Learning to FI


Is this man learning or working on a back problem?

It’s come to this.  Talent vs. hard work.  Nature versus nurture.    Armageddon.

Okay, maybe it’s not Armageddon.  But recently I’ve been thinking about the role IQ plays in the journey toward financial independence, and part of the conversation must include some talk of who exactly is capable of achieving this goal.  Although I think most people can do it, I’ve recently seen some bloggers say that only gifted people can pull a feat like this off.  Ugh.  That doesn’t sound right, does it?

Let’s take a look at some of the separate components behind the idea that you have to be super-smart to retire early and see how much truth there is to them.

Is the knowledge of how to achieve FI teachable?  Can anyone learn how?

Short answer:  Yes.  I can FI and you can too.

The longer answer takes some explanation.  Most people think that natural talent is all you need to learn something:  high IQs for chemists, super-long fingers for plucking cello string, limitless capacity to absorb human anguish for social workers.

The truth is that so-called ‘talent’ is only small part of the equation for success.   Drive, impulse control, and consistent practice over time are far more important variables than genetically conferred traits for most skills.   This holds at least until the elite levels competition are reached.  Example: Lots of 5’8″ guys are terrific at basketball in high school, and sometimes even college.  Common sense says that you’ve got to be tall to be good at basketball.  So how’d all of these shorter guys get to be so good?

The answer is they spend a hell of a lot of time practicing.  They think about it constantly.  During any available spare time, these kids will run down to the basketball court to play.  They pick up on the nuances of the game from people who are older or better or simply have different moves and tricks that they haven’t seen before.  Over enough hours, they become experts.  It’s only at the upper levels of competition that height becomes the deciding variable in success.  At the lower levels, on street courts and gymnasiums, it’s athleticism, personal drive, hours practiced, the quality of the mentors.  They become awesome players when compared to the vast majority of humans on planet earth, despite not being all that tall.

This isn’t just my opinion.  The phenomenon of becoming an expert at something has been well-studied for over half a century.  There’s even a rule of thumb for how long it takes to become a pro:  About 10,000 hours.

But most people simply don’t believe that practice makes perfect.  Instead they gush He’s so talented!   As if Bobby Fischer was born knowing how to play chess, and the Broadway musical star just woke up one day belting out show tunes at perfect pitch.  Not so.

Does IQ correlate with investing success?

The answer, according to the almighty Google, is maybe, but it’s by no means definitive.

  • People with higher IQs tend to diversify more which lowers risk and improves success rates.
  • But other measures of self-awareness and skill such as Emotional Intelligence (EQ), Moral Intelligence (MQ), and Body Intelligence (BI) have a higher correlation than IQ according to a Carnegie Institute of Technology study.
  • There’s a performance examination of a really smart investment manager’s portfolio over time on the amazon market blogs.  Spoiler alert:   His actively managed funds missed a large chunk of the market recovery over the past 4 years.  To go a step further, pretty much all investment managers have high IQs and are complete math and pattern-matching nerds.  And yet most actively managed funds fail to beat average market returns.
  • Warren Buffet thought IQ mattered, but only to a point, saying “Success in investing doesn’t correlate with I.Q. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Personally I’ve come to the conclusion that IQ has some correlation with investing success but isn’t the deciding factor.

Does IQ correlate with income?

In other words, do people with high IQs tend to earn more?   Here, the answer is a much clearer YES.  Although there are some studies which continue to cast some doubt, the evidence overwhelmingly swings affirmative here.

Does IQ correlate with high net worth?

This time it’s a big fat no.  I’ve only linked the one article here but there are many studies that show the same thing over and over again:  being smart doesn’t automatically make you good at holding on to what you earn.  It just helps you earn.  More on this later.

Do smarter people really have a better chance of reaching financial independence?

If you have a higher income, you’ll have a much easier time saving a large percentage of it which is all that’s required to achieve FI.

For a family at or around the poverty level (28K in 2014)  it’s going to be nearly impossible to do.  Even if you’re as extreme as Jacob Lund Fisker you’ll have a hard time living on under 20K a year for a family of four, although it can be done if you make it an absolute priority in life to learn strategies behind living inexpensively while investing the rest.  The problem for people in this income bracket is that the jobs themselves are frequently so draining that it’s difficult to have any energy left to invest in learning new skills.  No surprises here:  the working poor are stuck working most of the time.

Once a family earns the national average — about 50K — possibilities improve markedly because there is the potential to enable decent savings rates (40% or more) by reductions in spending.     But it’s still going to be rough going for these folks and they’ll have to apply every trick in the book to make it happen.  If you’re in this boat, start with the EEE 21-day makeover.

