The Different Levels of FI/RE
When you look at the FI/RE moment, the second half of it, “Retire Early”, is something that has a different meaning to everyone, similar to love apparently. Qualifying things around us is what people try to do to try to understand aspects of life. So others have tried to qualify the path to retirement between 3 to (the highest I’ve seen was) 10 steps. My goodness, 10 different steps of “Retire Early”. This just gets confusing after a while because you can easily be in two steps at once at this point and yuck!!!
If you’ve follow my blog posts so far, you might have read of a principle I like to mention called the “KISS” principle (“(K)eep (I)t (S)imple (S)tupid”). I’m not a genius. When I read the Trinity Study, I needed to read it over and over again to understand a single paragraph and by the time I got to the end, I drew the wrong conclusion from the numbers. Luckily, my buddies and I talk about things like this all the time and they are WAY smarter than I am and set me straight. They explained to me what it really meant. My point is that trying to add more layers to something new can sometimes overwhelm people that are just trying to learn about that topic, but simple and few little steps are easier for everyone to consume. Today, we’ll cover what I think are the three levels that are the biggest hurdles when trying to “Retire Early”, what they mean to me, and which level is my goal.
Since we are talking about levels FI/RE, I’m just going to assume that you have enough to cover your expenses at each level so I don’t have to repeat that you have enough money at every level.
“LEAN” FI/RE (The Minimalist Lifestyle)
Keep in mind this is the hardest level to achieve. The sacrifice will be new. The discipline to not spend is new. Investing your money will be new. The best thing is that once you get the ball rolling, it begins to snowball. You just need to need to start your journey to FI/RE.
A minimalist lifestyle is a style of life where you choose to live with less and cut every non-essential expense out of your life.
This is the first step to “Retiring Early”. Where you have enough money, so that no one could never kick you out of where you live, you’ll always have something to eat for yourself, and you’ll be able to live happy without anything excessive (going to Disneyland, Sea World, the SD Zoo….). Sounds pretty boring, but it’s nice to have this if only to start pursuing things that you enjoy in life without worrying about $$$$. Personally, once I hit this level (I did the calculation here for myself), I’ll definitely move to “BARISTA” FI/RE, with a job that I find less stressful and with medical coverage.
One of the things about this level is that “NON-ESSENTIAL” expenses can mean something different between when you are in life, where you choose to live, who you are as a spender / saver, and what kind of life style makes you happy? To me, I like to have about 400 dollars for a “Fun” fund because I have two kids and a wife to take care of and I deem their happiness essential. However, I know of others that say we all have to suck it up at the moment so that we can get past this crazy time of our lives. Both are very valid because my situation is different from theirs.
How do you start to achieve this level?
STEP 1: Start a monthly budget. Learn what your spending habits are and just start cutting things out that aren’t important.
This is the start of a concept called “Financial Freedom.” I heard a video recently that talked about our relationship with money and it defined a difference between “Financial Freedom” and “Financial Independence”, which I really appreciated. I will cover this on a different blog, but essentially starting a budget will help you begin to understand your relationship with money and learning about what you really need in life to be happy. This will help you on a mental and emotional level with money, because you’ll know where your money is going.
THE MAIN GOAL OF THIS BUDGET IS TO GET TO A POINT WHERE YOU SPEND LESS THEN WHAT YOU MAKE.
If you can’t reach this goal, then you need to get rid of some more things in your life (I’m sorry if you feel like you’ve already given everything up, but you need to dig even further). This is the mathematic side of finances. This single goal of a budget is unforgiving. If you spend more than what you make, you are digging yourself into a financial grave (Seriously, the stress is huge and will probably take years off of your life). If you can’t even get the bare essentials, then you probably have an income problem and need to work a side job. Do what you need to so that you make more than what you spend.
STEP 2: Invest whatever is left over, after your emergency fund is fully funded.
It doesn’t matter how much it is just put whatever is left over into the market. It could be 25 dollars a week, 50 dollars a week, 5000 dollars a month. JUST INVEST IT. You’ll never be able to retire if you never start letting your money work for you. This step TAKES MAJOR DISCIPLINE. It’s so easy to spend a windfall of money on more coffee at coffee shops, things on amazon that you don’t need, etc. However, if you want to have a future where you aren’t working or are working on something you love without worrying about your finances then just put the extra money in the market.
“BARISTA” FI/RE (Achieved “LEAN” FI/RE, but like to work or have side gigs)
When you reach this level, I just want to say “Congrats” this is a BIG achievement financially.
A lifestyle where you have already achieved “LEAN” FI/RE, but work a career or job that you find super enjoyable -or- covers basic expenses.
This is my personal goal. A lot of the books I’ve read and video’s I’ve seen recommend this level of FI/RE. This is because keeping yourself busy is actually healthier for you than just sitting around doing nothing all day everyday. At this level of FI/RE, you can do whatever you want to make money and you should be ok.
This lifestyle means that you have already achieved “LEAN” FI/RE and can technically stop working if you want, but life would be pretty sparse and minimal. To solve this part, a lot of people continue working while having their portfolios grow. This is where you can upgrade your “quality of life” SLOWLY by saving a little slower and using the excess money to do things that you enjoy. Whether you save the excess money in your portfolio or spend the extra money, it shouldn’t matter because you already have the basic needs covered by achieving “LEAN” FI/RE. (But I would say to continue to feed the retirement beast a little bit :)).
To get here, you had to have been super disciplined and motivated depending on the ratio of income you’ve been saving. Mr. Money Mustache is a pretty famous FI/RE blogger and he did the math to see the relationship between your savings ratio and how long you’ll have to wait to achieve “LEAN” FI/RE and enter “BARISTA” FI/RE. You can find his blog here.
What to avoid once you get “BARISTA” FI/RE
“Lifestyle Inflation”, the concept of when I make more money I can spend more. The problem is when you finally cross the line of “LEAN” FI/RE, it’s easy to spend what you worked so hard for. Keep the discipline, don’t spend any of the portfolio you worked so hard to make. Treat yourself little by little from the job by saving slower and just let compound interest do its thing. Or take a little bit of what your portfolio is generating from interest, I would say 25% is probably nice, and reinvest the other 75% for compound interest later on. Either way works because you deserve to treat yourself at this point, just don’t over do it.
“FAT” FI/RE (NEVER HAVE TO WORK AGAIN IN YOUR LIFE)
My favorite Joker was definitely Heath Ledger’s portrayal from “The Dark Knight”.
“I’m a man of simple taste…and you know the thing that they have in common. They’re cheap.” - Joker
A lifestyle where your money makes enough money for “Lean” FI/RE and more and you’ll probably never have to work another day in your life, if you choose to.
This is what you imagine when you win the 1 billion dollar lottery, before you realized you better learn how to be a billionaire. You’ll be surprised that this can be achievable in our lifetime if you start saving as early as possible in life and keep your living expenses down. Your money can easily make enough money for you to live “LEAN” FI/RE, have a few non-essentials, and have some left over to re-invest into the market. It just requires major discipline to hold off the principle of “lifestyle inflation” (The more you make, the more you spend) and save instead, but it’s definitely possible.
- M