Everything You Need To Know About Financial Independence

financial independence

As one of your fellow readers helpfully pointed out in a recent email, for someone who never really defined financial independence, I sure spend a lot of time talking about it. 

Point taken.  After all, the beauty of using writing as a creative outlet is the ability to focus on whatever topic interests me when I sit down with my laptop. 

The downside, of course, is that I sometimes get ahead of my skis and refer to things that reside in my head as opposed to on this blog. 

To make matters even worse, financial independence means different things to different people.  For some, it’s sailing the world on this while others would be perfectly happy living it up in Goa for £10/day. 

So let me address this oversight and lay out some key concepts and definitions you need to be aware of when it comes to financial independence. 

Hopefully, it will help contextualize the shared journey of financial and personal growth we are embarking on here at Banker on Fire. 

Financial Independence – What Is It?

This one is easy. 

Put simply, financial independence is the ability not to depend on anyone else for money. 

That means generating enough income from your investments to fund your lifestyle today, tomorrow and for the rest of your life.

And by the way, financial independence is not binary.  As you will see below, even a little is better than none and can do wonders to improve your quality of life. 

Okay Great – Why Should I Care?

No one said you should.  Many people spend their entire lives being financially dependent on their employers, their spouses, their children, the government or even the kindness of random strangers. 

The popular narrative that financial independence = happiness is WRONG.

If you are unhappy today, chances are you will be unhappy when you reach financial independence.  I’m sorry but it’s true.

However, financial independence can be a powerful building block of a happy, fulfilling life. 

It allows you to quit a job you hate – or simply take comfort in knowing that you can walk away anytime (bye-bye cortisol…)

Alternatively, it could actually supercharge your career progression.  If you play tennis, you know that you play very differently when you are up 40-15 than when you are trying to save a triple break-point.  Financial independence can help you relax, stop worrying about making all kinds of unforced errors and start hitting more winners at work.  

It can also give you the flexibility – and the safety net – to start your own business, travel the world, write a book, stage a play or volunteer at the local hospice.    

In other words, financial independence = flexibility. 

I See – So How Do I Get There?

The beauty of financial independence is that the maths are very simple to comprehend: 

  1. Figure out your annual spending needs
  2. Multiply by 25 (if you are mathematically inclined, divide by 4%)
  3. Stare at the number – this is the net worth you need to reach to be financially independent

Of course, it’s a bit more nuanced than that.  When figuring out your annual spending needs, you need to make sure this number reflects your desired lifestyle upon reaching financial independence.

If financial independence means no longer selling your soul to the devil commuting to Canary Wharf five days a week, cut out the associated transportation, lunch and office attire costs. 

Giving this up will be awesome…

But if you are planning to replace your commute with a permanent residence at The Mayfair, then you’ve got to make an adjustment for that as well.

… but camping out here might take a bit more saving

And to state the blindingly obvious, the one thing you will NOT have to do when you are financially independent is to save for retirement. 

It pains me to say this but as much as you may share my love for pension contributions, they will become a fixture of the past. 

Simple Enough – But Why Do I Need To Multiply By 25?

Because it’s my favourite number.

Don’t like that answer?  Okay, let me try harder. 

The point of financial independence is to amass a nest egg sizeable enough to cover off your living expenses now and into eternity. 

It has been determined by some very smart people (hint: not me) that you can safely withdraw 4% of your investment portfolio without running out of principal. 

No Way! Are You Sure That’s Enough? 

Yes, I am.  Read this if you want to be convinced. 

And if you still aren’t, reduce your safe withdrawal rate to 3.5% (i.e. multiply by 28.6 and not 25)

Do I Need To Be A Stock-Picking Maestro To Achieve Financial Independence?

Absolutely not. 

As a matter of fact, you are much better off not being a stock-picking expert, assuming you won’t try to do anything stupid become one. 

Unless you may have been living under a rock for the past fifty years, you may have heard of a little trend called passive investing.  Do you know why it’s so popular? 

Well, it’s because (most) investors have finally realized that while paying someone to manage their investments sure helps that someone buy a new Ferrari, it usually does an absolute zilch for the value of the actual investments.

And to be clear, it’s zilch if you are lucky.  The vast majority of time, active investment vehicles underperform the very market benchmarks they are supposed to beat. 

Large-cap fund performance

That’s right.  It’s like failing to meet your performance objective every year yet demanding a raise.

I don’t have a Ferrari.  I am not in the business of buying one for anyone else.  I don’t suggest you get in on it either. 

So please do yourself a favour and put your money into a low-cost, passive index fund

Sign Me Up!  Can I Retire Next Week?


As I said above, much of the beauty of financial independence is in the simplicity of the underlying maths. 

Some people will try and overcomplicate it, but the only thing that determines the time in which you will reach financial independence is your savings rate.  

The bookends are quite simple.  If you spend 0% of your income, you are financially independent. 

If you spend 100% of your income, you will never become financially independent

Take a look at the chart below and read this wonderful post to see how long your journey will take.  

financial independence savings rate

All Clear!  What Will I Do Once I Become Financially Independent?

You tell me!  Perhaps relax a little and spend more time reading this blog?

Well, here it is.  Hopefully this clarifies things and gives you something to ponder as we all head into the weekend.

Have a happy Thursday! 

Readers, am I missing any other obvious topics you would like me to cover off?  If so, please send an email to bankeronfire at gmail dot com (please don’t add me to your blast lists) or simply jot down a quick comment below.

About Banker On FIRE

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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

Find out more about me and this blog here.

If you are new to investing, this is a good place to start.


  1. Thanks for another well-written and useful post. Older people like myself used to be able to rely on annuities, but rates are so low now. Are you recommending that we just stay invested in the markets and take out 4% a year?

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