If you’re at double the national average (about 100K), the math is suddenly easy — especially if your employer offers tax-advantaged retirement accounts (401(k)s) or you are your own employer and can dump money into a 403(b)).   In this case it should be relatively straightforward to save 50% of your income with diligence and planning.  A 50% rate, assuming a zero net worth starting point, gets someone to FI in seventeen years.  And because of the high earnings, it would be possible for this family to do even better.  A 70% rate more than halves the time required to hit FI (7.5 years (!)), compared to the 50% rate.

There’s no beating around the bush here:  income is going to be the sticking point for many people.  The good news is that studies show that people of average intelligence can do most  jobs — although people who rate higher on the scale will perform somewhat better, especially in more demanding roles.  Over time, individuals with at least average intelligence should be able to work their way into a job with a decent income, which will in turn enable saving and investing a large percentage of it.

OK.  That’s a lot of information, but you haven’t really answered the question.  Do smarter people have a better chance of reaching financial independence?

The short answer is yes, because IQ correlates with income and a decent income makes it much easier to achieve FI.

On the other hand, folks who already make good income — say, 100K/yr —  have just as good a chance as very high earners (200-300K) to achieve FI.  This is because a) the math is based on savings rate and b) the ability to save is a learned skill.   And we just saw that anyone can learn (almost) anything, right?

All it takes is

  1. Setting FI as a goal  — (Having the desire to do it)
  2. Absorbing the required material for saving/investing —  (Learning the skill)
  3. Socking away 50% or more of your income  — (Implementing lifestyle changes to enable savings)
  4. Sticking to your plan over the long haul.  — (Being consistent in your approach)

If you’ve got average intelligence, you can learn pretty much anything, including this.

How is it possible that it’s not easier for someone making 300K versus 100K to retire early?

Lifestyle inflation comes easily to us.  The world broadcasts persistently broadcasts spend messages without ever letting up.  For the kids:  new clothes at every opportunity, tons of toys, devices, games, electronics, special schools, DVDs and expensive foods.  For the teens:  smart phones and dataplans, televisions in the bedrooms, clothes, makeup, concerts, movies, fast food, even cars.

Worst of all is the stuff for adults:  Restaurants, gambling, fancy vacations, upscale rentals or home purchases, home improvements, a new car every three years, giving money to your family or friends in need, designer clothes, weddings, lawn care, fat cable packages with 5,000 channels, long commutes to work, expensive hobbies, collections, second homes, boats, pets, charitable contributions, gadgets…

I could fill another another page with wants that we all spend money on but for your sake, I’m going to stop myself there.  It’s enough to know that it’s human nature to spend what you make.  As an added difficulty, it’s the societal norm.  Some people don’t like the idea of doing anything that might be seen as weird by friends, family, co-workers, neighbors, etc for fear of being ridiculed or becoming a social outcast.

The bottom line is that most families earning 250K feel as though they’re struggling to get by.  This is due to lifestyle inflation.  As earnings increased, so did spending.  They upsized their home.  Bought the extra Durango.  And so on.  All of these purchases increase the amount of money the family needs per month to get by, which means even if they’re saving, say, 2K a month, that 2K won’t go as far to cover their living expenses.

Put another way, would you rather have 10K in the bank with monthly expenses of 1K?   Or 20K in the bank with monthly expenses of 4K?

The higher earners may have more money saved but it won’t go nearly as far to fund their retirement because they haven’t learned how to live on less.   To be blunt, their savings rate sucks.

Can you speed this up and summarize everything?  I’m getting bored.

Sure thing — let’s get on with it.

If you’re smarter than Forrest Gump — and I know you are, because you’re reading a blog on the internets, you genius, you — then you can do it.  You can make a decent salary, learn how to cut your expenses, pick up on basic index investing strategies using cost effective brokers like Vanguard, and invest 50% of what you make.

Much more important than IQ are other characteristics:  Willpower and drive, temperament, consistency, adherence to the plan, and the willingness to learn new things.

Personally I like to think that super-smart people are at a disadvantage.  Geniuses typically have outsized egos to accompany their bloated IQs, and egos demand homage in the form of gifts.   Egos think they deserve stuff.  It is Known.  This mindset depletes wallets at the speed of light squared.  Geniuses also get used to believing that they’re always right.  The underlying belief in their intellectual superiority often bleeds into investing and they find themselves thinking they can beat the market.  But they’re wrong.

Statistically insignificant anecdotal backing stories

The Administrative Assistant

My Aunt L. recently retired from a university with a million and a half in assets.  She never made more than 50K a year but she saved 30% of her salary into broad-market domestic index funds through TIAA-CREF.  I consider her to be about average intelligence, somewhere between Zuckerberg and, say, Snookie on the bell curve.  Still, she enjoyed great success as an investor because she was consistent over time and did not deviate from the path.  Sure,  she didn’t retire early, but it’s clear to me that the potential was there.  I’m convinced that if she’d read one of the ER books like Your Money or Your Life 30 years ago, it would have been possible for her.

