Wednesday, June 6, 2018
HOW Do Those F.I.R.E. Folks Manage To Retire By 40? (Part One)
Many people want to know how on earth those subscribing to the F.I.R.E. ('Financial Independence, Retire Early') Movement manage to do it. Retire by age 40 or even as early as 30 or 35 years of age. It's not really that much of a secret and for all intents has been hiding in plain sight for the past 26 years, since the publication of the book 'Your Money Or Your Life' by Joe Dominguez and Vicki Robin. The current movement then is merely a reboot of the original one - so it pays to examine the basis of the earlier iteration first.
The principles laid out in the book are straightforward and can be summarized as follows:
1) Treat hourly wages as tapping your life energy, each hour worked for $X wage equals that much life energy - then you won't squander it.
2) Aim to save enough money to compile into a "cache". This is a large pool of money accumulated over time - beyond your immediate capital or job earnings - and there for future use. It can then be used to reach the "crossover point". This is reached when the "income from your invested capital (cache) exceeds your monthly expenses" (YMOYL, p. 277)
3) Follow the steps to financial independence defined in YMOYL to achieve financial independence.
Let's now consider each in turn:
If you treat each hour worked in a wage job as a quantum of life energy - never to be replaced- you will be more judicious and temperate in how you use that money. Also you will be more motivated to conserve that precious life energy to do the things YOU want to do, not what some external agent or corporation wants you to do. This is especially what motivates the drive for financial independence: not to be able to act like a lazy bum and goof off all day, but to find meaningful activity or work that you want to do. (Say to be able to join the Peace Corps and build village reservoirs in sub-Sahara Africa.)
Let's take an example of a Walmart worker who earns $15 an hour. Then each hour's worth of his life energy is rated at 15 dollars by his employer. Eight hours work in a given day translates to $120. Every purchase made by him can now be referenced to a fraction of a day's life energy equal to that amount.
Let's say he wants to buy a new HDTV at a cost of $360 at the same Walmart. Then that equates to three whole days of his life energy. Is the set really worth that? These are the sort of calculations that now enter into every financial decision. The ultimate goal will be to drive the person to save more than he or she spends. A cache provides extra cushion for emergencies, or should.
This brings us to (2), for which the end result of saving is to build up a cache. The latter can come from savings (e.g. of earnings), inheritance, or even a small lotto. In the days soon after publication of YMOYL the authors still wrote about purchasing treasurys (gov't bonds) and using money from the interest - say at 5 percent - to live off of. If the person had managed to sock away $500,000 then that would amount to getting about $25,000 a year in investment income. This is roughly $2,080 a month. Dominguez and Robins make clear (p. 268) this is "to provide a steady income for life from a source other than a job" In other words, they saw this as supplementing a job income not replacing it.
However, this led to many people, i.e. who followed their other principles, to just shrug and ask: "Why not just do away with the job, period? SO I can be totally financially independent!"
But this necessitates being able to keep monthly costs down below the $2,080 a month in investment income. For most people, in most places, it is simply not feasible without at least part time work as a complement. But Dominguez and Robins do acknowledge it is possible for many people to achieve, e.g. p. 274: You CAN Stop Working for Money!
But in order to attain that financial 'nirvana', integrating the 'steps' into one' plan may be needed. It is profitable here to just elaborate on the authors' Step 6: Minimize Spending, which includes a raft of subsidiary steps. Some of the main ones are listed below:
1. Don't go shopping. If you don't go shopping you won't spend money. So you stays away from malls and avoid amazon.com.
2. Live within your means. If your income is $2,000 a month then keep expenses below that. Of course, all the other subsidiary steps are designed to ensure that!
3. Wear it out. Whether shoes, shirts or paper, keep using it or translate the use into other areas before consigning an item to the trash, garbage. The authors elaborate (p. 174):
"Old letters become scrap paper. A chipped cup becomes a paper holder. A broken toaster becomes an assortment of screws, plus an electrical cord. Old furniture can provide the wood for your next carpentry job..."
The key point to ask oneself:
"Do I already have this item I want in another form, so I don't have to buy it?"
4. Do it yourself: Repair your own plumbing leaks, tune your own car etc.
The more skills you have across the board, the less need there will be to hire others to do assorted jobs. Hence, you can bake your own cakes - or wedding cakes for others, build your own book shelves, cut your own family's hair, and do some limited repairs on your car. The authors write (p. 175):
"Ask 'Can I do this myself?' What would it take to learn how. Would it be a useful skill to know?'
All of this self-skill development is directed to saving $$$.
5. Buy it used. Buy as much as you can used. Clothing, kitchenware, furniture, drapes - all can be found at thrift stores. If you live in a small compact town or village, consider foregoing a car entirely and just getting a bicycle, or even a scooter. Less costly upkeep - more money saved.
The authors' conclusion is clear (p. 181):
"The steps of this program have been successfully followed by thousands of people who have found they lead to a transformed experience of money and the material world. All the steps matter. They synergize to spur you on."
In Part Two: We examine more steps focused on the primary directive: Valuing Your Life Energy via the conscious lowering or eliminating of expenses.
We will also see how Vicki Robin's prescriptions translate to the 21st century arena and how it's allowing numerous younger citizens to retire early. Specifically, I'll look at how the original movement has broken into three main subcultures: the 'regular FIREs' - who just want to exit the rat race early; the frugal FIREs - who have adopted the original YMOYL austerity provisions and then some, and the 'fat FIREs', who prefer to be able to spend a healthy amount in retirement - and thus save aggressively via higher paying jobs, more DIY and being frugal early - to be able to spend more freely later.