of guy, etc. (Exception being my 50th birthday trip to Australia, for which I went ridiculously all out.
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