Cover image credit: “Cascadia Trip Accumulation” by sillygwailo is licensed under CC BY 2.0.

Everyone knows that you need money to satisfy your needs and wants (a.k.a., “reqs”). When you can meet your reqs – now and forever – without having to work to earn income, you’re officially considered financially independent (FI). This is, in a nutshell, the basic idea of the popular FIRE (Financial Independence, Retire Early) movement, viz., to accumulate enough money to last you forever without ever having to work for money. But if you really think about it – do we actually need our money to last forever?

Conventional FI

For most people¹, accumulating enough money to last forever typically takes a very long time². How long will it take for you to become FI depends mainly on how much you’re making compared to how much you’re spending, i.e., your savings³. Basically, the higher your savings, the earlier you can achieve FI.

However, high-paying jobs tend to be located in cities with a high cost of living⁴, where it’s very difficult to keep your living expenses low without making a lot of sacrifices in your daily life.

On the other hand, if you live in a place with a low-to-moderate cost of living to keep your living expenses low, there usually aren’t many high-paying jobs available to you⁵. In either case, if you’re starting from very little and are a typical salaried employee, you’d need decades to accumulate enough to be anywhere near FI. Furthermore, if you had any debt when you started working⁶, FI would be an even longer journey for you.

But given that you won’t live forever⁷, what is the point of having enough money to last forever?

Shortcomings of conventional FI

Some proponents of FI argue that being on FI is like having insurance against the worst possible financial situations, e.g., the depression of the 1930s or the recession of 2008. This argument is flawed for two reasons.

Firstly, history doesn’t repeat itself. Just because the amount needed for FI would have been enough to see you through the worst of the financial crises of the past, it doesn’t mean that it would be enough for future crises too.

Secondly and more importantly, you can’t get back the years you spent in the pursuit of FI. After all, YOLO (You Only Live Once)! For most of us, these years tend to be some of the most productive ones of our lives.

In light of this simple truth, one can argue that the insurance that FI affords is too expensive.

So should we just abandon the notion of FI and live paycheck-to-paycheck?

Financial runway

In fact, there is a middle ground between trying to achieve FI and spending your entire paycheck. Instead of attaching a binary label of FI/not-FI to your financial state, it’s better to quantify your progression towards FI. Within the FIRE community, there is a crude measure of progress towards FI indicated by labels such as Barista FIRE, Coast FIRE, Lean FIRE, etc. While this is a slight improvement over the binary FI/not-FI label, you can be even more precise.

Instead of figuring out which of the FIRE labels apply to you, the more practically relevant question is the following:

If all of your income from unsustainable sources, e.g., an unfulfilling job, were to suddenly disappear tomorrow, for how long can your current financial resources sustain your current living expenses?

In other words, how long can the money you have keep you financially independent starting from today? Let’s call this duration of time your “financial runway”.

For example, you may find out that your financial runway is about a decade, which may be more than enough time for you to recharge yourself, indulge in your hobbies, develop new skills, try out some new ventures for yourself, etc. Having discovered this, you may decide to walk away from your boring day job, since you’d be able to enjoy all the above activities in the prime of your life without worrying about how you’ll meet your reqs for the next decade. From this more general point of view, FI, in the conventional sense, is simply the special case in which the financial runway may be considered infinite. But, and this a crucial but

your financial runway doesn’t have to be infinite for you to walk away from an unsatisfying work situation – you only need it to be long enough for your own personal comfort level.

Now, since the future is uncertain, you can only estimate how much financial runway a given amount of money can provide. The amount of financial runway critically depends on future financial scenarios, e.g., market conditions, your living expenses, etc. So, it’s necessary to estimate financial runway for a range of possible financial scenarios in the future. When making any assumptions about future scenarios, it’s important to remember that it’s better to underestimate the financial runway than overestimate it⁸.

Your financial runway depends mainly on your current your net worth, as well as your overall spending level. With the help of your budget and some basic math, you can directly compute your current financial runway for a range of financial scenarios⁹. Then, you can craft a plan to help you create a financial runway of the desired length based on your personal comfort level.

Building your financial runway

While you’re on the journey to accumulating enough money for a desired financial runway (or FI), it can be helpful to know just how long the journey will be. Using some basic math, you can compute how long it will take you to get to the end of your journey⁹. Like in the case of estimating your financial runway, this estimate, too, depends critically on various parameters, e.g., your current and future expenditure, your investment returns in the future, etc. So, it’s imperative to consider different financial scenarios when estimating the time needed to accumulate what’s enough money for you. When making such estimates, again it’s better to overestimate the time-frame than underestimate it⁸.

An additional benefit of determining the time needed to accumulate enough money is that it can foster awareness in you regarding your consumption patterns. Furthermore, it can also help you evaluate the impact of important choices such as taking up a new (maybe more demanding) job for higher pay, or moving to a different area for lowering your living expenses on this accumulation time-frame. This would allow you to make more informed decisions, e.g., whether a particular job is giving you enough in return for your time, or where¹⁰ can you best spend your time at present.

Seen from this perspective, taking stock of your personal finances using some basic math and budgeting, can be a critically useful tool in informing important life decisions that may have very far-reaching consequences.