THERE is an impassioned, mostly millennial community that I accidentally discovered online. This is the FIRE community, an acronym for “financial independence, retire early.” As the acronym suggests, the goal of this movement is to gain financial independence, and this means getting away from reliance on paid employment to keep going and retiring early from corporate bondage.
Financial independence is not about getting rich. It is about figuring out how much money is enough to sustain a particular lifestyle. It’s about having just the right amount set aside, investing it wisely and living off interests and passive income. It is being freed from capture by the corporate world and doing just enough to live a more satisfying life where you are your own boss. For some it means taking an occasional job to supplement their savings although the strict advocates are comfortable with their investment account.
One good model of this FIRE movement is Chris Reining. At age 37, Chris successfully retired as a millionaire. He did not win a lottery. Neither did he engage in a networking scheme or some complicated business. His financial secret was featured a New York Times article tagged as “There’s a difference between ‘living rich’ and ‘being rich.’”
What prompted Chris to retire at such a young age? He said he did not feel sorry for himself for doing so but saw it as a once-in-a-lifetime opportunity for growth. “I wasn’t getting the things I wanted to get out of life and if you’re not getting the things you want to get out of life, then you need to change to become the person who can. If you stay the same you’re going to get what you’ve always gotten.” It was a risk he took for a change, a transformation to a better him and it included financial freedom.
What is his secret to financial security and independence per se? It’s a simple formula but difficult to execute. Spend less than what you earn and invest the difference. In layman’s terms, one must live within his means and learn the art of working on your numbers by investing. How will you be able to do that? One tweet of Chris Reining spilled the trick highlighting the difference between living rich and being rich. “Living rich: make $500k, spend $500k, don’t have two nickels to rub together. Being rich: make $100k, spend $40k, have $1 million in the bank.”
A lot of people want to be rich when they mean to say is they want to spend like a rich person. To be able to do that requires earning a bigger pay check and so the cycle goes on. More earnings, more wants (and most of these are on branded stuff and expensive items that depreciate their value over time) resulting to no savings at all. The reality of being rich is measured by assets generating income that exceed your standard of living.
Chris substantiated the “4% rule” to be able to be financially independent. This means that from your pay check, you must always separate a portion going to savings and this savings must be invested. Your savings will be sufficient when you have enough to allow you to withdraw 4% from your investment accounts yearly, adjust for inflation, and never run out of money. This theory was backed up by research papers of Bill Bengen and professors of Trinity University. Your amount of annual spending must be the basis of determining your savings goal or nest egg, enough to keep up with a decent lifestyle without working and just relying on what you have.
Chris added, “The funny thing about money is you always feel like you need more — even when you have enough, you never have enough.” Living an expensive lifestyle is fine but Chris realized that if he spends less he’ll have more to save and it will help him to achieve his investment goal faster. So, the game of being rich is not how much you earn but how much you spend for a living.
This reminded me of my previous article about contentment. Contentment begins with the eyes. Avoid envy for the possession of others, have a reasonable budget and simplify one’s lifestyle by focusing on the necessities. Avoid debt like the plague. Pay yourself first. If there is something you can’t resist buying, save up before purchasing rather than using credit.
Research and learn more about investment schemes that work best for you. It may be instruments offered by banks, government securities, pooled funds and other investment outlets. There are a lot of ways to grow your money without exposing yourself to high risk. Start changing your viewpoint about money and lifestyle now so you may retire early to your liking. Envision yourself using your time somewhere else doing the things you love to do.
You need not be a strict FIRE advocate, but its principles are rational, sensible and very practical. But to achieve its goals, one must have discipline and focus. It’s like going on a strict diet, in the finance area, and sticking to the regimen. And it all starts with making sure you live within your means and prioritize your needs to what is essential.
Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs.