We talk a lot about FIRE on this blog. I can only imagine the various definitions folks are really putting behind this concept and wanted to take a minute to unpack the concept. For those asking what FIRE really is, this is an article just for you.
What is FIRE?
The FIRE movement is was brought on by a group of individuals who sought financial freedom to retire early. The premise is that a person might make a series of life choices that allow her to escape the rat race– to enjoy a life without imposed financial boundaries, full of freedom, before traditional retirement age. But who is FIRE for, what does that journey look like, and what lifestyle habits need to take place to get you there?
Who’s FIRE for?
FIRE isn’t just for the middle class. Honestly, FIRE isn’t just for white, male, US-born, able-bodied, straight or cis-gendered people, either. FIRE is for people dedicated to growth, and for people who can transition their habits into constructive energy. For those with a lot of struggle in their history to build on, that’s really great news. It’s great news because a lot of the core concepts rooted in struggle translate into what’s needed to achieve FIRE. We are uniquely positioned to understand hard work. We have demonstrated the mental drive to hustle tirelessly, to do more with less, to innovate and find loopholes in order to achieve goals and to teach others how to do the same. We are positioned to communicate what we need and to ask questions. Each of these is critical skills that will ensure that you’re able to push us through the stages of progress and meet goals.
Take your time: this *ish comes in stages.
Well, let’s tackle those, one at a time. Just thinking through, there are six stages to the journey we all take after we leave our starting point. We all start out in financial dependence– where we rely on others to supply or pay for our basic needs. As babies, we depend on adults to feed, clothe, and house us. Later on, though we can either stay in or return to this stage, relying on government support. After this, however, there are six additional milestones (and here, I’m going to use the more technical terms, and we can re-write them later):
Financial solvency – The point at which you can fully support yourself without help from anyone or anything else: you make enough money in your regular grind that you can cover your bills (including debts) and can stash a few coins as mattress money for a rainy day.
Financial stability – This is the stage at which you have a solid stash (ie, mattress money and an emergency fund). These stacks make sure that, in a tough situation, you can continue to cover your bills without help from anyone else.
Debt freedom – Seriously. This is a BIG deal! This is the point at which you have no debt. That means you have no credit card debt, and you don’t owe anything to anyone. Oh, and each of the previous steps is true, too!
Financial independence – So here’s when definitions get murky. You’ve reached financial independence when your net worth (what you own minus what you owe) is at least 25 times your yearly expenses. At this point, the cash generated from your investments (if they were all invested in the market or returning cash to you from rental property) could cover your current lifestyle. If you were calculating this, you multiply your annual expenses by the number 25 because it represents a 4% withdrawal rate. What this means, though, is that, if you needed to stop working, you’d be able to live if you sold every asset you have that holds value, then took 4% of your pile of money out every year. This number, for a family that spends $4,000 per month on living expenses ($48,000 per year), for example, is $1.2 million.
Financial freedom – This point is beyond financial independence. You’ve reached financial freedom when you’ve surpassed each of these milestones and you have enough income to live as you’d like to– where you can take that around-the-world vacation and stay financially free, for example. We like to say that this is when the assets you’d be willing to sell can generate enough income for you to live (ie, you can remove your home from your financial independence calculation), and when you can build in a little bit of extra cushion for an emergency. This can be done by increasing the number used in your financial independence calculation above 25 (so to 35 or 40, for example). Your definition of freedom is the most important one.
Financial abundance – This is the best phase to be in. This is where you have enough income from your investments where you not only would be able to, but you would be forced to leave a legacy for the next generation. We’re talking substantial money. Think folks like Iris Fontbona (worth over $18 billion), María Asunción Aramburuzabala ($20 billion), Aliko Dangote ($3.3 billion), Oprah Winfrey ($2.5 billion), Kavitark Ram Shriram ($2.1 billion), Brian Sheth ($2 Billion), Bob Johnson ($1 billion), or Fernando Cho Pardo ($930 million).
