What is Financial Independence?


What is financial independence?

Financial independence, early retirement and financial freedom are different terms that mean pretty much the same thing. It’s about enjoying a lifestyle where your time is not dominated by constantly needing to earn money. This means the majority of your life is free to be spent pursuing stuff that makes you happy.

A financially independent person would see themselves getting an education that produces a high paying job. Followed by working for 10 years or so. Then, they reach financial independence and get to spend their days pursuing awesome life enriching things. Next, the last few years of life is spent being a decrepit old fart. And finally, they die.

It would look something like this:

EarlyRetirement timeline.png

Timeline of a Financially Independent Person

While, if you followed the lifestyle of a brainwashed pleb, you would spend the same amount of time getting an education. Next, you spend almost your entire remaining life working in a soul destroying job. Following, you have a short old age retirement where you’re generally not in a state of mind to do anything particularly life enriching. Finally, you get to die.

That life would look something like this:

Conventional Retirement timeline

Timeline of a Brainwashed Pleb (Conventional Retirement)

The reason the poor pleb suffers so long working a job is because they are brainwashed to burn all their cash consuming shit. Shit like over-sized houses, fancy fuel guzzling cars, extravagant holidays in artificial man-made environments (like cruise ships and private resorts), unnecessary gizmos (thermomixes and 100” flatscreen TVs), fuel guzzling floating toys (boats) and just general silly bling.

See below for how brainwashing makes the pleb burn all their cash on consumerist shit:

Consumption Timeline

Pleb’s spend their entire working life burning all the cash they make. They need help!!

On the contrary, the savvy financial independent person saves the majority of their cash, which then compounds , making more money and eventually providing enough passive income to cover their cost of living. As a result, they get to enjoy a life of financial independence.

That looks something like this:

Compound savings worktime

Financial Independence seekers save their cash and take advantage of compounding growth to retire early

And that’s pretty much it. So, for those whose curiosity has been satisfied – you can stop reading now. Because, shit is about to get serious.

There is a little bit more to financial independence than those simplistic timelines of life and a bit of fluffy talk about being happy. So, let’s get into some of the nuts and bolts of financial independence.

I figure the best way to discuss financial independence is by answering a few key questions: Number one, what is money? Number two, what’s money’s real relevance in life? Number three, how do you use money to achieve financial independence? And number four, how do you get started?

Number One – What is Money? A Quick Overview of the Fiat Money System

The modern economy operates on a fiat money system. That is, intrinsically, money is worthless. It’s just pieces of paper. Money is a representation of the price we place on stuff – the goods and services that make up the entire world’s trade. The price of stuff is derived from the demand for the stuff and the ability, or willingness to supply the stuff at any given level of demand. Hence, money is a tool that allows people to exchange goods and services easily. Without money, the exchange would be a lot harder.

Take for instance, bartering. It’s another means to facilitate trade. Bartering has been used historically, and still takes place today in some circumstances. For example, you could trade your computer programming skills for a week’s supply of groceries. But, could you imagine Apple trying to strike a deal to import a sea freighter worth of iPhones from their subcontracted assembler to your local Apple Store?[1]

Multiple exchanges need to take place to make an iPhone and get it into your local retail store. Exchanges with the component suppliers, the assembly subcontractor, logistic companies, Apple’s retail staff, Apple’s landlord , the utility providers and on and on. What would Apple give as consideration to all these different parties? What would Apple have that would be of value to them? I’m pretty sure the interested parties wouldn’t want a herd of cattle or gold bullion for payment. Even if they did, how do you get a herd of cattle of across the open ocean to China or Taiwan, without needing to facilitate even more exchanges? What happens when there isn’t enough gold in the world to facilitate all the trade? The system of trade is too complex for something like bartering to work effectively and efficiently.

However, the fiat money system provides a universally accepted form of consideration that can be exchanged seamlessly, instantly and used to facilitate the transaction of just about anything.

Hence, money is simply a tool to facilitate the exchange of goods and services.

Number Two, What’s Money’s Real Relevance in Life? How Money Applies to you

You’re probably wondering, all that fiat money theory is amazing and stuff. But, it’s nothing I couldn’t obtain from a basic textbook on macroeconomic theory. How does it apply to me?

Well, think of it this way. Let say there are two categories of people. Employees and Employers. Most people fall into the former category, being an employee. Employees trade their time for money. Then, they trade that money for goods and services to survive – food, shelter, water, (health insurance) and other shit – cars, internet, boats, dog groomers and so on.

Hence, the real relevance of money is that it is bound to your time. In order to obtain money you must sell your time

For example, 40 hours of your time = $2,000 of money.

X hours of your time = Y units of money.

Your time = Money.

This is a confronting restriction on your independence and freedom. As long as you need money, your time is bound to the process of earning it.

However, fortunately money generation can be unbound from your time. This can be achieved by either having money work for you, or selling goods and services. Essentially, this is the aim of financial independence.

Number Three, How do you use Money to Achieve Financial Independence?

Financial Independence, early retirement, financial freedom or whatever you want to call it, is about replacing your time with either money, goods and/or services as your source for making money.

This means your time is now independent of money making. Which means,you are free to depend on your intrinsic motivators, rather than external motivators, like a boss, to decide what you want to do with your time.

However, the trick to financial independence is to replace your time with money, goods and/or services extremely quickly. That way, you can enjoy “retirement” well before the conventional age.

