Financial Independence – FIRE and my philosophy
Financial Independence, too good to be true?
Have you ever thought about how different your life would be if you never had to work for money again? Where would you live, what you do do? So many options, so much freedom!
The term financial independence can sound overwhelming and unachievable when first heard. Can one become financially independent with an average job and average salary? Or is it reserved for a select few?
This blog post will go over the FIRE movement, accumulating wealth, popular investment strategies and my philosophy.
Table of Contents
The FIRE movement
The FIRE movement has gained a lot of traction over the last decade. FIRE stands for financial independence, retire early. In its core the movement revolves around saving and investing in order to retire way earlier than traditional budgets would allow. The goal is to live soley off passive income combined with small withdrawals from a investment portfolio. You don’t need to work to maintain your lifestyle.
A typical guideline is achieving a portfolio of 25 to 30 times your annual expenses and withdraw 3%-4% annually to cover living expenses. The target portfolio and withdrawal rate depends on your desired lifestyle.
Types of FIRE
There are different approaches on how to become financially independent and retire early. It’s important understand the route of financial independence is not set in stone. What FIRE type fits you, your family and lifestyle best?
The most common approaches to FIRE are:
- “Fat FIRE” refers to a more traditional lifestyle who saves more than the average retirement investor.
- “Lean FIRE” refers to a frugal lifestyle and extreme savings, resulting in a far more restricted lifestyle.
- “Barista FIRE” refers to a person who has quit their traditional 9-to-5 job, but still undertakes some form of part-time work to cover for living expenses.
The accumulating wealth phase is critical in any plan to attain financial independence. Being able to speed up the accumulation or growing phase will allow you hit your FI target faster and ‘retire’ sooner. Therefore it’s helpful understanding what the main variables are for building your investment portfolio.
Income is a key variable for growing your portfolio. Increasing take-home income while keeping your expenses unchanged allows you to save more. More savings means bigger contributions to your investment portfolio. As a result you could be ending up shaving off years from your retirement date.
A common way to increase income is starting a side hustle.
A second variable for growing your portfolio are expenses. Reducing expenses means higher savings and as a result bigger contributions to your investment portfolio. At the same time cutting annual expenses also means you can reduce your FI target. Effectively a double win. It’s recommended to track and categorize your expenses in order to understand how you’re spending your money.
An overview of your spending behaviour allows you to identify the categories where you can cut expenses.
3. Return on investment
The return on your investment portfolio is the third criteria which determines the pace at which you’re able to accumulate wealth. The higher the return, the faster your portfolio grows. It’s essential to understand the power of compound interest in connection to your investment portfolio. Compound interest is a mechanism that’ll propel you towards financial independence.
Time itself is not a variable in order to accumulate wealth faster. The reason ‘Time” is worth mentioning is its relation with compound interest. Accumulating wealth becomes increasingly easier over time. The larger your portfolio, the more compound interest is able to show its true potential.
Therefore it’s advisable to start saving and investing early on in life.
Calculate your own FI targets here.
A savings rate of 64% allows you to achieve financial independence in 10.9 years, assuming 5% annual returns.
Browsing through FIRE forums and blogs you’ll typically encounter the same set of investment strategies being used to reach financial independence. The three strategies appearing most often are investing in the stock market with index funds, investing in real estate and investing in crowdlending platforms. It’s perfectly viable to combine strategies as well.
The average investor will not manage to outperform the stock market, but should instead aim to BE the market. Index funds are a great way to become the market. Key advantages of index funds are the ease of diversification, the utilization of compound interest from dividend yields and its expected returns on the long term.
When selecting an index fund it’s advised to carefully consider its cost ratio and exposure. As mentioned in the paragraph on accumulating wealth, return on investment is a key variable for growing your portfolio. Well diversified low cost index funds are typically recommended for the average investor. Vanguard is widely recognized as a solid choice, but there are many more options out there.
Real Estate has been a popular asset class for a long time, and for good reason. The options for building wealth with real estate are plentiful. Common strategies include value appreciation, generating rental income and flipping properties for profit. This article won’t be able to do real estate investing justice so instead I’ll refer to Biggerpockets. Biggerpockets is a great resource when it comes to real estate investing and provides all the material you’ll ever need, and more.
Crowdlending, also knows as P2P-lending, is an investment strategy which is becoming increasingly more popular. Similar to index funds, key advantages of crowdlending include the easy of diversification and the utilization of compound interest.
However there’s also fundamental differences between crowdlending and index funds. Crowdlending does not experience the volatility of the stock market and its potential returns on the short term are higher than index funds. It’s impossible to predict the potential crowdlending has on the long term, because it’s not been around long enough to build a reliable track record. It’s worth noting crowdlending is typically considered the most risky of the three asset classes.
My FIRE philosophy and investment choice
My personal belief is that financial independence is achievable for anyone and is not reserved for a select few. The simple math doesn’t lie. Spend less than you earn, invest the difference and compound your way to financial independence.
I do recognize the pace at which FI is achievable is not identical for everyone. Bigger incomes will have an easier time to reach a higher savings rate. Always keep in mind reaching FI is not a competition, but a journey. And this journey is different for everyone. The key is deciding to get started.
Financial independence represents freedom for me. The freedom to choose how I spend my time. Quite frankly, I have no intention of retiring completely and I do enjoy my current job. But it’s not the same as having complete freedom over your time and I feel that’s worth attaining. Combine that thought with a desire to spend more time traveling and having the choice to really see my future kids grow up.
It’s a no-brainer, isn’t it?
It sure is for me.
I’m fairly frugal by nature, so saving has never been a problem. However, I don’t consider myself a minimalist. On the FIRE type scale I’m probably in between ‘Fat FIRE’ and ‘Lean FIRE’.
My investment vehicle of choice is crowdlending. I find crowdlending fits my personality and risk profile best at the moment. However I do see myself moving into real estate and index funds at some point. Real estate is sadly not an option for me at the moment as an expat.
I recognize crowdlending is considered far more risky than index funds, but I’m simply less comfortable with the stock market in its current state. Brexit, Trump’s trade wars and what looks like a bubble waiting to burst.
For now I’ll stick with my crowdlending portfolio.
My journey has begun, what about yours?
Please leave a comment and share your thoughts on FIRE!