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The Levers of FI
Misconception 1: But It's a Really Good Acronym
As a concept, FIRE is great at inciting reactions (especially the second part - Retire Early).
But in reality, the Retire Early part is secondary to the Financial Independence part.
Financial independence is the actual goal of FIRE. Retiring early can be an outcome of financial independence, but FI must come first. Phrased another way, you can reach financial independence without retiring, but you cannot retire early without being financially independent.
Unless you want to "live in a van down by the river," but that's not what we're talking about here.
So why not get rid of the FIRE acronym and go with something more representative of the movement as a whole? Something like FISYHTFTCWYWTDWYL?
Financial Independence So You Have The Freedom To Choose What You Want To Do With Your Life
Rolls off the tongue, doesn't it.
Or maybe FITWOYPACTWNTYDNHTWAMAM.
Financial Independence To Work On Your Passions And Change The World Now That You Do Not Have To Worry About Money As Much
You know what? Let's stick with FIRE.
Misconception 2: It's All the Millennials' Fault
Media coverage around FIRE seems to be centered on Millennials, which is not surprising as this group seems to be watched and studied like a new species found in the depths of the Amazon rain forest.
Or maybe that's the Amazon.com rain forest? I can't remember if they bought that yet.
Anyway, back to Millennials. Technically, I fall under this group by one year. I don't know whether this means I am not in touch enough with this group to be relevant, or if I'm like Marvel's Blade - "all of their strengths, none of their weaknesses."
Either way, I reject the idea that FIRE is centered around Millennials. It's just that the world is centered around Millennials because, well, we're the "target demographic" right now. Millennials are said to span approximately 1981 - 2000 which puts the group at 18-37 or so.
The FIRE movement is actually very diverse. It spans age, race, sex, and background. If you do not fall into the "typical" FIRE follower, who cares? Anyone can pull these levers.
What Are the Levers?
So what are the levers to FI? It all comes down to the equation.
Income - Expenses = Savings
The larger the savings, the quicker you can move toward financial independence (often defined as 25x yearly spending).
The "levers" of FI are the various levers you can pull to increase that savings rate. One lever might increase income (larger income with similar expenses increases savings). Another lever might decrease expenses (similar income with lower expenses increases savings).
You might even get lucky and find a lever that increases income and lowers expenses simultaneously, doubling the win!
Let's take a look at the pros and cons of each type of lever, and explore a few examples:
The income-side of the equation has one major advantage over the expense-side. There is theoretically no limit to your income.
Unfortunately on the downside, it is often harder to push this lever in a way that substantially matters to your overall savings rate. Here are a few examples to help illustrate the trade-offs.
If you are making $50,000 a year at a job, you can always look for a different job that offers $60,000 (or $100,000 or $1,000,000). There are plenty of online resources to help you look for the right position, and you do not typically lose anything other than time by looking.
However, your qualifications will eventually come into play, as well as your willingness to change locations, learn new things, and meet new people. That $1,000,000 job may indeed be out there, but not everyone will be qualified or be willing to move to a high-cost of living area and commute three hours per day.
Push for a Raise
At your current job, you can work harder / more hours / more successfully in order to position yourself for a merit-based raise. Then you must ask for it. There are plenty of books related to the subject, but I recommend Getting to Yes.
While I am by no means an expert, I can say that you will have your best bet of negotiating a raise if you have a clear "next best offer." In other words, it may be worthwhile to look for a new job simply as a negotiating tactic.
Pick up a Second Job or Side-Gig
When five o'clock hits and all of your coworkers are heading home for the evening, you could be on your way to your second job!
Okay, you're probably not thrilled about that option, but it works to pull the income lever.
Whether this is another "W-2" job or a "side-gig" (a.k.a. self-employment), there are plenty of options to bring in another paycheck. Check out Monster, Careerbuilder, LinkedIn or other online resources to find the right "W-2" job.
If a side-gig is more your style, Pat Flynn's Will It Fly is a must-read on the topic! His podcast Smart Passive Income is also a great resource.
The major advantage of the expenses-side of the equation is how much control you have over it.
With income, you can often do all the right things but show very little (or any) additional income for those efforts. Your company may just refuse to give you a raise, or that better-paying job may not be hiring right now.
But efforts on expenses are much more tangible. Here are a few ways you can pull the Expense lever:
Reduce Your Per-Unit Cost
As you shop, pay more attention to the "per-unit" price than the overall price. Buying in bulk or an off-brand can reduce the per-unit price far below what you would have spent.
The balance here is that you only purchase enough of an item to use before its shelf-life is over. Twenty pounds of chicken may give you a very low per-oz price, but make sure you freeze the excess before it ends up in the trash.
A bit more extreme, consider downsizing your life. Smaller houses and smaller cars mean smaller bills for utilities and maintenance.
These expenses are not often considered when planning large purchases such as a home or car. Our friends over at Choose FI put together a nice analysis. According to Brad and Jonathan, the total cost for a new car is in the range of $7,000 per year, when you include insurance, fuel, depreciation and maintenance costs.
NerdWallet did a similar analysis, illustrating that car ownership might be upwards of $8,500 per year!
Some expenses, such as car insurance, have a tendency to increase over time. And many Americans do not like the idea of switching providers.
I was definitely in that camp earlier this year. My current insurance provider had risen rates each of the last five years, but I had been with the company for nearly 20 years. As silly as it sounds, I was comfortable with my provider. I knew their office location and how to pay the bill.
They were familiar.
I put off shopping for insurance until I finally made the switch in July. Between car and home insurance, we saved around $500 per year. Don't make the same mistake I did - shop for insurance every few years. You'll figure out the new office location soon enough. Google Maps has your back!
To be clear, I mean maximize the cost-value equation. I've written about what it means to be frugal and minimalist - this point is about being mindful of what brings you value.
By minimizing those things that do not bring you as much value for the cost, and maximizing those things that bring you more value, you can reduce expenses without deprivation.
Chris Farrell hits on this point in his book The New Frugality. It's another of my reads from earlier this year, and I especially liked his take on frugality vs. being cheap.
Increase Pre-Tax Contributions (Retirement, HSA, etc.)
This is one of my favorite ways to decrease my expenses, but it doesn't necessarily feel like a decrease at first.
If you work for a company offering a 401k, 403b, or other retirement plan, or if you have an HSA available to you, consider increasing your contributions. Because pre-tax contributions are taken, you guessed it - before taxes, your taxable income is reduced. This means that your taxes are actually lower in result.
Increasing your contributions will reduce your take-home pay, but remember the goal of the equation. Increasing income and lowering expenses gives you more savings.
Taxes are an expense, and you can reduce this expense while simultaneously saving for retirement. It exactly accomplishes the goal we are after.
Recent articles seem to all suggest two things are critical to make FIRE possible - you must be a top earner ($100k is the minimum) and you must exercise extreme cheapness, bordering on deprivation.
Obviously the more money you make and the less you spend, the more you can theoretically save, but one needs not go to the absolute extreme to reach FIRE.
FITWOYPACTWNTYDNHTWAMAM on the other hand...
Do you have any other ways to pull the income or expense levers that I did not mention? In what ways do you purposefully compromise in order to live a healthy, exciting life while still moving towards financial independence? What's another good acronym that works better than FIRE? Let me know in the comments below!