Putting your money to work. Money = More Money

Investing your money makes it available, in some form, for others to use to produce good and services that makes them money. In return for giving them your money, and for the risk you take, you get a slice of their profits from the money they make. This profit slice could be in the form of a dividend, capital growth or both. The most obvious place you can invest your money is in a stock exchange.

Take this example as a simple explanation. You invest $1,000 in a index fund that tracks the weighted performance of every company listed on a stock exchange. The long term average return on this stock exchange is 8% per annum. Therefore, after a year your $1,000 has generated you $80 more money. Now you have $1,080. You keep this money invested for another year. Now the $1,080 generates you $86.40 more money. Now you have $1,166.40. In ten years time your $1,000 would be worth $2,219.64 and have generated you $1,219.64 more money.This is called compound growth. It results in an exponential long term growth rate which has the potential of turning financial independence seekers into multimillionaires.

Hence, you can see how putting your money to work can make more money. With enough money invested in the fund, you could generate enough money (typically called passive income) to cover your nut (your cost of living) forever.

Selling Goods and Services to make Money

If you make a good or provide a service, others are generally willing to pay money for the good or service. The money paid should cover your costs and leave you a profit.

For example, you start up a business that makes a machine that is capable of making anything imaginable from the basic elements. You can press a button on a display and viola! You just made a new mobile phone!

Anyway, once you get some scales of economy going, the machine costs you $6,000 to make. This includes everything – all your fixed and variable costs – utilities, wages, materials, rent, permits, shipping, advertising and so on. Based on your market research, you have worked out you can sell this machine for $30,000 at your desired levels of volume. That is a 500% mark-up before tax. After a 30% corporate tax rate, it’s a 178% mark-up. The mark-up is your potential profit. And this is fundamentally how businesses (employers) operate.

So how do employees fit into the equation? Employers start a business that sells goods, services or both. Once the business gets on its feet, the employer finds people willing to trade their time for money that will work in or run the business for them. They make sure that the mark-up on the goods and services covers all their costs and they keep the profit. The profit can then be reinvested back into the business through research and development, organic growth, acquisitions or some other mechanism to create more goods and services and make even more money. Alternatively, some or all of the profit can be distributed among shareholders. Depending on the business, the shareholders could simply be an individual employer, or thousands of people, such as the case of a company listed on a public stock exchange.

The nifty thing about profit is it can be completely unrelated to how much time the employer (business owner) actually puts into the business. This is because the employer’s employees are doing all the day-to-day leg work. This could mean the employer is effectively on an extremely high hourly rate, like $500/hr or more and hence reaping significant rewards from being a business owner

Therefore, selling goods and services = money.

Number Four – A Few Starting Tips to Start your Financial Independence Journey.

If you are anything like me, the concept of financial independence is extremely appealing to you. But, you may have no idea how to get started. Well, you’re in luck – because this is the main purpose of No Pants Money Man – to show you how to do it! Over time, I’ll be covering how to work towards financial independence in detail. However, below are three core starting points:

Start Saving

Making money from money is going to be absolutely essential for your financial independence. In order to do this, you need some money to make more money. Saving money from your paycheck is the best way to achieve this.

Start saving as much money as you possibly can. Then, stick it in an interest bearing account – an account that either reduces the interest you pay or makes you interest. Put it in the account with the highest interest rate. Max it out or pay it off, then put it in the second highest interest account. Rinse and repeat.

If you don’t know how you can save money, or are having trouble saving money – start by reading the article How to Control Your Money.

Start a Budget

If you don’t measure it, you can’t improve it. The No Pants household budget is $40,000 a year, including mortgage and a house renovation fund. (Without a mortgage and house renovation fund, our budget would be $24,000 a year.) We update our budget at the end of each month to see how we are tracking on our yearly spending and saving targets.

When you’re first getting started, you will not stand a chance at saving money if you don’t make a budget. I recommend starting a budget that covers every expense you will incur for an entire year. Food, utilities bills, shelter (mortgage), transport costs (fuel, registration), health insurance, internet, stupid consumerist purchases, and so on. Put them all in there and add it all up. Then, subcontract your take home pay. The left over is your projected savings for the year. To retire within 10 years, you should be aiming for a 70 – 80% savings rate.

If your savings rate is too low, analyse your budget and figure out where you can cut it down. The How to Control Your Money article provides some useful suggestions on areas where you could cut down your spending.

Track Your Spending

Once your budget is made, you need to track your spending against it. There is no point making a budget if you don’t stick to it. I recommend buying everything on a credit card so all your expenses can be monitored easily. Just remember to pay it off in full by the due date each month. Add up everything you spend in the month and categorize the expenses according to your budget. Which categories were over budget and which were under budget? Give yourself a pat on the back for the categories that were under budget, and figure out ways to get those over budget items in budget. Be creative and innovative. Saving money can be a lot of fun and reinvigorate your creativity.


Financial Independence is about breaking the connection of trading you time to earn money. It’s about making money from other sources, such as money itself, or selling goods and services. This allows you to be free to be governed by your own values and motivations in deciding what you want to do with your time. Ultimately, financial independence is about becoming more happy.

Peace Out,

No Pants Money Man.

  1. This is a gross simplification, if you want to read more about Apple’s complex supply chain and manufacturing strategy, start your research over at macworld
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