It has been almost a month since my last post. In early October, Mrs. Henry and I took the kids on a mini-vacation. If you haven’t figured it out yet, I am somewhat of a planner. However, this trip was largely planned last minute. Since our kids are still attending school virtually, we thought it was a perfect opportunity to vacation in October since this is a time period we normally cannot travel since the kids would be in traditional school. The trip was everything we hoped it would be. The kids were in virtual school during the day which opened up a lot of free time for Mrs. Henry and I that we would normally would be doing some planned vacation activity. With this new found free time, I was able to read a few books, work on the blog, and write my October 9th post which included the back-end analysis of our finances. Mrs. Henry arguably put her time to better use by spending time researching a business idea that she has been interested in starting. Within the span of a week, she took the concept from merely an idea to an actual plan. Since returning from vacation, she has started to execute that plan, and she is now well on her way to selling her first product in the next few weeks. I am sure there will be future posts about this adventure. Maybe I can even persuade Mrs. Henry to guest post.
So… Why I am telling you about our mini-vacation in early October? First, I wanted to provide some context for why you haven’t seen a post in close to a month. Second, I wanted to give you some context for my post today introducing the types of FIRE and my continued realization that the real power is in the pursuit.
The Pursuit of FI/FIRE is Not Binary
Our vacation was exactly that. It was a vacation. Upon my return it was back to reality, and reality means work. When returning to work, it seemed all hell broke loose which required that I put in a lot of hours. Since this is a personal finance blog, let’s look at the math…
More Time Working = Less Free Time
Less Free Time = Less Time Writing/Blogging & Spending Time with Family
Less Time Writing/Blogging & Spending Time with Family = Less Time Doing Fun Stuff
Less Time Doing Fun Stuff = Decrease in Happiness
Ok. Ok. It is not actual math, but it still is effective in outlining how my mind equates more time working and less time with family and doing fun stuff with a decrease in happiness. I would imagine most people’s minds work this way, even if they don’t consciously know it.
If you are reading this blog, you have undoubtedly read other books, blogs, or articles concerning the principles of financial independence and FIRE. One thing that you may have noticed is the way in which the pursuit of FI and FIRE is presented as binary. You are either financially independent or you are not. You either have the ability to retire or you do not. For those like me that have no desire to retire, but instead spend my time working on my terms, the pursuit of FI can still seem binary. You either have the financial means to pursue work on your terms or a passion project without regard to the income you generate or you do not.
In reality, like most things in life, the pursuit of financial independence is not binary. It can be nuanced. It can be messy. In the last few months, I have begun to realize that I have officially entered the messy zone. I am in the middle of the labyrinth if you will. In fact, I think I may have been here for some time and I am just now realizing it. I will get into that more in a minute. First, I thought it would be appropriate to introduce the different types of FIRE since I haven’t covered this yet.
Types of FIRE
Despite the pursuit of FI and FIRE being often presented as binary as noted above, there are several different types of FIRE depending upon your goals and timeline. Over the years, people have created labels for these different types of FIRE to include Traditional, Lean, Fat, Barista and Coast Fire. Let’s take a closer look at each.
Traditional FIRE:
The concept of Traditional FIRE is exactly as it sounds. The goal of Traditional FIRE is to save and invest enough money that you can stop working and support your current lifestyle in perpetuity without a paycheck. Work becomes optional. If you want to continue to work, great. If you want to sit on a beach and read, go for it. You no longer need a paycheck to sustain your lifestyle because you have enough income generating assets to cover your expenses. Put another way, you are no longer a wage slave. A wage slave sounds harsh, but it is the truth when you think about it. If you cannot live without your paycheck, and you are beholden to your employer you are a slave to your paycheck. Most people are in this position. However, as you pursue FI, you begin to have more options. More options equate to greater freedom to take risks and make change. The culmination is the full achievement of financial independence (AKA Traditional FIRE).
For context, as I noted in a previous post, you would need ~ $2.8MM in invested assets to support $100K in annual expenses at a 3.5% withdrawal rate.
Lean FIRE:
Lean FIRE as the name implies is the light version of FIRE or as I like to call it, Diet FIRE. It is FIRE for the frugal. Those in the pursuit of Lean FIRE seek to achieve the same outcome as those in the pursuit of Traditional FIRE with one key difference. Expenses.
The goal of Lean FIRE is to save and invest enough money that you can stop working and support a low-expense lifestyle in perpetuity without a paycheck. With a quick search of FIRE forums, you will find that typically this expense threshold is defined around $40,000 annually. Lean FIRE is often correlated with those that seek to lead extremely frugal lifestyles often accomplished through minimalism. Those seeking Lean FIRE have to be extremely disciplined with their expenses since their assets can only sustain a lower expense lifestyle.
