The FIRE (Financial Independence, Retire Early) Movement initially began with one way on how to achieve financial independence: save a ton of money as quick as possible to retire early.
However, that one-size-fits-all approach doesn’t necessarily work for everyone. And that’s okay.
So today we are going to examine the different types of financial independence strategies you can pursue as well as taking a look at the strategy that I’m implementing.
Let’s jump right in.
What is Financial Independence?
Some would define financial independence as saving 25 times your annual expenses. Others might argue it means having enough money in the bank to say “F U” and quit a job that makes you miserable.
The truth is that the definition is relative. Because everyone has different individual goals, there is not one exact answer.
However, the underlying theme is the same for everyone: Financial Independence is building the life that you want to live, and then saving for it.
With this mind, let’s explore the five most common types of Financial Independence.
Lean FI
Lean FI is having enough investments that can cover your essential expenses. Essential expenses include budget line items such as housing, food, and utilities. Think of Lean FI as providing a basic safety net.
As an example, if someone was Lean FI and were to get laid off, they would not have a problem with meeting their basic budgetary obligations. However, they might not have enough extra money leftover to then spend on discretionary budget categories like vacations & entertainment.
The individuals who pursue Lean FI are usually frugal and minimalist by nature. This enables them to require an overall smaller investment portfolio because of their natural tendency to spend less money.
For more detailed information, check out “What is Lean FIRE ?“
Regular FI
Regular FI is having enough investments that can cover your expenses associated with your current lifestyle. This is synonymous with traditional retirement and is the most commonly referenced type of financial independence.
Upon having enough assets to be Regular FI, you would be able to quit your job and enjoy the same level of spending that you have today. This means being able to cover your essential expenses (i.e. housing & food) AND discretionary categories (i.e. vacations).
Fat FI
Fat FI is having enough investments that can cover expenses associated with a higher standard of living than your current lifestyle.
There are a variety of reasons why someone may want to pursue this path:
- Wanting to have more discretionary funds later (i.e traveling more, etc.)
- Mitigating financial risk associated with market volatility
This type of financial independence is the one that takes the longest to achieve, but enables the greatest financial flexibility down the road.
For more detailed information, check out “What is Fat FIRE ?“
Barista FI
Barista FI is having enough investments that can cover a portion of your current expenses today and supplementing the difference by working a lower stress, part time job.
The name originates from the idea of working part-time at Starbucks in order to qualify for their corporate healthcare plan.
This type of financial independence leverages a ‘math hack’ that can result in a more balanced lifestyle.
Here’s how it works:
Let’s assume someone spends $40,000 a year to support their current lifestyle. Assuming a 4% withdrawal rate, that individual would need to have an investment portfolio of $1,000,000 to maintain that lifestyle.
They can continue working a higher paid job that they don’t enjoy to reach that $1,000,000 in savings OR…
They could build a $500,0000 investment portfolio and withdraw $20,000 annually (4%) from that portfolio. Furthermore, that individual could then work a part-time job to make up the other $20,000 needed to support the same $40,000 lifestyle.
This can be an alluring alternative to those wanting to enjoy more of their lives today and not spend a ton of time building a massive portfolio.
For more detailed information, check out “What is Barista FIRE ?“
Coast FI
Coast FI is investing up to specific amount and then relying on compound interest in order to reach your FI number, without the need to invest anymore.
The idea is that by investing early and often, you will eventually hit a point where you no longer need to save anymore in order to hit your FI number. You let compound interest work it’s magic.
Let’s look at a quick example:
Joe graduates at the age of 20 and lands a job making $60,000 a year. Let’s assume that he never gets a raise, maintains a savings rate of 20%, and is able to achieve a 6% rate of return. By 30 he will have $158,169.54 invested.
If Joe decided to not invest another dime, he would have $1,215,700.65 by the time he turned 65. He is therefore ‘coasting’ to retirement.
For more detailed information, check out “What is Coast FIRE ?“
My FIRE Strategy
When it comes down to the many different types of financial Independence, I decided to pursue a hybrid of Coast and Barista Financial Independence.
When I first began my FIRE journey, my original goal was to be Regular FI by 40. As of this post, I’m still projected to hit that goal.
However, I am attempting a stretch goal of trying to become Barista FI by 35. I plan on doing this by increasing my passive income streams beyond my W-2 income.
Final Thoughts
When it comes to pursuing FIRE, there is no one-size-fits-all approach.
Even the strategy that I am following is a hybrid of two popular approaches.
However by understanding the difference between the different types of financial independence, you can begin to tailor an individualized approach that is in line with your life goals.
If you are interested in starting your own path, I recommend checking out how to start your path to financial independence.
What type of FIRE strategy are you pursuing? Let me know!
Thank you for reading! 🙂
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