Has Inflation Derailed Your Financial Freedom Plan?

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Are you wondering whether inflation has derailed your path to financial freedom? I follow a few bloggers in the F.I.R.E. (Financial Independence Retire Early) community. And once again, I’m worried that they are so hyper-focused on achieving complete financial freedom at a young age that they are missing out on the joys of youth and life. With high inflation after decades of really low inflation, even the most carefully calculated plans will need recalculation since inflation is one of the greatest destroyers of savings. This is one of the biggest challenges of early retirement. You have a very long runway in which all sorts of things could happen (i.e., war, inflation, deflation, market crashes, recessions). You need an income through thick and thin.

What if instead of focusing on accumulating a pile of cash that you can than live off in perpetuity, you focus on creating an inflation-adjusting stream of cash flow?

Some people may find this an easier way to retire sooner. You focus on cash flow instead of a “magic number.” Then you don’t need to worry about what happens with inflation. Also, it is really easy to figure out when you have reached financial freedom because your passive income will exceed your expenses. That is the tipping point into financial independence. 

How do you create this perpetual stream of cash flowing into your life?

You can start a fun hobby or lifestyle business and grow it so that it generates enough to cover your expenses. Or, you can invest in real-estate and grow your portfolio of properties until they generate sufficient rental income to cover your expenses. Alternatively, you can create intellectual property and collect royalties or licensing fees. In addition, you can build a portfolio of stocks that generate income. Lastly, you can mix and match any combination of the preceding suggestions until your income exceeds your expenses. Voila! You are free.

You may find that shifting your focus to creating reliable income streams might be more rewarding than saving and investing over time. Also, you may be able to retire much sooner than if you followed the traditional retirement plan that generally needs 30-40 years of saving and investing. (Don’t get me wrong, I do also save and invest alongside my income-generating strategies as a way to further diversify).

Why not get creative and consider other ways to retire early that can be more fun and get you there faster?

Coming up with enough money to retire much earlier than most is easier done with business or property income than with an investment portfolio. More often than not, very young retirees have started and sold a successful business or perhaps worked in a start-up that succeeded and then sold their shares of that company. Other relatively young retirees may have developed a portfolio of rental properties and now have sufficient rental income to replace their day job. Accumulating enough paper assets (i.e., stocks, bonds) to generate enough income to live on is the slow route to wealth (unless you are on the FIRE path). That is why most people need some 30-40 years in a career before they amass sufficient funds to fully retire. Unless, of course, they use a different plan!

The good news is that you don’t have to be a super successful multi-million big business owner to have a significant impact on your early retirement date. There is a simple heuristic called the Rule of 300. With this rule, for every expense you want to spend in retirement, you need 300 times that sum invested to cover that expense. So, if you want to keep up your daily coffee habit at $3 a day then you need 3X30 days = $90/month X 300 = $27,000 invested. (This works in any currency so you can swap $ for £).

You might decide, “Hmm…if I cut this expense, then I don’t need to save an extra $27,000,” and that would be great. Or you might decide that it is well worth saving the $27,000 so you can enjoy that coffee until the end of your days. It all comes down to maximizing your spending in alignment with your values. Unfortunately, many people don’t think about what they really value and are heavily influenced by others as to what they should value. So, take some time to really think about what gives you joy. I’ve discovered that simply by buying quality used cars for cash, we’ve been able to enjoy life’s luxuries. Some prefer to have a new and fancy car. There is no right or wrong, but it may be worth rethinking the myth that everyone needs a new car and a big house to be considered successful.

 I’m with Christopher Morley: 

“There is only one success—to be able to spend your life in your own way.”

The good news is that you can find the ideal career and get on the path to financial freedom at any age. So, the sooner you begin, the easier it is, and the more you can spend!

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