For context, you would need ~ $1.1MM in invested assets to support $40,000 in annual expenses at a 3.5% withdrawal rate.
Fat FIRE:
Fat FIRE is the opposite of Lean FIRE. It is FIRE for those that are less concerned with maintaining very low expenses. The goal of Fat FIRE is to save and invest enough money that you can stop working and support a higher than average expense lifestyle in perpetuity without a paycheck. Once again, with a quick search of the FIRE forums, you will find that typically this expense threshold is defined as $100K+ annually. As a result, FAT Fire is typically reserved for those with an above average income.
Since I identify as a HENRY and this blog is written to an audience of HENRY’s, I see Fat FIRE through a different lens. If you are seeking to achieve FI based upon your current lifestyle and your current lifestyle costs $100K+ annually, then I do not think you are pursuing Fat FIRE. I think you are pursuing Traditional FIRE. As a HENRY with an above household average income, your lifestyle may very well cost $100K+ because your above average household income often results in larger expenses. For a lot of HENRYs, the pursuit of Fat FIRE is just the pursuit of FIRE.
For context, you would still need ~ $2.8MM in invested assets to support $100K in annual expenses at a 3.5% withdrawal rate as noted for Traditional FIRE.
Barista FIRE:
I like to refer to this variation of FIRE as part-time FIRE. The goal of Barista FIRE is to save and invest enough money to support your current lifestyle in perpetuity with supplemental income. Work is not optional because you still need some level of income to support your lifestyle.
Obviously, when you see the term Barista FIRE you think Starbucks or a coffee shop. However, you don’t have to work part-time in a coffee shop to be a subscriber to Barista FIRE. You can do anything to close the gap between the income produced by your investments and income needed to sustain your desired lifestyle. This could be part-time work or an income producing passion project. The point of Barista FIRE is not to have to work full-time which obviously can provide a lot of advantages. If you are a professional in a corporate work environment, achieving Barista FIRE could mean no more rat race. No more 40+ hour work weeks. If you are a physician, attorney, engineer, etc. achieving Barista FIRE could mean you have the ability to scale back the number of hours you work while still continuing your current career.
Let’s look at an example just to see how the math works for Barista FIRE.
At $100K in annual expenses, you would need $2.8MM in invested assets at a 3.5% safe withdrawal rate to achieve Traditional FIRE. However, if you are willing to continue working in some capacity in order to earn ~ $40K annually you would need ~ $60K in investment income. Instead of $2.8MM in invested assets, you would need ~ $1.7MM. That is over a $1M dollar difference in needed assets.
There are many advantages to Barista FIRE.
First, you can achieve Barista FIRE faster than you can achieve Traditional FIRE or Fat FIRE which allows you take back more of your time earlier in life. Many burn out trying to pursue Traditional FIRE too fast. Hell… Many just plain burn out trying to pursue Traditional FIRE on a reasonable timeline. Barista FIRE offers an alternative.
Second, healthcare and healthcare insurance can be expensive and there is currently a lot of uncertainty with the direction of healthcare in the U.S. Working part-time can potentially help to reduce some of this expense and uncertainty through employee sponsored health coverage.
Coast FIRE:
Coast FIRE is a relatively new term in the FIRE space. It is somewhat of a derivative of Barista FIRE. The goal of Coast FIRE is to save and invest enough money that you can achieve FI at a later date on a desired timeline without the need to save any additional money. You simply need to let the 8th wonder of the world, compound interest, work its magic.
Although the concept is relatively straight forward, Coast FIRE can mean different things to different people. If you wish to work in some capacity for the next 30 years, then achieving Coast FIRE would be the point at which you have enough assets accumulated that you will reach your FI number in 30 years without saving another penny. For someone in their mid-30s, this would essentially be a traditional retirement timeline. However, the timeline doesn’t have to be 30 years. The timeline can really be anything. You simply need to have enough assets accumulated to reach your FI number on your desired timeline. Of course, the longer the timeline the less you have to accumulate through saving because compound interest will have more time to work. Conversely, the shorter the timeline, the larger your pool of invested assets will need to be. Let’s again look at a couple of examples just to see how the math works.
Example 1: 40 Year Timeline (25 Year Old – Seeking Standard Retirement Age of 65)
Target Expenses: $100K Annually
FI Number: $2.8MM
Key Assumptions: 3.5% Safe Withdrawal Rate & 8% Return
With the assumptions above, a 25 year old with ~ $130,000 saved could not save another penny for the next 40 years and have ~ $2.8MM accumulated by traditional retirement age. I don’t know about you but running calculations of this nature are bitter sweet. On one hand, seeing compound interest at work really is amazing. On the other hand, it makes you realize the importance of starting early. Time is a finite resource in every way and you cannot get back lost years.
