ARE YOU READY FOR FIRE (FINANCIAL INDEPENDENCE, RETIRE EARLY)?
Young professional millennials in the US are literally on FIRE. An acronym for Financial Independence, Retire Early, the FIRE movement is a lifestyle system that is primarily focused on achieving one’s goal of financial independence and retiring early. In the west, FIRE advocates are already disrupting the traditional career life cycle by going against the norm of retiring and making it an attractive proposition to leave the work force as early as in their 30’s or 40’s. While this phenomenon is not yet as pervasive in Asian countries, it is definitely quickly gaining momentum amongst the current generation who wish to break free from the orthodox financial mould reminiscent of their parents and grandparents.
Vicki Robin and the late Joe Dominguez, co-authors of the 1992 bestseller “Your Money or Your Life” originated the path to FIRE decades ago, where they outlined steps `to achieve financial freedom from the 9-to-5 daily grind.
Before you start jumping onto the bandwagon of the FIRE movement, I would like to share my views with you on the various financial practices of FIRE followers. Thereafter, you can evaluate whether FIRE is the right lifestyle for you.
Practices you should follow:
- Calculate your net worth
FIRE advocates that your first step down the road to financial independence is to calculate where you currently stand. I totally concur that we must know where we are now before we can develop strategies to reach our intended destination. This essentially means tallying your assets versus your liabilities to get a clear picture of your net worth. Robin advocates taking this one step further and figuring out how much money you have earned in your entire life, starting from your very first pay check. This “clears the fog shrouding your past relationship with money,” she writes, and dispels any myths that you might tell yourself about your earning power. Once, I asked an audience of 800 accountants, how many of them have calculated their net worth in the past one year? Fewer than 20 raised their hands.
- Make saving your default action
Most people treat savings as whatever is left over after all their monthly expenses have been paid. In my experience, this practice will not work for Malaysians. A fair number of clients who are high income earners still fail to save a meaningful sum at the end of the month because their high expenses essentially eroded whatever take home pay they have. If you are serious in putting aside your hard-earned money for the future, you need to reverse that mindset. Make saving your number one priority by putting that fixed amount aside the moment your pay comes in.
- Find cheaper ways to satisfy your needs and wants
Proper financial management does not mean deprivation of good things in life. In fact, not everything has to come with a big price tag in order to bring happiness and fulfilment. It is possible to find cheaper or even cost-free alternatives if we apply a little creativity and resourcefulness when shopping for lifestyle necessities such as housing, transportation, food, clothing, travel, fitness etc. For example, instead of spending a lot on expensive entertainment, you can opt to engage with family and friends in less costly (and healthier) activities like hiking, swimming, bike riding or board games. At the end of the day, it’s your choice whether you choose to live someone else’s dreams i.e. keeping up with society and peer expectations – or, deciding to do what makes you happy.
- Measure your spending in terms of “hours of life energy”
According to the FIRE theory, if you earn $300 a day and want to buy a $100 pair of shoes, you should ask yourself whether those shoes are really worth nearly a third of a day of your precious time on Earth. At Whitman, we subscribe to measuring every investment ringgit lost in terms of “years of retirement life”. Suppose you are able to save on average RM50,000 a year and unexpectedly, you make an investment loss of RM100,000. This loss works out to 2 years of your precious retirement life because you would need to continue working for another 2 years to make back the money you lost. As such, investment decisions should not be taken lightly because for every additional year of work you need to compensate, your goal of retirement gets delayed further.
Clearly, the FIRE movement is advocating some very sound and effective financial management practices which I am fully supportive of. However, there are certain points that I do not agree on.
Practices you should think twice about following:
- Do-It-Yourself whenever you can
FIRE advocates that you should mow your own lawn, repair your own house and upkeep your own car because when you pay for the convenience of outsourcing these tasks to a 3rd party, you are spending money which could instead be saved. They encourage a simple barter system of manual labour, where for example you help your neighbour’s son with his homework if he helps you paint your garage. According to FIRE, you should also learn to change your own car oil, fix your own sink leak and refinish your own table.
I cannot agree with this idea because I believe in the 80/20 rule where we should focus on our biggest strengths to realise our highest income potential. Time should be spent wisely identifying where our skills and abilities lie and thereafter invest effort in improving these areas. Time is our most precious commodity, therefore it should not be divested in routine or mundane chores that can be easily delegated to others at a lower price. .
- Save 50% of your income
FIRE followers aim to save at least 50% of their income. I do not view this figure as a practical target because in reality, even saving 10% or 20% can be a challenge for middle-class Malaysians.
The concept of financial independence holds a different meaning to different people, for the simple reason that every individual has a different income level, different family composition and obligations and different financial goals. As a first step, one should determine what their unique financial goals are and only then, find out how much savings is required to achieve one’s financial independence.
There are mobile applications that can help you plot your roadmap to financial freedom once you have established your financial goals. Make good use of these apps to help you identify your personal optimum savings target, rather than blindly following an arbitrary figure used by other people.
- Measuring financial independence
I do not agree with FIRE’s measurement of financial independence, that is, your net worth should be 25 times your annual expenses. There’s no “one size fits all” number because the question of ‘how much is enough’ really depends on every individual’s personal financial needs and goals. It is over simplistic and even naïve to compare the expenses of single working adult with that of say, a couple with 3 kids and a mortgage. Even if we were to look at families from similar social strata, they may have different financial goals to fulfil such as saving for children’s tertiary education, upgrading their home or planning for their dream vacations. These costs will certainly not have been covered in the calculation of “annual expenses”.
What’s more, an individual’s investment experience, depending on the return on their savings, will also have an impact on the timeline towards achieving financial independence. A person who makes a lower return may need more than 25 times of his annual expenses, compared to one who has achieved higher investment returns.
The fire that warms us can also consume us; it is not the fault of the fire – Swami Vivekananda
I believe it is fair to say that each individual’s life is unique and therefore, likewise his/her idea of financial independence. There can never be one formula that applies to everyone on this planet. While the FIRE movement has been effective in raising public awareness on what it means to achieve financial independence, it is ultimately up to us to recognise what works for us individually and what does not. Failing to do so may impede our financial goals or worse, result in irreversible damage to our financial position.
While the FIRE movement has inspired and motivated millennials to strive for financial independence, the next crucial step is to tailor the relevant investment strategies and financial management plan to suit each person’s unique financial situation. While money itself is no guarantee of happiness, managing your money effectively can safeguard your future wealth. As the American philosopher Henry David Thoreau once said, “Wealth is the ability to fully experience life” and this I believe is what all of us, FIRE followers included, want at the end of the day.
Yap Ming Hui ( firstname.lastname@example.org ) is thrilled that his mission to empower every Malaysian with a roadmap to financial freedom has finally come to fruition with the release of a free DIY roadmap to financial freedom tool on the iWealth mobile app.