#20 F.I.R.E đ„
The surprising closeness of escaping the rate race and achieving financial freedom.
Hello friends, and welcome back to the latest issue of Tenets of Stoic Wealth!
This week weâre going to be taking a look at the concept of F.I.R.E, something Iâm sure many of you will have come across in your personal finance journey (not to be confused with a now infamous music festival of the same name but different spelling!)
Financial Independence, Retire Early.
As it says on the tin, itâs all about achieving financial independence and retiring as soon as possible, allowing you to live life on your terms. Weâll dive into what it takes, what the benefits are, and show that 90% of reaching Financial Independence depends on one thing alone.
Your mindset.
Letâs jump in!
What is FIRE?
The current human life cycle involves studying until your late teens/early 20s, working until youâre about 65 years old, and then enjoying the last few years of your life (your âGolden Yearsâ theyâre ironically called!) as your health dwindles away, living off the money youâve been able to save, until you drop dead somewhere around your late 70s.
And thatâs it.
Perhaps 10-15 years to do whatever you want after dedicating the best part of 45 years of your prime to a job you probably donât enjoy that much in order to get there.
Now I donât know about you, but that doesnât strike me as the ideal way of doing things. And thankfully, there are plenty of other like-minded individuals out there who feel the same way!
Your FIRE number is a figure that was created in order to put a numerical value on the amount of money that you needed to have invested in order to be financially independent.
Annual expenses x 25
Being invested in the market, this allows you to draw down 4% of your investments to cover your expenses, lose a further 3% of value to inflation, and with the market typically returning (on average) higher than 7% annual returns, insures that you never run out of money.
An infinite money loop if you will.
Therefore the only thing that remains in order to reach this near legendary status is to reach your FIRE number as fast as possible.
Thin FIRE vs Fat FIRE
Your FIRE number depends primarily on how much youâre going to spend each year in retirement. There are plenty of stories of people reaching financial independence because their expenses are so incredibly low that they barely need to have any money invested at all, but living in a tent and living off plain rice doesnât sound especially appealing to me, even though Iâd be âfinancially freeâ.
We still want to be able to enjoy life and the things that make it worth living.
This is where you have the most common split between Thin and Fat FIRE.
Thin FIRE is for those who want to reach a level of financial independence as soon as possible and cut expenses back to the absolute bare minimum.
Fat FIRE is for those who still want to be able to enjoy a well-off lifestyle and not give up on any of the creature comforts of life.
Both are viable options and itâs up to you which you prefer. Many people settle for some sort of middle ground, knowing that theyâre not going to be spending as much, but still want to be able to enjoy themselves.
You then save and invest part of your income in order to reach your FIRE number.
If your household income is ÂŁ50k and you save 20%, at 8% invested it will take you 29 years to reach financial independence (25 x ÂŁ40k = ÂŁ1 million).
But if youâre able to save 40% of your salary (ÂŁ20k a year) then in the same situation youâd reach financial independence after just 18 years (25 x ÂŁ30k = 750k)
11 years less, and no increase in salary.
*Both of these situations start from having ÂŁ0 currently invested towards your retirement.
The lower your expenses, the lower your FIRE number.
The greater your income, the higher your savings rate.
High savings and low expenses = fast FIRE.
On a household salary of ÂŁ80k, saving ÂŁ48k and investing at 8% a year would mean you reach financial independence after just 11 years.
From 0 to financial independence and being free to do what you want with your life in 11 years.
Now thatâs a goal worth pursuing!
Staying the Course
Achieving financial independence is a long term goal.
We have to be able to stick with it, acting consistently, in order to reach it and the benefits that it brings.
Once you have reached FIRE, you are technically retired, which can seem like such a strange concept for us in our 30s, 40s and even 50s.
Thereâs still so much time ahead of us.
This is the real beauty of it all, in my opinion. It is not the retirement as such which is the objective, but rather the financial independence.
You no longer have to do things that you donât want to do, simply because you need the money.
You can continue working, or give it up. You can travel, or stay right where you are and spend your time reading, walking, and going out for a long lunch on a Tuesday.
Itâs the freedom to do what you want, when you want, knowing that your usual expenses are all covered.
And being able to bear that in mind when you decide against a new car lease, or that jet-setting holiday.
Because youâre playing the long game.
I didnât write this newsletter edition with the aim of creating the next wave of FIRE fans.
I wrote it to demonstrate the end effect of several of the topics that we have already covered in previous editions, and link them altogether.
The importance of focusing on increasing your earning capacity, while not falling prey to hedonic adaptation. How to enjoy your money, while also knowing what not to spend. The benefits of discreet wealth and the effect it has on your end situation.
And above all, the immense value of having the time to do what YOU want to do.
Get after your financial independence, and Iâm so excited about the opportunities that await all of you on the other side of it!
Have a great weekend!
Felix