Part I: The 7 types of financial independence
This is the first step in the "getting started with financial independence" blog series. I’m documenting all the steps so people can use this as some sort of guide as well. Once I added another step it will be added to a list I’ll link from here.
The first thing my girlfriend and I need to do to for our financial independence (FI) plan, is choosing the right direction we want to take. There’s a couple of different directions we can take. I’ll describe them and see which one fits us.
What types of financial independence are there?
There are a few different types of FI with their own unique names. Also, I think the community has not 100% decided yet on the usage of these names and the interpretation of them. So let me share my own opinion and see if I can clear them up for me and you. I’ll describe them and link to the reddit community if you want to know more or want to get involved.
FI / FIRE
This is the ‘Financial Independence' and 'Retire Early’ term when most people hear about FI for the first time. It’s the foundation for the other terms. You’ll take a look at your expenses and your current income. You try to increase your savings rate so you can put as much money in your investments. You’ll come up with a yearly expense number which is acceptable for you, and you feel comfortable with.
After this you have two options.
Option number one is aiming to become financial independent. This way you have the freedom to make your own choices, once you've gathered a decent amount of money. Don't like your job anymore? Quit and take a break while you figure out what to do. Want to travel for a year? Try to talk it through with your boss. Boss doesn't want it? Tell him you have the option to quit.
Option two is to retire early. You multiply your expense number by 25 and there you go; your goal for early retirement. This expense number is where I think the difference of other types of FIRE come from. People want to retire in different ways, or give a different meaning to retirement. Obviously there is no right way and it’s entirely personal preference. So.. if FIRE is the basis, what other terms are there?
This is probably the most popular way of FIRE. It’s also what a lot of people describe as “FIRE” instead of leanFIRE. leanFIRE means you retire with a yearly expense rate of max $40000. This means you would have to save up precisely one million dollars before you could retire. That’s a pretty well rounded milestone. For europeans it’s a bit different though. leanFIRE is originally US oriented, so the number of $40000 makes sense. For europeans, if you would convert that number, it would result in €34400 a year. That seems like an excessive amount for me right now. But maybe it’s less of an excessive amount if I get children later, or retire and have to pay more for health costs. I wouldn’t take the $40000 as an all or nothing approach but make it depend on your current situation.
The definition of leanFIRE for me would be: optimizing all aspects of my life to save as much as possible. This means no unnecessary expenses e.g. eating out or certain hobbies. Once I’ve reached my retirement milestone, I keep up this lifestyle and still keep living frugally.
Take leanFIRE, and then take the opposite of that. This would be fatFIRE. People who want to fatFIRE want to pursue a nice lifestyle and not limit all of their expenses or live frugally. When they retire they want to keep this nice lifestyle. This means they need a larger amount of money to retire. There is not a specific money goal for fatFIRE, it’s completely based on your own personal preference and goals in life. If you want to drive a nice car and buy things which give you happiness but still want to retire early, then fatFIRE is the thing for you. Obviously fatFIRE is a harder goal to reach since you need a larger amount of money before you can define yourself as retired.
Some people in the fatFIRE community are not only looking at their current job, but also at different opportunities like starting their own company or side hustle next to their primary job. However, the fatFIRE community is not alone in this. I assume the FIRE and leanFIRE community have people who are looking at these opportunities as well. I do think the relative number of entrepreneurs within the fatFIRE community is higher than in the FIRE or leanFIRE community.
The definition of fatFIRE for me would be: pursuing financial independence and early retirement while maintaining a lifestyle I want. This means I won’t reduce my lifestyle to avoid certain expenses and maybe retire earlier.
coastFIRE / baristaFIRE
coastFIRE or reaching your “coast” goal basically means you don’t really need to put more money in your investments once you’ve reached this goal. You can let your investments grow purely by compound interest. coastFIRE can also be described as a sort of milestone on your way to FIRE.
After you reached your “coast” goal, you basically have two options. Either you keep working like you’re doing now and put even more money in your investments to be able to retire even faster. Or you can choose to work part-time, only to pay for your current expenses. This way you don’t invest new money in your investments but you will be able to retire once your retirement goal is reached purely by the compound interest of your current investments.
The latter is where the term baristaFIRE comes from. People basically describe it as being a barista for X amount of days just so you can pay your expenses. However, being a barista is tough work. So I’m not sure if this term is chosen correctly. Maybe it has to do with the fact you still get health insurance in the US while working at Starbucks. Or with the simple fact people romanticize being a barista. I think the term baristaFIRE can also be coined as semiFIRE. You can either keep working where you are right now, but work only part time (e.g. 2 days) or find a new job where you can work part time and be able to pay for your monthly expenses.
The definition of coastFIRE for me would be: having enough money in my investments just to let it grow based on compound interest and not having to put anymore money in it to reach my retirement goal.
The definition of baristaFIRE for me would be: being coastFIRE and working part-time, or only the necessary amount to pay for my current expenses.
This is actually not a term really used in any of the subreddit communities, but I wanted to describe it anyway. FIOR means ‘Financial Independence / Optional Retirement’. It’s a term which is being used by Mad Money Monster to describe their path to FI. It basically means, becoming financially independent and then retire whenever you want. Want to retire once you’ve reached your goal? Do it! Want to keep the option to retirement open but still loving your job so you want to keep working? Do it! It’s both fine. On the Mad Money Monster blog they describe it as keeping your options open which should strike a chord with everyone who’s interested in financial independence. After all, isn’t that what it’s all about?
What financial independence path would fit us?
The questions I have to ask myself and my girlfriend: What do we see ourselves doing once we reach some form of financial independence? Do we aim for full retirement (FIRE)? Or do we aim for optional retirement (FIOR)? Wouldn’t we be bored when we’re not working? What would we be doing on a daily basis? We’re definitely not the only ones with this question. Some people get a lot of satisfaction from their jobs, others a lot less. We’re both probably in between somewhere.
I’ve been listening a lot to the ChooseFI podcasts. I still have a long way to go until I’m all caught up, but there’s already a few things I love about ChooseFI. The most important one for me being their take on financial independence as a lifestyle. Financial independence is a lifestyle. And I think if you really embrace it, you’ll never be bored. There are so many things to do, so much stuff you can optimize, so much relationships you can build and/or expand. Jonathan and Brad really transfer their enthusiasm nicely on their podcasts and give you a lot of ideas with things to do as well. What they’re basically saying: Once you reach some form of financial independence, it isn’t money what you’re struggling with. It’s have enough time to do all the things you want.
So what does this realisation mean for my girlfriend and me? Well financial independence is definitely the first step. Full retirement would be optional for us. I think we both have no problem working part time for two days just to pay the bills, while having the freedom to do what we want on the other five days in the week. Of course this opinion can change over time, but we can atleast draw the conclusion to first focus on coastFIRE. Once we’ve reached that, we’ll hopefully have a clearer vision of the future.