Lean FIRE is a type of financial independence where you have enough investments in order to cover your essential expenses.
However, what’s considered an essential expense?
This question can be answered by psychologist Abraham Maslow’s hierarchy of needs theory.
In a nutshell, Maslow argues that humans must first satisfy their ‘basic needs’ prior to moving on to higher-level needs.
These basic needs are illustrated by the first two levels of Malow’s pyramid. They include both physiological (food, shelter, clothing) and safety (employment, health, security) needs.
Therefore, any expense associated with the first two levels can be classified as an essential expense.
These expenses include:
- Food
- Transportation
- Healthcare
- Clothing
- Personal Hygiene
In other words, think of Lean FIRE being equivalent to a basic safety net.
With that being said, this does not mean individuals pursuing Lean FIRE are unable to achieve the more complex needs in Maslow’s pyramid.
This is because individuals pursuing Lean FIRE tend to be naturally frugal. As a result, spending a lot of money is not a requirement in order to be happy.
How do you calculate your Lean FIRE Number?
I want to set the record straight.
A lot of people claim that achieving Lean FIRE requires an annual budget equal to a specific amount i.e. $30,000, $40,000, $50,000, etc.
However, that is not the case.
Your Lean FIRE number is based on what YOU spend on YOUR essential expenses.
This could mean that your Lean FIRE number is equal to a $100,000 annual budget!
A larger Lean FIRE number could be due to a variety of different factors such as:
- Having kids
- Supporting other family members
- Living in a high cost of living area
The bottom line is that everyone’s situation is unique.
Now that we’ve set the record straight, what is the formula for Lean FIRE?
Here is how the above formula works:
- Multiply your monthly essential expenses by 12 in order to give you an estimated Lean FIRE annual budget
- Divide your estimated Lean FIRE annual budget by your safe withdrawal rate
- The final number is the portfolio required to achieve Lean FIRE
Note: In this case, I am using 4% as the withdrawal rate. This is a common safe withdrawal rate to use based on research from the Trinity Study. You can adjust the withdrawal rate based on your own individual risk preferences.
After calculating an estimated portfolio, you can then use this guide to calculate your progress to Lean FIRE.
What does a potential Lean FIRE budget look like?
Leveraging data from Bureau of Labor Statistics, we can calculate a potential Lean FIRE budget.
From 1999 – 2019, the average American household’s average annual budget was approximately $48,278.
This average annual budget can be broken down into the following categories:
However, when calculating our potential Lean FIRE budget, we will only consider essential expense categories:
- Housing
- Transportation
- Food
- Personal Insurance & Pensions
- Healthcare
- Apparel & Services
- Personal Care Products & Services
Leveraging our Lean FIRE formula from earlier, we can calculate a potential Lean FIRE number for the average American household (assuming a 4% safe withdrawal rate):
As a result, we have a potential Lean FIRE budget of $1,032,900.
If this number seems high, the most effective method of lowering it is by decreasing our big 3 expenses (housing, transportation, food). These expenses alone account for 63.5% of all our spending.
The Pros and Cons of Lean FIRE
There are pros and cons associated with any type of financial independence.
However, if you are considering pursuing Lean FIRE, consider the following.
What are the Pros of Lean FIRE?
Investment Portfolio Size
The primary benefit of Lean FIRE is that it doesn’t require a huge investment portfolio.
As a result, less time is required to become financially independent relative to other types of financial independence (i.e. Traditional FIRE, Fat FIRE).
This shorter runway translates to working less time at a job that you may be unhappy with.
Less is More (especially stress)
To recap, individuals pursuing Lean FIRE tend to live frugal and minimalist lives.
Embracing Lean FIRE is less about keeping up with the Joneses and more about living a simple and wholesome life. It’s about breaking the association between spending a lot of money in order to be happy.
By hopping off the hedonic treadmill, we can decrease our chances of developing money dysmorphia.
Compound Interest
Lean FIRE requires less money relative to other types of FIRE.
However, it still requires a lot of money.
The good news is by the time someone achieves Lean FIRE, their portfolio will be at the point where compound interest can begin working it’s magic.
This is awesome for those who originally wanted to become Lean FIRE and subsequently decided it wasn’t for them. All is not lost, their portfolio can continue to grow substantially via compound interest!
What are the Cons of Lean FIRE?
Lifestyle Inflation
Significant increases in lifestyle inflation can reduce the likelihood of sustainably living off one’s portfolio.
This was the foundation of the Trinity Study, where researchers examined the relationship between withdrawal rate and how long a portfolio would last in retirement. As one’s withdrawal rate increases, the probability of running out of money in retirement also increases.
So if you plan on spending a lot more in retirement, then Lean FIRE may not be for you.
Market Fluctuations
Living on a smaller investment portfolio means being more vulnerable to market fluctuations.
In fact, depending on the magnitude and time frame, certain fluctuations can even reverse one’s financial independence status.
As a result, when calculating your Lean FIRE number, it’s important to add some extra padding to hedge against volatile markets.
Relocation & Cost of Living
If you have thought about moving after achieving Lean FIRE, it’s paramount to make sure you are relocating to somewhere with a similar cost of living.
For instance, relocating to an area with a high cost of living has the ability to completely invalidate your Lean FIRE number. This is due to the higher cost of living preventing you from affording your current lifestyle.
Final Thoughts
Whether it’s part of your journey or the destination, Lean FIRE is amazing milestone to reach.
The ability to say that you have the money to cover your basic needs is a big deal.
If you want to learn more about Lean FIRE, I recommend checking out r/LeanFIRE on Reddit.
Thank you for reading 🙂
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