What Number is Financial Freedom? (FIRE Approach)

Envision a time in the not-so-distant future where you are not burdened to begrudgingly work a job that you do not enjoy, trading your time and effort for money. With this newfound privilege, you could fill your time with far more enjoyable and fulfilling activities, having virtually full autonomy over your time and choices - financial freedom often produces time freedom and potentially location freedom.

An idyllic case.

With life's obstacles however, it can sometimes seem like just that, a vision, a dream.

With care, discipline, and strategy, it can be, and is an achievable goal, easily at that. Read on, I'll show you how...

What is Financial Freedom?

The term "financial freedom" describes the state of compiling sufficient passive income or wealth that covers ones living expenses for life, permitting them to never need to work a job. It can be described as the point at which you are no longer shackled and free to enjoy the full human experience, living a life fuelled by your desires.

The main bulk of the population make a living through the trade-off between time and money. Where more time is sacrificed for more money and vice versa. Many working jobs they hate with hopes of one day retiring and enjoy the benefits of their hard work. But who wants to work, sacrificing and pinching pennies until they're 65, where it's far too late -  chilling on a beach at 70 doesn't exactly sound like my idea of fun. Achieving this freedom in your 20s and 30s when you're young and healthy is more optimal. Erecting the allure of gaining financial independence quickly and in your youth.

Financial freedom looks quite different for many and is varied by the individual, determined by culture, lifestyle as well as their short- and long-term goals. There are many routes and strategies to get there, each with their own benefits and drawbacks.

F.I.R.E Movement

Financial Independence, Retire Early.

FIRE is a movement by an assembly of people online subscribing to an alternate form of retirement. The goal being (if not already assumed from the title) to retire far earlier than the customary 65-year-old OAP. It is based off a passive income source.

FIRE teaches it's enthusiasts to aggressively accumulate a large nest egg of funds by employing extreme savings strategies and investing the capital for a steady annual return. Reaching a point where their investments cover their expenditure, allowing them to live independent of a 9-5. Saving + cutting costs through their career: where every expense is evaluated as the amount of working hours it would take to pay for it - I'd argue the acronym should spell out Frugality, Investment, Retire Early 😅.

The amount needed in said nest egg would be determined by an individual's yearly expenses. The lower your annual expenditure, the lower the amount you would have to save up and thus you could reach your early retirement much quicker and easier. There's a balance here however, with one end of the spectrum being swift retirement and the polar being access to comforts/experiences. Where you're situated on the scale is dependent on your preferences and largely determines how long and what your retirement would look like.

The 4% rule aids in formulating that coveted "financial freedom" number. This concept says that you could safely withdraw and live off 4% of the total fund without touching the accumulated principal. Think of it as your retirement budget.

Why 4%?

With the sum of money invested in an asset with historically backed yearly returns of between 7-10% (like the S&P500), this percentage could be safely removed year on year from the fund without progressively eroding it - you wouldn't want to take out the whole 7% annually as this quoted return is just an average. i.e. some years will be less (even negative) and others more. The 4% is conservative and leaves you a 3-6% buffer to also combat the degradative effects of inflation over the time period.

Example:

If your expenses in a year were: $10,000, $20,000 & $40,000, the following would be the total required invested sum.

$10,000/year -> $250,000

$20,000/year -> $500,000

$40,000/year -> $1M

Your intended lifestyle dictates your required fund!

Intended lifestyle ~ The 3 variations of FIRE representatives:

Fat FIRE: this individual indulges in their comforts and thus would aim to save substantially more than their other FIRE counterparts. Quality of life is not a compromise here and thus larger budget, larger sum.

Lean FIRE: these individuals adopt a minimalistic lifestyle, leading a much more stringent and refined life. This makes retirement far easier to attain but at the cost of some of life's leisures.

Barista FIRE: here lies the middle ground, of neither lavish nor parsimonious living. They quit their 9-5 job in their retirement and work part time, allowing them to live off their retirement fund whilst having an extra income to cover, more colourful life activities.

Strategy

Regardless of the flavour of FIRE you select, the core components remain constant. Having an income, financial discipline, reducing living costs significantly, being prudent and delaying gratification are all fundamental parts of the strategy.

Having a 6-figure income is not pivotal as it is very possible to achieve your goals with far less, but it sure does make it easier. Increasing income horizontally by picking up an extra job, starting a side hustle, acquiring assets, or building a business are all common in the FIRE community. There's also always the option of vertical growth through career development.

Financial discipline is where theory meets practice. Planning and laying out a sound strategy is all well and good but goes in vain without execution. This is where the magic happens, actually effecting your plan.

Reducing costs: as stated earlier, viewing every unnecessary expense as the number of hours it would take at your job to cover. That holiday to the islands looks like a couple of months now huh? That new car, years? uhuh..

Delayed gratification is a shift in mentality. It's realising that there's a time for sowing and one for reaping. Your performance in this sowing stage largely affects the resultant harvest.

Bonus:

Working a casual/flexible part time or pursuing passion projects. Like in the barista approach you aim to have a part time job in your retirement, which lets you significantly reduce your nest egg figure, whilst allowing you to work at your leisure to cover any extra, out of budget ventures and activities.

Shortcomings

There are risks and shortcomings of this strategy that are often overlooked, namely: market volatility & crashes; historical data not being a viable predictor of future trends; any personal unforeseen circumstances; the ever-increasing cost of living and frugality extended into retirement.

I'd say that, yes sure, FIRE allows you to live independent of a job and thus one can legitimately claim financial independency but it doesn't feel much like freedom really does it? With the palpable overshadowing presence of the unstable "retirement budget", and, needing to live within stringent allowances the purpose seems to be almost defeated. Will the budget suffice to raise kids and what experiences will be extend to them in their youth? What will be willed off to them? What is left over to offer to the world?

That isn't to say the whole strategy is nullified.

If I may add my two pence; the activities in your retirement will determine the effectiveness of the approach! Assuming the "70% banked earnings" standard is adhered to by an individual during the penny-pinching period, it can be inferred that no mortgage is undertaken, no car loan and just about zero ownership of anything is acquired. I'd label this a frail standing. Wealth is ownership.

FIRE is a great platform to build off, a safety cushion, a battle won, but by no means is the war over.

Dealing with your Newfound Freedom

Ever stopped to consider that sitting on a beach will eventually (if not quickly) get boring? You've freed up an extra 3-4 decades of your life and you plan to travel the world(if your budget accommodates such expenditure)? What else will you do with this freed up time?

I'll leave out slandering the Lean FIRE bunch because a life of minimalism, solely tending to their pet hamster is enough punishment.

Assuming the Fat FIRE example who aim to live a more well-rounded life. You've got your independence, what will you do with it? You could move to a low-cost nook of the earth and live out the rest of your days to be fair, but allow me to pull this thread.

True Freedom - La Vraie Liberté

To me this is to find your purpose and chase your passions. You are no longer bound by a job or need for money. You must realise and learn that work is not inherently bad. As stated verbatim from Merriam Webster, to work is to "be engaged in physical or mental activity in order to achieve a purpose or result ".

Money is no longer the purpose; you get to choose! You are your own boss. Allow yourself to be inspired, to create, to influence, to give back.... fill in the blank.

LOVE YOUR WORK

Envision a time in the not-so-distant future where you are not burdened to begrudgingly work a job but rather doing something you enjoy that you would do whether paid or not.

Don't play with FIRE ... or do...