When starting off on my journey to financial independence (FI), I had no idea where to start. I felt overwhelmed and had no real direction. I knew I had to take control of my financial life, and take better care of our family’s money. How exactly was I going to do that? My parents passed on their frugal nature to me, and I know the importance of a budget. But no one passed on any advice, wisdom, direction, or reason why I needed to do this and how it ties together with the goals and dreams I have for my life.
The FI Community Will Provide
If you’ve read my story, you will understand that I am a big fan of the Financial Independence (FI) community. The FI community has played a big role in giving me enough knowledge and support to build my confidence and take control of my financial life. My Financial Independence Policy Statement was actually inspired by a blog post I read by Physician On FIRE, He does a great job outlining the importance of having an investment policy statement to guide you through both the good and bad times when investing. I found this framework super useful for investing, and at the same time, I thought there is a way to make this better.
The FI Policy Statement
I came up with the Financial Independence Policy Statement because I think people really need to understand why they are working so hard and saving their hard-earned money. The FI Policy Statement isn’t just a statement of your personal financial goals, and it’s about more than just trying to make or save money. You know deep down you want more than that. You want your approach to financial independence to reflect your values and goals as a human being. FI is not the end goal. Your life is much deeper and personal than a return on investment or a number.
Why, What, and How to FI
There are several paths to achieving FI. The FI Policy Statement provides you a chance to self-reflect on the WHY, WHAT, and HOW to FI. The FI Policy Statement is broken down into four key areas:
- Your FI Philosophy: The FI Philosophy captures all the things you value as a person and as an investor. This may have been the most important and hardest part of my FI Policy Statement to create. That’s because it forced me to take a step back and reflect on who I am, what I want to accomplish in life, and how I want to invest.
Your Money Priorities: Money priorities means exactly what it sounds like. When money comes into our bank account, we need to prioritize where it goes. Most of us prioritize things like paying for our rent or mortgage, food, utilities, etc., so that we have a roof over our heads, food in our bellies, and a relatively comfortable lifestyle. The hope is that my money priorities reflect my FI Philosophy. By setting these priorities, you can use them as a guide every paycheck as you distribute your money.
Your SMART FI Goals, Objectives, and Tactics: In developing the FI Policy Statement, I thought it was important to ensure to incorporate SMART (Specific, Measurable, Attainable, Relevant, and Time-bound) goals, objectives and tactics. This is a great way to make sure you are focused. SMART goals keep your eye on the big picture. SMART objectives hone in on the parts of your life you can controI. SMART tactics give tangible next steps that directly meet your objectives.
- FI Investment Approach: The investment approach focuses on how, where, and when to invest your savings. You will need to think about the following: Your Risk Tolerance, Your Asset allocation (pre- and post-retirement), and Your Drawdown Plan.
The FI Policy Statement is meant to act as a guide and is a living document changing and adapting as your situation changes. On your path to FI, this document should be considered sacred. Though it should change and grow with you, it should not be changed often. I plan on reviewing this with my family once a year and revising it accordingly.
For something like this, there is no one-size-fits-all. Each person and family is unique. Your plan can be as simple or as complex as you like. What’s important is that you have a plan. The above structure helps people think things through and focus on the why to your FI. Having a plan is crucial in order to achieve financial independence.
I know what you’re thinking, “Thanks Mr. Prairie FIRE, but it would be great if you could provide an example for me to work with.” Well look no further my friend. For an example and guide on how to make your own FI Policy Statement, feel free to use the Prairie FIRE FI Policy Statement.