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Many people are unhappy at work. Some are working on being financially independent and retire early (FIRE). Here are some lessons about money we can all learn from FIRE.
Do you want to retire early? I think the vast majority of people would answer this question with a resounding “Yes!”
There’s numerous studies about how the vast majority of the workforce is not happy at work. More than half of U.S. workers are unhappy in their jobs!
But most people swallow the pill just to pay their bills. Your rent/mortgage, grocery bills, utility bills don’t care that you’re unhappy.
So every now and then when there is a story about a couple who have managed to quit their jobs at 30 and now travel the world – that is a story that piques my interest.
Those to subscribe this idea are part of the FIRE movement. In a nutshell, their goal is to gain financial independence (FI), and retire early (RE).
Heck, I left the corporate world, because I was unhappy! Who wouldn’t want to be able to quit a soul sucking job until you retire.
Upfront, let me tell you, I am not actively pursuing FIRE. So I am not going to try to convince you that this financial hack is your golden ticket in life.
But it’s no secret that money can give you flexibility and freedom, and increase your quality of life. Having more money does afford people the flexibility to change careers, maybe even take a gap year, or even extended travels.
Even if retirement is not what you are looking for, a good plan for your money, can afford you the flexibility and freedom when you need it!
What is FIRE?
The idea behind FIRE is to get to a stage of Financial Independence (FI), and be able to Retire Early (RE), before the conventional age of 65 or 67.
Those pursuing FIRE utilize a combination of:
- saving more – often in the realm of 50%-70% of their incomes
- reducing their expenses – by way of frugal living / minimalism
- investing in low cost index funds to grow their wealth
These combination of these strategies allow their net worth to grow. They are then able to retire when their net worth is at a point, that they can draw down about 4% for living expenses, and continue investing the rest of their money and continue to grow their investment for future expenses. This means that they no longer need to work to bring in income in order to survive, so they are now able to retire a lot earlier than 65 or 67.
Of course, the term “retire” is up to interpretation. Many people who are pursuing FIRE do think about what they will do with their time after they “retire.” Some of them even count on their ability to monetize their hobbies or side projects.
FIRE may seem like a radical, unconventional movement, but the basics are rooted in good financial management. It focuses on understanding your current financial situation, increasing your cash flow, and growing wealth.
I may not be pursuing FIRE but as someone who enjoys reading about the way people manage their money, the concept has intrigued me for a while now.
Of course, often these measures are either extreme, and may not accessible to everyone. However, we can all learn a little about how those who are successful in this movement are able to grow their wealth!
6 Helpful lessons from FIRE about money
Focus on your net worth
The basics of becoming richer, comes down to your net worth. Your net worth is calculated as: Assets minus liabilities.
Which means, that in order to increase your net worth, you have to either increase assets, and/or reduce or eliminate your liabilities.
For those pursuing FIRE, the focus is on the end number – i.e.: what does your net worth need to be, in order to retire and live comfortably?
Whether you plan to retire at a more traditional age or pursuing FIRE, in order to built up your financial base you have to understand what your net worth is, and how you can focus on increasing your net worth.
Understand your cash flow
How much money are you earning from all sources?
How much are you spending? How much do you to survive?
These are all questions you should be able to answer in order to get a handle on your situation.
For those pursuing FIRE, there is often a drastic lifestyle change. Depending on how quickly they want to retire, that might include saving 70% of their salaries. While, that is not feasible, nor advisable for everyone. It is important to keep a track of how much you are spending vs what you are saving.
Live below your means
This bring us to not spending all your income. There are definitely rules of thumbs that you can follow, like spending 30% of your income on rent/living expenses.
Often, people focus on their income only, and expenses increase in proportion. Of course, when you start earning more, you want to maybe buy a bigger house, have access to more conveniences. But this risk of lifestyle inflation is what holds many people back.
Those on FIRE will often maintain the same expenses despite earning more, in order to reach their destination earlier.
Investing is encouraged
Since I’ve entered adulthood, I’ve heard enough about why investing is the best thing since sliced bread.
If you’re a skeptic, let me show you.
The S&P 500 (which tracks the top 500 companies on the stock market) has historically averaged a return of about 10% (before inflation). Of course, there are good and bad years, but if you consider a long term horizon, a 10% average return for very little work is not bad!
Investing in a diverse portfolio used to be thought of as something that was only accessible for for rich people, with high net worths and advisors.
With the advent of low cost index funds, and ETFs, it is very possible for an average individual to be invested in the entire S&P 500 – such as through the index fund SPY. This allows you to diversify your investment, and spend very little on fees.
Even Warren Buffet thinks that an index fund is the best way for most people to invest!
Multiple income streams are encouraged
Proponents of FIRE are focused on increasing their wealth. There are two primary methods of increasing your wealth base: 1) invest, and 2) build and grow and side hustle or project.
The idea of diversifying your income streams is not a bad idea. Given how coronavirus has ravaged through the world, there is now a risk to most people’s jobs. We’re not in the clear yet. There might be more people who lose their jobs. Or others, who might find that the businesses that they worked for will not return, or find that their roles have been made redundant.
Having a second or third income stream is not only a way to increase your income, but also a way to reduce the risk associated with income from your job, no matter how stable it may seem.
FIRE encourages discipline
The best lesson FIRE provides in my opinion is discipline!
The time horizon of increasing wealth, and eliminating the link between work and money, is short term for those pursuing FIRE. It’s easier to find the motivation and discipline to stick to your strategy.
That does not mean that the average person not pursuing FI/RE can’t be motivated to stick to their goals. You can still have the discipline to increase your net worth, income, and cash flows.
You question your why
If you enough money to retire today, would you continue to work?
One of the biggest arguments against FIRE has been that many people are not truly retiring. Often, they will look to monetize a side project, or work part time.
But to me that is the best part of it. The ability to be financially independent, and be free from having to work just to pay the bills, is the best lesson from FIRE. It is the idea that you have the flexibility and freedom to design a life that you truly enjoy.
Money and wealth can be a way to achieve independence. If you reach your goal, there is no rule that says you have to retire. If you enjoy the work that you do, you should keep doing it!
But money does provide freedom and flexibility that is out of reach for most people!
Should you pursue FIRE?
Of course, as a movement, there are a lot of reasons why it is not for everyone. Some people don’t believe it’s entirely possible, especially if you’re relying on the stock market to provide you long term returns. Or that the movement is not entirely inclusive, since there are lots of people who can barely afford to pay rent with their earnings. But there is still something to learn from it.
We can all aspire to spend less and earn more!
I don’t know about you, but though the concept is enticing. It is not something that I am actively trying to achieve in the long term. But it can help form habits of good financial habits, and even influence your long money strategy.
Cheers,
