The FIRE movement which stands for Financial Independence, Retire Early, is not really about finances and money. Huh What? Yes, you heard me. While financial independence might seem about money (its even in the name), money is not the end goal. It’s a means to an end. Whatever the motivation people have to start with FIRE, whether it’s to stop working, or working less or working somewhere else, and being able to focus on other more important things such as family, friends, hobbies, and so on, the ‘real’ assets you are gaining by achieving financial independence are time and freedom. When you have enough of alternative sources of income (whether they are active or passive), you can basically free up time to do whatever you want. In my previous blog posts I already explained (1) why I joined FIRE, (2) the importance to realize the reality behind FIRE, (3) how to achieve multiple sources of income and (4) how to live more frugally. This 5th post is about the urgency and need to start FIRE. If you want freedom however, this will come with a sacrifice.
On the 26th of July in 1584 the Dutch declared their independence of the Spanish Empire with the Act of Abjuration. One of the reasons was to pay less taxes. The result of course was war, and unsurprisingly the Dutch paid a lot more taxes afterwards to pay for their continued freedom. Nothing in life comes free, especially not freedom.
Say you’ve decided to start with FIRE, because you are convinced it is probably one of the only ways to achieve more freedom. First you should ask yourself if it’s really worth it and if you really want to sacrifice whatever it is you need to sacrifice. Are you really willing to work longer hours, or more days, every week, every month, every year for the foreseeable future just to retire a bit earlier, or to be able to finally change your current job to something you like but that pays less or requires less hours?
Lets do some easy math (it’s wrong but bear with me). Let’s say you are 30 and want to work part time (80%) when you are 50 instead of working full time until you retire at age 70. If you just look at the hours/years of labor, you could say you just shift that 20% of labor during 20 years to your younger age, which means you will have to work 120% from 30 to 50. If it were this simple, no one would do this for the following reasons:
- Working 20% more is exponentially more exhausting and not sustainable in the long run.
- You have less free time for doing the things you love, which is basically the opposite of what you’re trying to achieve.
- In some cases taxes will not leave you with 20% more wages. In my country (Belgium), there’s a system based on income scales. It quickly goes up to 50% taxation once you earn a bit more than average. If you work less, you earn relatively more. There is also a large proportion of our country who don’t have to work and receive a lot of benefits (we have jobless wages, living wages, which are also supplied further with child allowances, social housing, social tariffs on utilities and so on). This is great to avoid people falling in a devastating poverty trap. However, it does discourage or even punish those people who work more or at all for that matter, and it also ensures more companies export their producing facilities outside the country. You can see the same thing happening in certain States in the U.S. right now: people and companies (such as Tesla) leave high taxation states such as California for more enterprise friendly states such as Texas. In Western Europe our companies run away to Easter Europe, northern Africa, Turkey, Asia and the United States. The people however, due to language barriers, are more or less stuck. I digress, but you see can see my point: working more is not always profitable and possible.
- Lets say you don’t live in a communist AHUM I mean socialist state where there is little to no reward for working or building a business, and you can still earn more when you work more: earning (for example) 20% more will not make you amass your wealth fast enough, especially not with inflation.
Let’s take a more positive viewpoint. If you just get by now with your full time job and have little or no saving, you are basically stuck in the hamster wheel forever. Once you stop working (even if you pay of your house), you will not have enough income. Even if you are able to save a tiny bit, or even a lot, inflation will have eaten most of it. However, if working more actually pays more in your country/state, which will allow you to save AND invest more, it can actually make you disproportionally more wealthy than if you hadn’t invested at all. Here are some examples with some more basic math:
- If you need 20% down payment for a €/$ 500.000 home, this means you need €/$100.000. If you save €/$10.000 per year it will take you 10 years. Let’s add in house prices that can rise 10% a year (or more). After one year the house will costs €/$550.000 and you will already need €110.000 for the down payment. After two years the house will costs €/$605.000 and the down payment will be €121.000. By the time you think you can own your house (after 10 years), the actual price will be €/$ 1.296.871. If you calculate 20% of that, you will need €/$259.374 for a down payment.
Here come’s the ‘positive viewpoint’. Most people won’t be able to keep up. Yes, this is a positive viewpoint for you IF you work or earn more than most people, because you will be able to buy an asset such as property faster and save exponentially more money (and make exponentially more money if you sell it). The same goes for buying stocks/funds. If they all keep rising 10% a year, the earlier you buy, the more you will exponentially make.
However, working or making 20% won’t be enough. If you really want financial independence, you need to work and grind like you’ve never before. Elon Musk said that if you work twice as hard, you will get there twice as fast. I disagree, you will get there disproportionally faster. The first €/$100.000 or the first €/$1.000.000 are the hardest to amass, because most of it will go to living expenses. Once you’ve got those living expenses covered however, you can use all the extra income to build more wealth which will go exponentially faster, and therefore you will achieve exponentially more freedom. This is why I focused on multiple sources of income in my third post, and the need to be weird in my fourth post to cut down your expenses. So in a nutshell, you need to be on fire to achieve FIRE, but don’t forget: being on fire can also cause you to burn-out. So chose your sacrifice, but do it wisely.