There’s been a considerable amount of media attention in the last several months regarding what seems to be a substantial movement in the otherwise sleepy and stodgy Personal Finance industry.
This movement is called Financial Independence, or FI, to those that have become its standard bearers. Many of the individuals that strongly identify with all of the strategies that make up this particular approach to personal financial go the additional step and call the movement Financial Independence Retire Early, or FIRE.
Regardless of what you call it, FI or FIRE, it approaches Personal Finance in a very, very different way than what has become the typical approach that most people in the Western world have been instructed to handle their finances.
The “Typical” approach to Personal Finance
This typical Western World approach to personal finance is built around a few structural aspects towards finances that have been promoted for the past few decades such as:
• To plan on a 40-year working career
• Save a maximum of 10% to 15% of your annual income for savings and investment
• Buy the biggest house you can afford as it will always appreciate in value
• Go to the most prestigious college that you can get accepted into regardless if you have to incur considerable debt to do so and
• Take on debt to finance depreciable items such as cars, furniture and consumable items
The need for a new approach to Personal Finance
Interestingly enough, considerable cracks have started to become evident in the ‘veneer’ of this typical approach to Personal Finance. For starters, within just one generation employees no longer have the ability to fall back on Defined Pensions which guaranteed monthly retirement payments at a set level, with some even growing from what was referred to as a Cost of Living Adjustment, or COLA.
Now without this Defined Pension style retirement plan providing the foundation for our retirement, 10% to 15% set aside annually for retirement is mathematically insufficient. Especially when these funds are now being invested in a 401(k) program which is at the whim of the uncertainties of the stock market.
The foundation of the world of work has shifted
In addition, with a significant amount of anxiety rising amongst workers regarding how the introduction of artificial intelligence, machine learning and automation will impact their long-term careers and earning power, there is starting to become stronger cries for more affordable housing options.
This has been amplified lately in the news from the growing concern amongst retiring baby boomers that there is nobody coming up behind them able or willing to purchase their large…call them McMansions…homes and enable them to downsize into smaller dwellings.
Added to this fact, that although real estate pricing is still strong in most major urban areas at the time of this post, there is a growing level of speculation that this could be the top of the bubble and indicate yet another period where real estate may simply not provide the type of asset appreciation that most people have come to expect.
This is NOT your parent’s world…or economy
This traditional financial lifestyle is also being challenged by the trend, especially in the United States, whereby the cost to attend many mid to upper tier colleges and universities is outpacing the ability of their graduates to be able to land the type of jobs required to be able to pay the monthly cost of these loans. As a result, many people are finding themselves in crushing debt even before they start on their financial journey.
All of these traditional approaches to Personal Finance only get riskier with the growth of very affordable and what our banking institutions have gleefully called “cheap” credit. For many individuals, this builds a never-ending cycle of borrowing money at extremely high annual interest rates only to just be able to pay the “low” monthly payment.
As was so well stated by a young millennial woman recently, when she applied the math to figure out how long it would take her to pay off an outstanding credit card bill by simply meeting the minimum monthly payment she stated, “20 years to never”. This hardly seems like the right strategy for a sound financial life. In fact, more and more people are looking for a simple financial strategy.
The Financial Independence (FI) Movement
Now what about this FI or FIRE (Financial Independence Retire Early) movement? What would have been straight out thought to be a radical approach to conducting your personal finances just 5 years ago, is now starting to look more sensical than the alternatives…INCLUDING the traditional approach.
In fact, it’s starting to look downright like the only responsible way to approach personal finance in this day and age
For those who may have not heard of FI/FIRE before there are several main tenets to the approach:
1. Create a money “gap” between your income and your expenses by cutting expenses to the greatest degree possible, as well as doing what can be done to maximize your income.
2. Invest the “gap” identified above in number 1 in low-cost index funds.
3. Save and Invest the largest percentage of your income as possible; 30%, 40% or 50% are solid initial goals.
4. Pay yourself first by automating savings and investments
5. Take advantage of every tax deferred investment program available, such as your employers matched 401(k) program.
6. Actively control and reduce your three highest expenses; Housing, Transportation and Food. This is done through what FI practitioners refer to as “hacks”.
7. Reduce and eliminate, if possible, recurring monthly “want” expenses such as cable, cell phones, and those stealthy “subscription service” payments.
8. Actively look to “optimize” aspects of your financial life, such as getting benefits such as ‘cash back’ or travel mile awards through credit cards, which are completely paid off each month.
9. Resist buying consumable items, including cars, and if purchased spend the least amount of money on them and avoid borrowing any money for them.
10. Determine and strive to hit your FI number, which is an amount that you have available in savings/investments and which equals 25X your yearly expenses.
This amount would theoretically allow you to withdraw 4%, or the “4% Rule”, of it annually and still cover your yearly expenses indefinitely (for example, if your annual expenses were $40,000, you would need $1,000,000 available in order to withdraw 4% of it annually, or $40,000).
Although hard-core FIers might argue that there are more foundational principles that make up the FI movement and should have been included in this post, if anyone were to follow those that I’ve listed above, they’d be a financial superstar within years. In fact, they might even be able to “Retire Early”!
Conclusion
I have absolutely enjoyed the attention that the FI movement has garnered these past few years. In fact, as it turns out my wife and I have been living a FI lifestyle for decades and we didn’t even know it! As such, I was honored to be featured in a recent Market Watch article https://www.marketwatch.com/story/how-these-parents-are-raising-frugal-kids-as-they-attempt-to-achieve-fire-2019-07-11 (when I blogged at Elite Life Warrior) that featured how we had taught our daughter these same principles over 20 years ago!
I used to express my interest in this type of an approach to life as simply being a “minimalist”. However, I started to think differently when those that started to write openly about their chosen FI lifestyle as being something much differently than being a minimalist. They referred to it as following a simple financial strategy and life blueprint.
They saw themselves as being “intentional” about their financial journey. They didn’t see themselves as self-depriving misers. No. In fact, they saw themselves as being “valuists” and “optimizers”.
As proof, if they saw something that they believed would bring quality to their lives, they didn’t balk in purchasing it regardless of how much it may cost. THIS spoke to me!
As a result, I embarked upon a different path for the past 20 years and which a name for it, FI/FIRE, has finally caught up to it. To my surprise…it’s even become a movement!
