What does Financial Independence REALLY Mean? (Ignite your FIRE)
Could you be pursuing financial independence for the wrong reasons? What does Financial Independence really mean? To you.
If you’re frustrated by the time it will take for you to reach financial independence, worried you may never make it or tired of being chained to your current life, you’re going about it the wrong way.
This post is for you.
Financial Independence and a brief overview of the FIRE movement
Generally, financial independence means having enough income to cover all your reasonable living expenses, for the rest of your life, without having to be employed or having to work to generate that income.
That income is essentially passive income, most likely from an investment portfolio.
If you’re reading this post, then you’re probably aware of the Financial Independence Retire Early (FIRE) movement.
In a nutshell, the movement is about frugality, saving aggressively and investing these savings until it assets grow sufficiently so as to be Financial Independent (FI). This will allow you to safely Retire Early (RE).
To determine the amount of assets required to reach FI, FIRE proponents calculate their FI number based on the specific rules such as:
- The 4 percent rule (aka the Trinity Study)
- The Ratcheting Safe Withdrawal Rate
- Flexible spending rules
If you attempt to calculate your FI number, no matter which rule you choose, you’ll quickly realise that the number is quite astronomical and will take considerable time and effort even for the most prolific earners and savers of this world.
And, unfortunately, I’ve got some more bad news. Life is fraught with uncertainty and whatever rule you choose, you’ll still likely remain exposed to the following:
- Persistently low investment returns or negative returns, way above historical norms
- Wanting or needing to spend significantly more money a few years down the line
- Tax or regulatory risks (new wealth tax, substantial increases in dividend, interest or capital gains taxes)
- And more!
How much should you increase your FI number to take into account all of these risks? How long will that prolong your craved FI lifestyle?
The short answer to both questions, by quite a bit (and sorry to be a party pooper).
The traditional paths to financial independence (Lean FIRE and Fat FIRE)
Most of us mere mortal folks on the path to Financial Independence will probably come up with the lowest feasible FI number that would generate just enough to cover our modest annual expenses. This is called Lean FIRE in community parlance.
We’ll then diligently save and invest to reach this number, often with significant sacrifice.
And even at this “low” FI number, it’ll still take a while, to say the least. And we’ll still be left exposed to the risks I mentioned earlier.
The most hardcore earners and savers of this world will go to the absolute extreme to reach an astronomical FI number, which will enable them to generate a very high amount of passive income every year. They are striving for Fat FIRE, but possibly to the detriment of their health and well-being.
And, unfortunately, many will simply not bother even starting on the path to FI because the numbers will seem unattainable, so what’s the point right?
There must be another way.
And, the good news…
The alternative paths to financial independence (Coast FIRE and Barista FIRE)
Over time, two concepts have evolved in the FIRE movement providing a much more achievable alternative to “traditional” FIRE for most people.
Coast FIRE essentially means that you save money until the point at which your investment portfolio will most likely ensure you reach FI sometime in the future without you having to save anymore.
It reaches a certain (much earlier) point, after which you stop saving, “coast” through life and simply let your portfolio grow with time. Until it grows large enough for you to reach FI.
While your portfolio is working for you, you just need to find a way to cover your living expenses. You now have the flexibility to work less and/or get a more fulfilling but lower paying job as long as it covers your living expenses.
If the name is any indication, Barista FIRE means that you will need to have a part time job making coffee. Well, not necessarily, but a part time job nonetheless where you will need to trade hours of work for money.
Barista FIRE is similar to Coast FIRE in the sense that you’re not fully FI but still in a position to benefit from some flexibility.
The key difference with Coast FIRE is that you don’t necessarily have to cover your living expenses with your job. You will supplement your earned income by withdrawing from your portfolio (according to your safe withdrawal rate) to cover the balance of your expenses.
But the result is essentially the same, you now have the flexibility to work less and/or get a more fulfilling but lower paying job as long as both your job and your portfolio withdrawals, together, cover your living expenses.
