Why You Definitely Can’t Reach Financial Independence

Since being introduced to FI in 2015, we’ve heard a lot of reasons why people can’t achieve it. The first reasons were our own. Our engineer friends surely could pursue it, but we were a photographer and a javelin thrower who planned on being a coach. How could we ever make enough money to reach FI? Since then we’ve proven ourselves wrong and made significant progress on the path to FI. Here are 6 challenges to financial independence that we’ve heard.

Common Challenges to Financial Independence That We’ve Heard

“FI seems like something that is for 25-year-olds.  I’m 40,  it seems too late to take advantage of the compounding interest” 

When is the best time to plant a tree? Twenty years ago. When is the second best time? Today. You may have missed the boat on achieving Financial Independence by 40,  but does 50 sound better than 65? Shoot you might already be part way there. The real number might be 46 or 47. If you are not already tax optimizing and cutting superfluous spending, focus on that.

Tax optimization is following the incentives of the tax code to decrease your taxable income. Uncle Sam wants you to have enough money in retirement so he offers/allows accounts like IRAs, 401ks, 403bs, 457s, HSAs, FSAs and other accounts to help you with retirement. When you put money in these Uncle Sam says, “Thanks for being responsible, I’m not going to tax you on that money you just saved”!

By removing any spending that doesn’t add real value to your life, you might be able to increase your savings rate by 10-25% without impacting your lifestyle.

Decreasing your spending has a triple advantage: 

1. Saving more allows you to invest more. You’ll have more money to put to work for you, making you move faster toward your FI number.
2. You require less to live on, thus reducing your FI number so you don’t have as far to go. 
3. After you reach FI and decide to stop working for money, you will require smaller withdrawals from your portfolio (FI number) to cover your expenses. This means you will pay less in taxes. You will get more healthcare subsidies. You will get more financial aid for your children’s college and many other advantages. Having fewer expenses is a superpower that will continue to produce an incredible bounty for you. Who cares what you did between 25 and 40, you can’t change that. All you can do is focus from here to the finish line.

“FI seems great but I’m pretty sure these people don’t have kids or know how much daycare costs. Plus a starter home in DC is over a million dollars.” 

Wow, DC seems expensive! Have you ever considered if living in DC is bringing you enough value to justify the cost? Have you ever considered moving to a lower cost of living place (AKA geo arbitrage)?  In this current economy, remote jobs for highly skilled workers are plentiful and many jobs that are not remote can become remote if the employee has the confidence to request it.

Following the tenets of FI to increase your savings rate and investing the difference can increase your power at work and make you less dependent on your employer, making you more confident to ask to go remote or apply for other jobs. Even if another job pays less, the only thing that matters in terms of your ability to move toward FI is the difference between what you make and what you spend.  The cost of living in a smaller nearby city like Richmond is 65% less than in DC. I understand that your family is in the DC area so Richmond at 110 miles away might be too far away, so how about Baltimore at 40 miles away? 

The cost of living in a satellite city like Baltimore is 46% less than in DC. So if moving to a job in Baltimore or Richmond means your salary drops by less than the cost of living does, it could be worth considering. If the difference is big enough you could completely overhaul your finances in one fell swoop. Trickle in the other tenets of FI and you might be closer than you think. 

“Why would you want to retire so early? What would you do if you weren’t working?” 

Um, do you like Monday or Saturday better? Friday night or Sunday night? Need I say more? If you see your job as your main source of purpose, you could either be in a great job for you that you would do even if it didn’t pay you anything or you have too rigid of a mindset on what work is. A job is certainly work. But so are plenty of other things that don’t (necessarily) pay you money. 

Work can be raising children, taking care of a sick relative, doing house projects, cutting wood, learning to play the harmonica, etc. I understand that a job can give you a sense of purpose, but don’t think that if you were to stop working your job you would necessarily have to stop working. 

In my life, I am trying to feel as much autonomy, mastery, and purpose (AMP) as possible. Happiness is vague and fleeting so I prefer to focus on getting AMPed instead. MIT studies have shown that supporting employees in these facets (AMP) leads to better performance and satisfaction. I prefer pursuing these to pursuing ‘happiness’. If you care strongly about the purpose that your work provides you, a reframing of what work is might allow you to imagine a world in which you could feel purpose from doing other forms of work that you might dramatically prefer to your current job.  

Even bigger questions to throw back at you would be, “Do you feel like you have enough time to spend with your family and friends? Do you feel like you have enough time to take care of your health? If the answers are “no” to either of these questions, taking action on the path to FI to free up your time seems more important than worrying about what you’d do if you stopped working.

“I don’t trust the stock market, I’d prefer to have my money in a house. Plus home prices are soaring so I need to invest in that so I don’t miss out.”