Allen Iverson

Here we are, back on the subject of basketball.

AI made a lot of money in his career.   But he’s broke now.  If this isn’t an example of lifestyle inflation taken to the extreme, I don’t know what is.  He did all the right things to become an expert at playing hoop, but never took the time to learn to FI.

This is true for tons of high earners — 78% of NFL players for example.

I know I’m repeating myself here but these reports prove again and again that in order to retire early, it’s much more important to learn the skill of FI than it is to make a lot of money.

Industry Co-Workers (IT and software development)

My peers are high earners, pulling in between 100K and 200K annually.

We don’t talk about money all that much but when we do, most of the conversations are about how hard it is to make ends meet, what with all of the shit we’ve “gotta” pay for nowadays.  There’s the usual whining about raises, some discussion about optimizing cellphone and cable plans, maybe some bitching about general salary depression and that sort of thing.

Despite the complaints about not having enough money, these very same people will reveal  — willingly!  proudly! — that they just traded in their 4-year old SUV for the newest model and then promptly drove across country to either Disney World or Disney Land (whichever is farther away, of course) and bought an iPad per kid  for the ride down because hey, you hafta keep ’em busy, right?

I think that software engineers are generally considered to be pretty smart, but I don’t see any improvement in their spending patterns over anyone else.  And most don’t appear to have any interest in retiring early;  they’re resigned to work forever.   This isn’t a guess — I frequently hear people make dreary comments like “Oh, only twenty five more years of this to go.”   Makes for some cheerful company over at the salt mines.


I’m not a genius.  Not even close.  I’m smart enough to fix computers and write little programs — nothing all that complicated, trust me.  I can read and do basic math, basic algebra and geometry.  (Note: I failed algebra the first time I took it and had to try again.)  I got through calculus in college but needed the help of a study group and had to do a lot of extra homework to practice for the exams.

And I was born poor by American standards.  My parents didn’t have much money.  I got hot-lunch tickets in school and that sort of thing.  I’m your average Joe in most respects, not some silver-spoon fed child of FI destiny.

I got an interest in getting out of the rat race because, like many people, I started hating my job. (It wasn’t always that way, but over years the grind just sort of wore my enthusiasm down until all I can feel is friction applied directly to nerve endings.)    I started by reading Your Money or Your Life, then moved on to books on personal finance.  This convinced me to cut expenses and save.  While I was working on that, I read books on investing, then more books on investing,  started investing, failed here and there but tried to learn from my mistakes, and continued the process.  At this point I’ve put in the 10,000 hours of training and practice to become close to an expert in this area.

In the meantime, I realized that I could learn lots of other skills as well.  Skills that would help me to further reduce my expenses and help me both save more and grow as a person.   I do my own landscaping, painting, cooking, simple plumbing tasks, electrical, all sorts of odd around-the-house stuff.  I learned how to take better care of myself which keeps health costs down and increases my energy levels.  Some basic auto-maintenance.  The whole journey ends up being tremendously fun because learning all of these new skills and taking control of your life makes you feel fantastic, a superhero of sorts.

Just do it.

You can reach financial independence.  All you need to do is learn the required skills, and then work at it for the number of years required by your savings rate.  Start racking up those hours learning how.  Read books and blogs, change your lifestyle, sell stuff, downsize, and get excited because it can and will happen once you get on the path and start walking.

That might sound hard, but consider that the alternative is working forever.

In real life, all seven dwarves' names are Grumpy.

In real life, all seven dwarves’ names are Grumpy.


Sounds a lot easier now, doesn’t it?

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6 Responses to Learning to FI

  1. Moooooser says:

    Another great post! I’m beginning to especially like the commentary notes on the pictures. It’s a great way to make reading about investing and lifestyle choices fun!

  2. Aaron says:

    Tacking on to the talent vs hard work discussion, Talent is Overrated is probably the best book I’ve read on the subject. Takes the 10k hours and discusses what you actually need to be doing during those 10k hours (hint:deliberate practice). Great book.

    • livingafi says:

      Thanks for the recommendation, I’ll check it out. I’m fascinated by these sorts of topics, as I’m sure you can tell. Human capacity for learning. How people actually achieve goals and become who they become. Outcomes. I’m currently reading Adaptation to Life by George Vaillant which discusses coping mechanisms and how they play a large role in success/failure in life. It’s a little pedantic but has some fairly amazing stories in it which might interest you.

  3. Gamergirl says:

    Love the link to the ERE 21 day makeover!

    I stumbled on your blog from the MMM website, lots of good articles!

  4. Pingback: Financial Tailwinds |

  5. Stephanie says:

    I’ve discovered your blog recently and I am in love with it. I was also shocked to see that the blog was not made to make money out of it. This means something to me. I just wanted to say “Thank you” for taking the time to share with us your thoughts about about the process of becoming FI. Very well done.

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