What is financial independence? How does it differ from retirement? And why should I care?

The term FIRE , or “Financial Independence Retirement” has been used for a few years now and seems to be catching on as an alternative to traditional retirement. Those who are interested in this topic will find many articles about what FI really means and how to get there. But what does FI mean to you personally? Do you want to retire early? If so, how do you plan to do that? Will you work part-time after FI? Or full-time?

FIRE stands for Financial Independence Retire Early. If you want to retire early, you need to saved in assets and investments that the return of those assets exceed your annual expenses. For most people the goal is achievable... but it requires one important ingredient... patience. 

The Different Types of FIRE

We reach to financial independence when our expenses can be covered by the passive income from our investments. However, there are many different forms of financial independence which all have different goals and outcomes. There are many more types of FIRE than just the few below however these are the most commonly used

Lean FIRE

Lean FIRE is achieved when an individuals investments cover their basic needs, or their most crucial living expenses. e.g. food, shelter, transportation. An individual may choose lean FIRE to free up some time in day-to-day life while still having to work a part-time job if they choose

Fat FIRE

Fat FIRE is the other end of the spectrum in comparison to Lean FIRE. Fat FIRE is achieved when an individual has saved enough money to pay off all debts and only rely on investment income to meet their daily needs.

This type of FIRE is often referred to as “retirement” because it allows someone to stop working altogether. This is the ultimate goal of the FIRE movement.

You don’t need to wait until you are debt free before achieving fat FIRE. You can achieve fat FIRE even with significant student loan debt. The key is to make sure you are saving

Barista FIRE

Barista FIRE is a hybrid between Lean FIRE and Fat FIRE. Barista FIRE is achieved when an investor has reached financial independence but chooses to continue working either full-time or part-time. The reason behind this decision is usually due to the desire to create more wealth through side projects or business ventures.

Coast FIRE

Coast FIRE is achieved when an individual has enough in savings and retirement accounts that without any additional contributions, they reach retirement at a traditional retirement age. Coast FIRE is also known as “retirement readiness”. Some people use coast FIRE as a stepping stone to reaching lean FIRE.

You don’t need a large nest egg to achieve coast FIRE. In fact, you could potentially achieve coast FIRE with just $5k-$10k in a pension fund.

Slow FIRE

Slow FIRE aims to ensure there is a balance between focusing on retirement and spending time with family and friends. Slow FIRE is achieved when an investors have reached financial independence and have chosen to spend more time with loved ones than working. This is often slower than other forms of FIRE, however it is important to note that Fat FIRE can still be achieved while spending good quality time with family and friends with enough planning or a good enough income.

How Can I Achieve FIRE?

There are two main ways to achieve financial independence: through investing and entrepreneurship.

Investing

If you want to achieve FI through investing, then you will need to start saving now. Start small and build up slowly over time. As long as you invest wisely, your returns will compound over time. Furthermore, you can use dividends to boost your returns. Dividends are paid out of companies profits and represent a portion of those profits that go towards shareholders. Our other blogs will explore how to save for retirement, how to get started investing, and how to invest in stocks.

Entrepreneurship

Another way to achieve financial independence is through entrepreneurship. By starting a business, you can create multiple streams of revenue. You can sell the product yourself or hire others to do so for you. If you decide to go down the entrepreneurial route, then you should consider starting a side hustle first. A side hustle is a low risk, high reward venture that doesn’t require much capital upfront. 

Or even better... go for both! If you can combine investing with entrepreneurship, then you can maximize your return on investment.

It's More Achievable Than You Think

It may sound like a distant or even impossible goal for many people, however I am here to tell you that it is possible! In fact, I believe anyone who wants to achieve FI can do so.

There are two main reasons why achieving financial independence is easier than you think:

1. Time

You don't have to spend much time working on achieving Financial Independence. Although it can take many years to achieve FIRE, for most people all the time really spent differently is the 5 minutes a month you spend saving a certain percentage of your income. Of course, you can speed up the process by trying to work on your career or side-hustles to increase income but the goal of FI is achievable on as little as £100/month. If you do decide to focus on increasing your income by spending more time working in the near term, you can expect to improve your savings rate and reach your goal much faster.

2. The Power of Compound Interest

The power of compound interest is one of the greatest forces in nature. It is something we see every day yet few understand its true potential. Not only does this force help us grow our wealth, it also helps us grow our knowledge, skills, and abilities.

a month with an 8% annual return for 40 years, you will have a total of £351,687; £48,000 comes from deposits, and the other £303,000 comes from the interest. 

The most important thing to know when beginning your FIRE journey is to identify your financial goal. With that in mind you can work out how to reach it. Whether you are looking at 10 years, 20 years or 30+ years until retirement. Checkout our calculators where you can test out different numbers and potentially even figure out when you could become financially free.

Compound Interest Calculator

https://portfolio-hub.co.uk/calculator/compoundinterest

Retire Early Calculator

https://portfolio-hub.co.uk/calculator/retireearly

Want to Know More?

The Portfolio Hub blog aims to share information on financial independence and retiring early. Stick around to hear more about how to save money, retire rich, and travel the world. We plan to cover topics such as frugal living, passive investing, early retirement and online business. 

We hope you find these articles helpful.

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Let me know your thoughts on Financial Independence. Are you currently involved in the FIRE movement? Do you want to be? Leave a comment below and let me know what you think.

FAQ

What Is Financial Independence Retire Early FIRE?

Financial Independence, Retire Early (FIRE) is a movement of people devoted to a program of extreme savings and investment that aims to allow them to retire far earlier than traditional budgets and retirement plans would permit . Born out of the 1992 best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez, FIRE came to embody a core premise of the book: People should evaluate every expense in terms of the number of working hours it took to pay for it. (investopedia.com)

What are the principles of the Fire movement?

Saving as much of your income as possible (up to 70%),  Living exceptionally frugally. Paying off all your debt, including your mortgage Fire's magic calculation says: (thetimes.co.uk)

How to Calculate Your FIRE Number

Annual Expenses x 25 = FIRE number So for example, if your living expenses are $4,000 per month, your annual expenses are $48,000 and your FIRE number is $48,000 times 25, or $1.2 million. (time.com)

Is FIRE right for me?

Another thing to consider is how you'll spend your time without filling your days with a paid job. (cnn.com)

What are the disadvantages of early retirement?

Early retirement has its advantages, but there are also some drawbacks. One disadvantage is that you don't have enough time to build up your pension pot. Another drawback is that you may not be able to maintain your current lifestyle. (moneywise.co

Why do I want to retire early?

You can choose to retire early because you want to enjoy life more. You might be looking forward to spending more time with family and friends. Or maybe you just want to explore the world. Whatever your reasons are, they're valid ones. But you need to make sure that you can afford to live comfortably after you stop working. (businessinsider.com)