Historically, stock market returns have outpaced home appreciation. There is no way around this. You tend to hear more about home prices because more people around you are trying to buy houses than invest in the stock market.

The American dream of home ownership is so pervasive that everyone feels like it’s the only path to financial success. There are short periods of time and specific locations where home appreciation outpaces stock market returns, but these are much rarer than you would think.

People say things like, “My parents bought their house in 1999 for 250,000 and now in 2023 it’s worth 600,000!” That is certainly great appreciation but take a look at the stock market over the same period. If you invested 250,000 in 1999 in a low-cost index fund tracking the total stock market like Vanguard’s VTSAX you would have 1,275,000, over twice as much as the value of your parent’s home. I understand that this comparison is only apples to apples if the home was bought in cash, but the principle remains the same: a house is not as good of an investment as most people think. Only in rare cases will it appreciate more than the stock market and the longer the term, the less likely it is to outpace it.

Hell, my friend’s parents bought their house in a Midwestern city in 1991 for 117,000. The value in 2023 is 260,000. This represents a 2.45% annual appreciation. Over the same time period, the stock market grew at 10.32%. That means that 117,000 dollars in 1991 would now be worth 2.69 million! Your house is closer to a forced savings account than an investment. It’s better to have a high mortgage payment than to have a low mortgage and gamble the rest away or spend it on jewelry and cars, but it pales in comparison to investing in the stock market. 

All this being said, we’re not anti-home buying, although the case can be made for renting being the most financially optimized path in many parts of the country. We are homeowners. What we are against, however, is buying the most expensive home you can “afford”.

The FI recommendation is a lot like the cardinal rule of off-roading: As slow as possible, as fast as necessary. But in this case, it would be to buy as little house as you need, not as much as you can afford. Hmm, that analogy may not work as well as I thought. Anyway, if you purchase a house that is at the top of your ability to afford it, you will have nothing left over to invest in things that historically have been much more lucrative investments like the low-fee total stock market index funds. If you get pre-approved for an $800,000 house, consider if you can get a large portion of the good things that an 800k home can offer for significantly less.  Maybe 400k or 500k. This leaves you with money left over every month to pour into better investments.

There are significant benefits to owning a home. No landlord to deal with, you can customize it to your taste, and pride of ownership to name a few=-. But remember, rent is the maximum that you will pay for a place to live, and the mortgage is the minimum. Don’t forget repairs, maintenance insurance,  taxes, etc. The appreciation numbers that people talk about usually do not factor in these additional expenses. A huge mortgage is often the biggest line item in your yearly budget. The higher the expenses the lower your savings rate. This keeps you beholden to your job and employer and contributes to the feeling of being trapped. If you buy half the house you can afford, you cut your biggest line item in half and right away have breathing room.

“I get that engineers, doctors, accountants, and lawyers can do this,  but I chose to follow my passion and become a college track and field coach. I know I’ll need to work until I’m 70 to retire,  it’s just part of the game.” 

This is what I said when I was introduced to FI by our close friends who were both engineers. To my past self, I say: Good point! It will be harder for you. But don’t coaches have extra time in the summer? Could you start a business that leverages your specific skills? How about clinics?

Starting a business opens up a whole new world of tax optimization opportunities and income potential. The beauty of a business like this is that you don’t have to recreate the wheel. There are loads of clinics are out. Take a look at which ones you think might be most profitable and model your business accordingly. You might find yourself making more money in your side hustle than in your day job! Or maybe your wife’s photography business will take off! Trickle in the other tenets of FI and you’ll be looking at a shorter path to FI than you’d expect.

“I wouldn’t expect to see 7% returns from the US  stock market in the future.”

Does this hunch of yours discount all of the tenets of FI? Does it override all of the data on the stock market? Oh, you’re concerned about potential societal instability brought on by massive economic shifts with the rise of AI and the inevitable waning of the United States as the world leader? Those seem like reasonable concerns, my apologies for getting defensive.

If you have doubts about the long-term trends of the US stock market, do you have an alternative? Rental real-estate and low-cost international index fund investing you say? Well touche, my fine person, those are very reasonable alternatives. Real estate is a bit too much like a job for me but maybe I’ll look into international index funds. In the meantime,  I’ll continue hanging on Jim Collins’ shoulder like a monkey riding the Simple Path to Wealth all the way to the promised land. Oh and the US stock market is more like 10%, not 7% (I had to have the last word).

Disclaimer: FI is easier to achieve for some than it is for others. There are a million challenges that people are up against. Poverty, substance abuse, disability, trauma, caring for sick or disabled family members, racism, sexism, consumer debt, and poor education.  There are many people who are severely disadvantaged which can slow or even prohibit people from achieving FI. However, the tenets of FI can help everyone get to a better place in their lives.