- What is Financial Independence?
- FI vs FIRE Movement
- Speaking of Unorthodox
- FI Principles & Tactics
- Principle 1: Be Purposefully Frugal
- Principle 2: Create The Gap
- Principle 3: Invest Your Savings
- Simple ≠ Easy
Hello again dear reader. Have I told you lately how much I appreciate that people like you take the time to read my blog? I’ve been doing this blog thing for just about a year and it still blows my mind that people come back to read my stuff. I am grateful and humbled to be able to share my story about how the FIRE movement (financial independence retire early) changed my life.
Reflecting back on my writings so far, I feel like I could do a better job explaining the basics behind financial independence (FI). If you truly want to join me on this journey, you will need to learn about the basic principles and tactics needed to achieve financial independence.
What is Financial Independence?
“Financial independence means you have enough wealth to live on without working”
Financial independence is a state where you have enough wealth that you do not have to worry about working. Key to financial independence is your asset portfolio. What is an asset portfolio? Your portfolio is a collection of appreciating and/or cash flow positive producing assets (e.g. stocks, bonds, real estate, business, etc.) that you purchase with your savings. Whether you know it or not, we are all in the asset collection business. When your portfolio begins to produce enough money/income every year that it is equal to or greater than your annual costs of living, then you are financially independent!
Portfolio Income ≥ Expenses = Financial Independence!
Got it? Ok good.
FI vs FIRE Movement
So now that you understand what financial independence means, it is important to know that you don’t have to do it alone. In fact there is a relatively unknown movement focused on building community, and supporting each other to get to financial independence as fast as possible. This is commonly known as the Financial Independence (FI) Movement. Within the FI Movement there is an even more niche sub culture called the Financial Independence Retire Early (FIRE) Movement. I’ve provided a brief definition below that explains the difference between FI and FIRE:
The key takeaway is that there is a diverse and wonderful community out there looking to buck the trend of the mainstream approach to working for 45 years and retiring gently into the night. Our path to FI is unorthodox, radical and is the one less traveled.
Speaking of Unorthodox
Ok, so you now know the subtle nuances behind the FI Movement and the crazy FIRE people who haunt the internet with their dream of early retirement. Now what? What exactly does the path to FI look like? Where the heck doe you start? Hey I feel yah. I had the exact same questions. Here’s what I discovered.
FI Principles & Tactics
The FI movement at first seems complex and can be super intimidating. But don’t get tripped up on the hype. The principles and tactics behind the movement are relatively simple and easy to understand. This is a good thing for me, because I’m no financial genius, and simplicity makes it possible for everyone to at least try to reach financial independence. The foundation of the FI movement can be summarized into 4 basic principles:
Principle 1: Be Purposefully Frugal
In the FI movement frugality is a key principle, but being frugal for its own sake lacks purpose. Instead frugality is a principle and technique used to build up wealth, avoid debt (AKA the wealth killer) and prevent lifestyle inflation ( AKA keeping up with the Joneses).
Frugality: The economical use or expenditure of resources; prudently saving or sparing; not wasteful
Below are some popular frugal tactics you can start doing tomorrow:
Principle 2: Create The Gap
Another key principle is called creating the gap. This principle is based on creating a significant difference between your income and you expenses. The wider the gap the more you can save. When you explore other FI sites you may also hear the term savings rate. This is a simple measure of the percentage of your income you are able to save and build your wealth.
Below are some key things you need to do to create the gap:
Principle 3: Invest Your Savings
I’ve saved the best for last (see what I did there? #DadJoke). If you apply the previously mentioned principles and tactics, you should have money left over every month. It is important to understand that all investments are based on people’s savings. When you hear about someone having money to invest in the market, it is the result of them creating a gap and having a good savings rate. It cannot be done any other way. For the FI movement it is not unusual to hear people plowing 30% or more of their income into their investment savings. Below are some common tactics and places to put your savings:
Simple ≠ Easy
There you have it. The principles of FI/FIRE movement in a nutshell. You can take heart that the path to financial independence does not have to be complicated. The simple principles and tactics can be done by anyone. But, just because it is simple, it doesn’t mean it is easy. That’s why I’ve joined the FIRE community; to gain knowledge, support and information to help me on my path.
Don’t be afraid to start your journey today. You may feel like to you don’t know enough. But, we all start from a place of ignorance and fear. What’s important is that we aren’t driven by our fear and insecurities. Instead, we need to take steps to move out of ignorance and into enlightenment.
All the best,