But how do you get there? What are the key things you have to do in order to move from one stage to the next? I mean, other articles on this blog have talked about some of the financial priorities required to adjust daily living, but we haven’t really uncovered the real reason all of this is important or the big changes that will really get you there. So, let’s take the time to dig in now.
Why do all this?
Much of the why is really personal. Why do you want to be wealthy? Is it to have a shiny thing, really, or is it to spend more time with family? Does wealth mean that a loved one is taken care of, or that you can repay someone for the way they’ve invested in you? Does it mean that you can give back to your community in a way that really makes a difference or that you can push for a change for someone else’s life? At the end of the day, part of the joy of pursuing greatness is that you get to ask — and answer — these questions for yourself. If nothing else, do it for the options. I’m not talking about the stock options or anything related to trading. Instead, I’m talking about the power of choosing how you get to spend each day, each minute of your life, and the ability to enjoy it on your own terms. In identifying your why, you get to discover the meat of your soul and bring it to your own journey. In doing this, you set your own milestones and do the big work of enhancing your life — and how you align it with your own mission– as you grow closer to your journey.
But how do I arrive, financially?
The long and short of it is that you can achieve financial abundance by positioning your struggle to propel you onwards. There are some habits that can be adjusted to assist you with this process. What are the core habits that have shown themselves most important over time, for those who’ve been successful in this journey?
The habit of setting goals and aligning your actions to meet those goals. We deal with strategic plans and analytics all the time. They may come in the form of sales or revenue goals at work, or dollar targets around the holidays, but what we tend not to do is to really dig into this type of goal-setting in our personal lives. But, if time has shown that this detailed planning works, why not?
The habit of knowing your numbers. This includes following your credit, setting and sticking to a budget and calculating and tracking your net worth as it grows.
The habit of mindfulness: understanding and appreciating the immediacy of now. Start on your journey this very moment and in your determination, be consistent.
The habit of keeping it simple. This includes the survival techniques of staying humble and living on less. As you stay humble, take the difference and save more. Automating your savings not only creates systems to support your savings progress, but it creates habits to keep lifestyle inflation in check. Also, setting up systems to invest your savings as you accumulate them will ensure that your money grows as you do.
The habit of hustling smart. Many of us understand what it is to hustle– to sweep floors for money, or to do odd jobs to make ends meet. We also get that we shouldn’t always rely on one single method of making money, and that adding several methods adds security to the grind. For this particular habit, though, the key is to hustle smarter– to not only create those multiple streams of income, but to develop ones that, once set up, require little to no additional work to creating income. This might be done by writing a book or a song that earns you money (you only had to create it once, and it keeps producing cash), or creating a revenue cycle from referrals (you can put up ads for someone else’s business and the referral fee they pay makes you money). Sometimes it’s through investment (investing in dividend-paying stocks or a business, putting your money in a CD, or owning rental property so that the monthly income pays you). Maybe you want to own a laundromat or a vending machine business? All of this counts!
Developing a healthy allergy to owing anyone anything. This includes debt, and more specifically, not only paying off any debt you already have but also avoiding further debt (personal, to the big banks, or otherwiae). For me, this encompases ALL debt– mortgages and credit cards, personal and private loans, car loans, etc. Work at this piece by piece. Having everyone off your back will prove a relief, both financially and emotionally. I promise.
A habit of learning as a daily ritual. Drink in knowledge. Whether it’s through reading a newspaper each day or picking a new book each month, imbibe to grow. Lean into your own edges. Get into the habit of asking questions and learning from the time-tested experiences of others.
A habit of asking for help, and with that, creating systems of accountability. Get a financial advisor that’s fee-only and a fiduciary. Create systems of accountability to serve as checks and balances for you on your journey. This may be set up with that financial advisor, with a mentor, with your partner or with someone else you trust. Check-in on your numbers at regular intervals to ensure you stay on track.
A habit of taking care of what you have. Maintenance is cheaper than replacement, quality is better than quantity, and humility will get you where you want to be fastest.
A habit of making space for your mental and physical wellbeing. Eat healthily. Take time to balance, refill and refresh. Pay attention to and listen to your body.
What’s the hardest part of leaning into FIRE for you?