The other day I was having WhatsApp chat with one of my high school buddies. I raised the topic of FIRE (financially independent retire early) as a motivation for me to get back to active blogging. In response, my friend made the following comment: “Minimalistic living life style sounds great but hard to implement“.
This comment got me wondering as to why FIRE would be associated with minimalistic living. After some googling, I came across this article, which offers some clues. The article in itself is a fun read as it tracks the origins of FIRE way back over 800 years
It is quite possible that the association of FIRE with minimalisim can be derived from the works of Jacob Fisker through his book, Early Retirement Extreme and the very popular blog, MrMoneyMustache.com, maintained by Peter Adeney, which have been instrumental in popularizing simple living lifestyle,
The following definition from investopedia, “Financial Independence, Retire Early (FIRE) is a movement dedicated to a program of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow.“, sums it all for how FIRE is thought of in popular media.
I am not exactly sure, when I got the wind of the FIRE movement, but to me it was a aha moment, much similar to what I experienced when I was first introduced to the Intelligent Investor. I came to think of FIRE as a framework to to sort life-priorities, slow down and enjoy all that life has to offer. The way I see it, FIRE is a hodge podge of ideas on basics of personal finance, i.e., save more spend less, DIY, anti-consumerism and opportunistic side hustle.
As is espoused in popular media nowadays, one approach to FI and RE is frugality or minimalistic living. I however believe that one does not have to be frugal or minimalistic to achieve FIRE.
For me FIRE starts with self-introspection. FI means having enough money to never have to work-for-money again, not because RE is my goal, but rather freedom of choice is. Once the vision of FI is clear, the next step is to assign a dollar value to FI.
For example, the goal is to determine one’s FI number. It is very important to build in a margin-of-safety in calculating one’s FI number. While, the above linked article talks in some details about different ways to compute one’s FI number, calculations become much easier after self-introspection on FI lifestyle one desires and figuring out the annual cost associate to maintain that life-style.
Let’s say, $60,000 (after taxes) or $5000 per month is sufficient for an individual/family to sustain FI lifestyle. Assuming, by some measures, an extremely conservative 2 % safe-withdrawal rate, FI number of $3 Million (60000 x 50), would allow this individual/family to sustain a FI lifestyle forever.
For an individual/family that can sustain their life style on an annual budget of $60,000, achieveing a FI number of $ 3 Million, should truly enable them to not worry about money in any market/economic cycle.
Given that (US) markets have historically returned about 7.6 % real returns, short-term bonds has returned about 3.5 % and even cash (very short term T-Bills) have returned 2.3 %, it would take a prolonged extreme event to justify a safe-withdrawal rate of anything less than 2 %.
The next question is to figure out steps necessary to achieve one’s FI number. This is where, I believe, the mis-conception of minimalistic living comes in. One path to FI is cost control, extreme version of which would be frugal/minimalistic living lifestyle, at least until the time one achieves the desired FI number. However, I want to emphasize that this is not the only path forward. At the opposite end of the spectrum to cost cutting is increased earning capacity. DIY work and opportunistic side hustle are all steps towards maximizing earnings without sacrificing lifestyle.
Accordingly, there are two flavors of FIRE movement, lean-FIRE (what is commonly referred to as FIRE) and fat-FIRE. The lean-FIRE aspirants are minimalistic, frugality-focused individuals, who optimize their lifestyle to control cost as opposed to a focus on earning more. On the other hand fat-FIRE aspirants put more emphasis on investing and earning more.
We are more atuned to fat-FIRE approach and are working towards optimizing our earnings potential and at the same time taking care to not be wasteful with money.
In summary, below are some of the FIRE principles that we have adopted in our daily lives, none of which requires minimalistic living.
- Make earning more than you spend your default priority
- Keep a money journal, track all your spending
- Adopt DIY mindset
- Slow down and take time to enjoy all the good things in life that does not break the bank and finally
- Always prioritize spending more time with kids and family.