I attended a great conference earlier this month where I had the opportunity to talk to a group of folks who are part of the FIRE movement. FIRE stands for Financial Independence Retire Early. We had some interesting discussions and I’ve thought a lot about those conversations since then.
Many of the people I spoke with are in their 30s – although one was “29”. And while you often read about the extreme frugality and the extreme savings orientation of FIRE followers, these people were spread over a pretty broad spectrum. I, myself, haven’t related to the FIRE movement as it’s often portrayed in the media, however I think there is a lot to be learned from the general ideas of the movement. The question becomes how these lessons could apply to you.
Awareness of your financial situation
Many of the folks I work with initially struggle with understanding their full financial situation. There are lots of moving parts – often employment income, investment income, possibly business investments, employer benefits, retirement accounts, homes and other assets, and expenses. And their time is dedicated to earning a living and raising a family. It’s hard to also dedicate time to see how each part affects the others and understanding how to control more of their situation – especially in light of the constantly changing tax rules, market fluctuations and family needs.
The FIRE folks are aware of their financial situations. This might be an understatement. I think hyper-awareness of their financial situation is a characteristic that applies to all of the FIRE folks I spoke with. They are aware of each penny coming in and going out and the exact timing of those pennies. They are aware of exactly what percentage of their income is dedicated to every category of expense. They have eliminated every expense not related to achieving their goal. Which brings us to…
They have very well-defined goals with deadlines. They have dollar-amounts and dates in mind and on (digital) paper. And, while financial independence was the stated goal for each of them, in deeper conversation, I discovered that the definition of financial independence differs from person to person. And, that differing definition led to some heated debates.
What can you take away from the FIRE movement?
How you set your goals
I believe that goals are critical. And, I believe that identifying your values will make pursuing your goals much easier. That isn’t to say that achieving your goals will be easy – financial or otherwise – just easier. Having goals aligned with a guiding principal makes determining the steps to take on your journey much clearer because you can choose your steps with your guiding principles in mind.
I think that single-minded focus on a goal simply for the sake of achieving a bank balance on paper is likely to leave the seeker feeling unfulfilled. I get where many of them are coming from. I love what I do. But, I have had jobs where I didn’t love what I did. I may have loved some aspects of a job but been drained by other aspects. So, regardless of where I am right now, I can relate to folks who feel drained by their current position and want to get out. And I understand that their pursuit of financial independence as quickly as possible is their answer. But sometimes the larger purpose is missing. So, the question becomes, once you achieve the bank account balance, then what? What will you do with your money – and why? Rather than focusing on what you want your bank account to look like, what do you want your LIFE to look like?
What is financial independence?
I strongly believe that personal finance is personal. The definition of financial independence can, and should, differ from family to family. From FIRE followers with really strict interpretations of financial independence, it means not needing to rely on earned income for the rest of their lives. For some, even vetting potential renters for rental properties doesn’t constitute financial independence while, for others, reliance on actively managing rental properties is the backbone of their whole FIRE plan. And for still others, financial independence might mean only working on projects that they love or being able to work from anywhere in the world.
However, no matter how independent any of us become, there will still be factors beyond our control. Plans that don’t allow for changes in lifestyle, regulations or tax laws could blow up. I am a big advocate for keeping options open in financial plans – multiple income sources, differing tax statuses, varying benefits. What if there’s a medical emergency or long-term illness? What if tax laws change again? How will your plans hold up?
Intentionality and purpose
One benefit to becoming very aware of your financial situation is that it allows you to make decisions with intentionality and purpose. When you truly think about your values and then your goals – and then how money can help you reach your goals – you become more aware of how you use money. You can make informed choices.
And even subconsciously…
And, once you have those goals in mind, you understand tradeoffs of each transaction – even if subconsciously. While you may not set a specific latte budget, when you place your order in the coffee shop, you’ll be more aware that the transaction is affecting your progress towards your goals. For some followers of the FIRE movement, they’ll know exactly how much time that purchase will add to their pursuit of their financial independence. For many of us, there will simply be a silent decision – an acknowledgement of the impact that this purchase is having on my financial life. Without an awareness of your financial situation, it’s difficult to know the financial impact of your everyday decisions.
While waiting in line at a café, I was approached on two different days by a young man who said loudly “Control your money or it will control you” while he grabbed handfuls of sugar packets from the self-service portion of the bar and stashed them in his pocket. He was among those who told me that he knew the amount that he needed, down to the penny, to be financially independent. He tracked his progress on an app on his phone – and he checked it often. What I found ironic, was that while he touted financial independence, he certainly seemed to be controlled by his money. The pursuit of a bank account balance completely absorbed his thoughts and actions.
Maybe pursuit of financial freedom is a better description of what so many people are trying to achieve. Freedom to live the lifestyle they desire without an overarching anxiety that they don’t know what they don’t know about their financial resources. A comfort level that they are using their financial resources efficiently and in ways that are aligned with their values and goals. Freedom from the constant worry that they don’t know if they’re taking the steps that they could be taking to move them towards their goals. A lot of this stems from a fear of regret – I would have taken the right steps if I knew what they were.
One thing I think the FIRE movement gets right is that it encourages followers to be aware of their financial situations. What I would like to see from that awareness is more people being aware of what their finances could do for them – rather than what they need to do for their finances. That would be financial freedom.