An Introduction to FI/RE

Good morning. Today we delve into the captivating realm of Financial Independence / Retire Early, commonly known as FI/RE. This movement has gained traction worldwide, inspiring individuals to break free from financial constraints and retire early to enjoy life on their own terms. In this issue, we'll explore the core principles, strategies, and steps to embark on your own journey to financial freedom.

Decoding FI/RE

1. Financial Independence (FI): Financial Independence is the cornerstone of the FI/RE movement. It refers to achieving a state where your passive income covers your expenses, liberating you from the need to rely on traditional employment to maintain your lifestyle. While there are many ways to achieve “passive income,” we at The Financial Fire consider it a bit of a misnomer. Whether it is through investing or building a business, a considerable amount of time, capital, and resources are used on the front-end of an enterprise, and it is anything but passive to start. Financial Independence is more of a marathon than a sprint. Through delayed gratification, FI/RE individuals commit their time and money upfront to pay their future-selves dividends in the future.

2. Retire Early (RE): Early Retirement, the second pillar of FI/RE, involves leaving the workforce well before the conventional retirement age. It's about reclaiming your time to pursue passions, travel, hobbies, and personal growth. Serious subscribers to the FI/RE movement can push forward with a 10 or even 5 year plan; others may be happy with simply shaving off 10 years of time in workforce. It comes down to the individual and their why.

The Principles of FI/RE

1. Savings Rate Matters: FI/RE emphasizes saving a substantial portion of your income—often 50% or more—to accelerate your journey towards financial freedom. This percentage can fluctuate depending on how aggressive a plan an individual sets for themselves. While conventional financial wisdom suggests allocating 20% of each paycheck towards savings, FI/RE community members strive to optimize this metric. Your savings rate is the most vital metric when attempting to retire early—find ways of cutting out unneccesary costs whenever possible.

2. Invest Wisely: Effective investment strategies are essential. Diversified portfolios, index funds, and real estate investments are popular choices within the FI/RE community. It is in the casual investor’s best interest to steer clear of purchasing individual stocks—those who does not desire to learn the intricacies of financial statements and fundamental analysis should invest in popular index funds such as: The S&P 500, The Dow Jones Industrial Average, Nasdaq, and the Russell 2000. Once you’ve allocated your funds to investing, continue to dollar-cost-average on a set cadence. Do not try to time the market! Remember: time in the market beats timing the market.

Consider this: assuming a 20 year old plans on retiring at the age of 65 and a 10% monthly compound growth rate, $1 today is the equivalent of more than $88 in future value! Terrifyingly, a $10 purchase today can cost your future-self almost $1,000. The Money Guys explain this topic incredibly well. The power of your dollars today improve with time; the longer they can work for you, the stronger your financial future becomes.

The Types of FI/RE

1. Lean FI/RE: Lean FI/RE involves living frugally and optimizing expenses to minimize the amount of money needed to retire early. It is typically for those that want to approach the problem of financial independence from a minimalistic, stoic, frugal, or anti-consumeristic perspective. A great place to learn more can be found in this Reddit community.

2. Fat FI/RE: Fat FI/RE is for those who desire a more comfortable retirement lifestyle, with larger savings to cover both essential and discretionary expenses. Members of this group tend to be high income earners that extend the duration of their savings period to have more income in their retirement. A great place to learn more can be found in this Reddit community.

3. Coast FI/RE: Coast FI/RE is about reaching a point where you've saved enough to comfortably retire in the future without adding more to your savings. Once an individual has invested enough of their capital, they stop their savings/investing and return toward a “typical” spending rate. Over time, their investments grow and at retirement age, Coast FI/RE members begin to withdraw from their portfolios.

4. Barista FI/RE: Barista FI/RE is a form of semi-retirement. This is where the returns from your investments are able to cover most, but not all of your living expenses. Typically, those on the Barista FI/RE path step down from their stressful or time-consuming jobs and work part-time (as a barista—hence the name—or similar positions) to offset the remaining expenses.

The Steps to FI/RE

1. Calculate Your FI Number: Determine the amount of money you need to accumulate to achieve financial independence. This is your FI number. A simple calculation to determine this is based off of the 4% rule (made famous by financial advisor William Bengen). In his analysis, Bengen found that retirees can comfortably withdraw about 4% each year—adjusting for inflation—of their total portfolio without exhausting all of the funds. The calculation is: annual expenses multiplied by 25. For example, a Lean FI/RE follower makes $80,000 a year. They have annual expenses of $40,000. $40,000 × 25 = $1,000,000. This is their FI number. Working backwards, if this individual were to invest the remaining $40,000 each year with an annual 6% return on investment, it would take ~15.7 years before they could retire living the exact same lifestyle they had prior.

2. Budgeting and Tracking: Create a detailed budget to track your income and expenses. Understand where your money goes and identify areas to cut back. There are many financial tools and resources available to track your income and where you are spending it. One of my personal favorites is Mint. It’s a free app that I’ve use consistently for 4+ years.

3. Debt Elimination: Pay off high-interest debts early to free up more money for savings and investments. Compound interest can be your best friend or worst enemy. Stay out of credit card debt, high interest auto loans, and student loans whenever possible. Not all debt is bad, and savvy financial practitioners can utilize the power of leveraging their capital to turbocharge their journey toward financial independence; however, it’s important to recognize one’s risk increases by doing so.

4. Emergency Fund: Establish an emergency fund to cover unexpected expenses, so you don't need to tap into your investments prematurely. Consider first building up a $1000 emergency fund, as Dave Ramsey suggests, and then adding to this position over time. A strong emergency fund should be able to cover 3-6 months of living expenses. For those incredibly risk-averse, consider establishing a 12 month emergency fund.

Achieving FI/RE: Practical Strategies

1. Increase Your Income: Look for opportunities to earn extra income through side hustles, freelancing, or starting a small business. Focus on bringing value to people, whether that is at your company or through a side hustle. Think like a creator, not a consumer. The money will follow.

2. Live Below Your Means: Embrace frugality and mindful spending to reduce unnecessary expenses and boost your savings rate. One of my favorite books covering this topic is The Millionaire Next Door. Remember: rich people stay rich by living like they are poor. Poor people stay poor by living like they are rich. This does not mean turning into an ultimate cheapskate; it is entirely possible to pursue FI/RE without turning into a Scrooge. There is a difference between being frugal and being cheap. Find the things you enjoy and invest in quality while reducing expenses elsewhere.

3. Maximize Tax Efficiency: Understand tax strategies to minimize your tax liability and optimize your investment returns. This can be a dedicated series in of itself, but for starters: max 401ks, Roth IRAs, HSAs, and get yourself in touch with a dedicated accountant who is willing to walk you through ways of saving thousands of dollars from Uncle Sam.

4. Invest Wisely: Diversify your investments, consider low-cost index funds, and stay informed about market trends. For those looking to expedite their financial independence journey, real estate is perhaps the most effective method for doing so. I highly recommend beginner real-estate investors consider house hacking. This is where you purchase a property slightly larger than you need and rent out rooms or units to help offset the cost of your mortgage. By generating income while you live there, it gets your toes wet while you learn the details of real estate investing and property management, you get favorable interest rates due to owner occupancy, tax benefits, leverage, and the perks of appreciating markets and rents to stave off inflation. I personally combined house hacking and the BRRRR method to aquire my rental properties and current residence. It is, by far, the most effective strategy for financial independence.

The Benefits of FI/RE

1. Time Freedom: Achieving FI/RE provides you with the priceless gift of time—time to pursue your passions, spend with loved ones, and explore new horizons.

2. Reduced Stress: Financial independence reduces the stress associated with financial instability, giving you peace of mind.

3. Intention: Achieving FI/RE forces you to focus on the difficult and time-intensive task of retirement. It helps you eliminate the noise from your life and place emphasis on the people, hobbies, and things that bring you joy. Too often, we fall prey to consumerism and lose sight of the things that are truly important to us.

4. Mindset: Embracing the journey of FI/RE cultivates a mindset of patience, disipline, and adaptability. It helps retool how you think about a problem. Instead of framing something as: “I can’t do that,” FI/RE proponents learn to ask: “How can I do that?” It’s a powerful shift that gives the individual agency and sharpens your problem solving capabilities. While necessary for financial independence, you may see this mindset shift bleed out into other facets of your life such as friendships, romantic partners, and learning goals.

5. Milestones: There’s something to be said about achieving milestones throughout our life, and financial ones are no exception. Hit savings milestones and celebrate successful investment decisions. It feels good to win!

Conclusion:

The path to Financial Independence & Early Retirement is a transformational journey that requires dedication, financial literacy, and mindful decision-making. It's about gaining control over your finances, your time, and your future. Whether you're drawn to Lean FI/RE, Fat FI/RE, Coast FI/RE, or Barista FI/RE, remember that the key to success lies in a clear plan, consistent execution, and a passion for financial empowerment. As you embark on this remarkable journey, keep your eyes on the horizon of financial freedom and the boundless possibilities that lie ahead.