OK, enough with the theory, you now have a good (enough) overview of the FIRE movement.
Onto the good stuff, it’s time to ignite your FIRE!
What does Financial Independence really mean, to you
Do you know anyone who retired between 25-40 after hitting an FI number ranging from 600K to 1.2M euros or USD and then stopped earning money completely?
I don’t, and I’ve been following the community for a while.
Financial Independence is more than hitting a number and more than being free not to work ever again. At its core, it’s about how you truly want to live your life.
Take the time to reflect. Why are you striving for financial independence?
Is it because:
- You hate your job?
- You hate having very little control of your time?
- You want to be in another country or location but the salaries are really low there?
- You want to spend a lot of time travelling?
- You want to work on your own projects or launch a business?
- All of the above? And more?
What I’m getting at is that you should be clear about what Financial Independence really means to you in terms of leading the life you want.
Something concrete, that goes beyond the “I want to be free to do what I want”.
Then the opportunities will really start to open up, and sooner than you think.
Ignite your FIRE, your own version of Financial Independence
You don’t have to choose between Lean Fire, Fat Fire, Coast Fire or Barista Fire to reach your goals.
In fact, I would argue that it would be detrimental to pigeon-hole yourself in categories defined by the community. Especially since you don’t have to.
Instead, start thinking about concrete practical possibilities that will steer you in the direction of the life you want to lead. How about:
- Reducing your working hours at your current job to work on a passion project
- Working part time in a job you love
- Working full time in a job you love but that maybe pays substantially less
- Having a side hustle or business you’re passionate about.
At this stage, I’ve purposefully kept the options limited to doing something you love. Because let’s face it, this is the ideal scenario.
Do you want to switch from a stressful job that pays well and that you don’t enjoy to a maybe less stressful job that pays badly, and that you don’t enjoy? It’s an option for sure but far from ideal. It’s much better to find something that will fulfill you.
Does Jeff need to work? What about Zuck? Billy G? My ol’ pal Warren?
Are they financially independent? Yes, and they still work.
“Find a job you enjoy doing, and you will never have to work a day in your life.” Mark Twain
Many people are stuck in the rat race because they don’t have the luxury to find meaningful work. If you are lucky enough to have the opportunity, you owe it to yourself to consider having a more fulfilling life. Explore different avenues.
Alternatively, it could be that you actually don’t mind your job that much. That you even like it (dare I say LOVE IT?) Or maybe your job provides incredible flexibility should you so wish.
In these cases consider negotiating part-time work in your current position to spend more time with your family or other pursuits.
Why not also consider taking regular unpaid leave or sabbaticals to recharge or launch a business.
I hope that you’re starting to see that your options are practically endless once you’ve reached a certain amount of financial security.
You don’t need to wait for decades until you have reached the FI number that will beyond the shadow of a doubt allow you to stop working forever. Especially since you’ll probably not want to stop working forever anyways. At least if you’re still relatively young.
You’re striving for FI, you’re a go-getter! Are you really going to spend your life lounging around all day?
If you’re clear about what you want and what financial independence means to you, then you can tailor your financial goals in the best way to empower you to… go for it!
To achieve your real goals and maximise your chances to a happy life.
This means saving enough money (save smart, not hard), to give you the confidence to start taking a few more calculated risks to transition towards your ideal lifestyle.
As you save more and more money at some point you need to realize that;
- You’ll have the flexibility to work less in a job you don’t like or working for less in a job you love.
- You’ll have the flexibility to withdraw from your portfolio or let it grow.
- You’ll be able to mix and match as you see fit and as your situation evolves.
So even if you’re not able to save enough to be completely FI, all is not lost and it’s not too late to start. You’ll always be better off by applying good financial habits even if you don’t reach full FI.
You’ll just have to settle for your own version of financial independence, your FIRE. And enjoy a fulfilling life.
Don’t run away from the life you have now but run towards the life you want to lead and, while you’re at it, bask in the journey.
So? What does Financial Independence really mean to you? Are you ready to ignite your FIRE?