FI, FIRE, Financial Freedom, House Hack, Geographical Arbitrage… Huh? What’s with all of these buzz words circling around the web with 30-something folks stop working their 9-5 jobs by choice? (most of them are frugal millionaires by the way, which helps sustaining these movements).
FIRE – Financial Independence, Retire Early. These terms are used interchangeably. E.g. “I’m 2 years away from declaring FI”, “I entered FIRE on 2016”, “One million dollar is my FI number”
What is it?
The idea is, you no longer depends on your regular income (W2, self-employed) to sustain your life. You live out of passive income generated from your portfolio (stock dividends, rental income, blogging income, selling books, etc). This doesn’t mean you have to stop working all together. It just means you have the option not to work anymore for life.
But by nature, there’s a reason how these type of people get to reach early retirement, by passion, hard work, high level of discipline and self control. It’s highly unlikely that the early retiree stops working completely. They might take a couple of months to travel the world, play video games, and stay on sweatpants for days. But they can’t run away from their drive. A lot of them starts a blog, write books, start a business, volunteers, organize events, and many more.
In short, you need to build enough equity that produces residual/passive income (a.k.a “money makes money when you sleep”) that can sustain you indefinetely.
The classic example is $1M portfolio with the 4% withdrawal rule. In this case, it is $40k / year. For the sake of simplicity, let’s say the portfolio gives 4% dividend annually. Even if the value of your portfolio doesn’t appreciate, you can take $40k each year forever.
Track your net worth for free! Sign up and download the app now.
Then you figure out how much money you need to live on, factor in inflation, then calculate your FI number. As long as your portfolio’s growth beats the inflation rate, if you can sustain the lifestyle, you will be ok for your lifetime.
Of course the 4% rule is not the only way to FIRE. Some people do it by building real estate portfolio that provides more than 4% ROI / Cap rate to live comfortably while not “actively working”.In the case of Mr & Mrs RetireBy, our FI number is $2.5M. Using the 4% rule, this will give us $100k annually. It’s a bit high, but living cost here in Seattle is getting pretty expensive (and we love Seattle). You can’t go crazy with $100k income like it used to. We’re shooting to be able to retire early in Seattle, but worst case we can always find a cheaper, nice location to retire on 🙂
We plan to do a mix of various source of passive income (stocks, funds, real estate, online business). But the point is, we want to have the freedom of how we spend our time without having to worry about going to work anymore.
Now close your eyes for 5 minutes. Take 3 deep breathes and relax your mind. Imagine if you don’t have to go to work tomorrow? And the next day… and the next day. Yet, you still earn the same amount of money (or even better).What would you do?Go take a walk on the beach? Take time to enjoy your coffee instead of fighting rush hour? Spend a day in the park with your loved ones? Live abroad in exotic location for an extended time instead of exhausting your vacation days?
I do this exercise every day. It helps me focus on what’s important in our life. What’s priority, what’s impulse. This helps you making decision when spending. For example, we’re perfectly happy with our Nissan Leaf. We no longer have the desire of driving Tesla, which I see more and more nowadays at my work’s parking lot.
I want simple things in life on my own term. I want to have to option to go Ski or Paddleboard today instead of spending many hours delivering projects for a big corporation. I want to take an hour drinking my coffee and reading newspaper (no, not on iPad).
I want to exercise regularly. I want to do more cooking (or at least learn about it).
The call to action
I had this epiphany when I was in my mid 30’s. I wish I had this revelation and knowledge when I was in my 20’s, I would’ve been on FIRE by now.
I’ve always played by the book. But I’ve been reading the wrong books. I didn’t grow up in US, so when I came here to study, I wanted to pursue the American dream: A house, 2 cars, a dog, 40-year of great career, and retire at age of 65. And be the American consumer in that 40 years of working, just like your neighbors. But after working for 10 years, I realized that there is no way I want to do this same job for another 30 years! There has got to be a better way.
Then I started to research the better way, read books and blogs. Turns out that there are multitude of people out there that retired by the time they turned 30, 40, 50. It is possible to retire in 7 years, if you’re willing to do what it takes to get there (e.g. save at least half of your take home pay vs. save 15% of your income).
Start questioning what you do today. Do I really want to do this for another 20 years? Will I even have enough to stop working by then? Do your research. Crunch some numbers. Read FI blogs / books. Well, you’re reading this article, so hopefully this is a good inspiration/resource for you.
Then, start taking action today. Don’t wait because live tends to go by quickly when you do the status quo. What is your FI number? What are you going to start doing to get there?