Example 2: 15 Year Timeline (35 Year Old – Seeking Work Optional Status at 50)
Target Expenses: $100K Annually
FI Number: $2.8MM
Key Assumptions: 3.5% Safe Withdrawal Rate & 8% Return
With the assumptions above, a 35 year old with ~ $900,000 saved could not save another penny for the next 15 years and have the same ~ $2.8MM accumulated by 50 years of age. The $900,000 starting point is much higher than the 25 year old on a 40 year timeline, but that is still ~ $1.9MM in growth in 15 years.
In my estimation, Coast FIRE offers most of the same benefits of Barista FIRE. Once you are at a point that you no longer need to save money for your future, but instead let your existing assets grow on your desired timeline, you have options. You no longer need to earn enough income to support your lifestyle and saving. You only to need to support your lifestyle and current expenses. Depending upon your expenses, this can have a profound impact on your life through the ability to work part-time, pursue a less stressful career/position, etc. Much like Barista FIRE, achieving Coast FIRE offers you options, and options are everything.
The Power is in the Pursuit
As I noted in my introduction, the pursuit of financial independence can be nuanced and messy. The various types of FIRE support the fact that financial independence is in fact not as binary as it would seem.
When I first discovered financial independence and the FIRE movement, Traditional FIRE was the goal. It is still the goal. However, the last six months have caused me to take a step back and evaluate everything in my life. I suppose like many, the COVID-19 Pandemic was the initial catalyst, but it has permeated into my entire life.
Up until this point, I have largely viewed my journey to financial independence as simply a journey with a destination. Achieving financial independence is the goal, and the achievement of that goal is the final destination. However, I am continuing to realize the real power lies in the pursuit of financial independence and not necessarily achieving it.
It was during our recent vacation that I was reminded of this power. In preparing our financial update for my most recent post, and planning additional blog post topics, I realized several very important things that I had not previously considered:
- Based upon our desired FI timeline, we have already achieved Coast FIRE.
- If I chose to work until traditional retirement age, we achieved Coast FIRE long ago.
- Achieving Coast FIRE when you spend ~ 50% of what you earn, presents A LOT of options.
I have always known the pursuit of FI would give me options I would not otherwise have. As I noted in a previous post, just having a well-funded emergency fund gives you more options than most. I also have always known the pursuit of FI would be messy. Messy in the sense that more options equates to a greater ability to take risk or make large changes in your life that would not otherwise be possible. With my latest realization above, I now know I have been in this phase of my journey for some time and didn’t even know it. Now the question is what to do next…if anything…
What Are You In The Pursuit Of?
What do you think? Now that you have an idea of the different types of FIRE, where would you say you land?
- If you live extremely frugally and can maintain your expenses below $40K annually and want to become completely work optional, you are in the pursuit of Lean FIRE.
- If you spend $100K+ annually and want to become completely work optional, you are in the pursuit of Traditional/Fat FIRE. This is likely where a lot of HENRYs will identify.
- If you are willing to work in some capacity to supplement your income, you are in the pursuit of Barista FIRE. Perhaps, you already have the option, and maybe you don’t even know it.
- If you want to save aggressively in order to accumulate enough assets to then allow your investments to grow while you cover your expenses with your income, you are in the pursuit of Coast FIRE. Once again, you may already be there and don’t even know it.
If you are like me, you quickly come to realize that the pursuit of FI can be messy and you don’t know what you truly want until you are presented with options you did not previously have. That is the beauty of pursuing financial independence. Financial independence gives you options, and options can have a profound impact on your life. Whether you choose to act or not is up to you. But you have the choice, and that is what matters. That is where the real power lies.
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Henry’s Personal Highlight
I thought today’s highlight would have a different spin. Consider this Henry’s Public Service Announcement instead.
If there is one thing that I have learned from personal finance, investing, and the pursuit of financial independence, it is that most anyone can become a millionaire if they start saving and investing early enough. The power of compounding and time is absolutely amazing. As I have noted in previous posts, I have two small children. My hope is that they have a healthy relationship with money when they get older and that they understand that money is simply a tool. I also hope they are able to pursue their passions in life without the weight of worrying about how much their chosen career pays.
In an effort to make both of these happen, I want to introduce my children to the importance of saving and saving early. I also want to educate them on the principles of personal finance and investing. I know it will be a process and it will take time, but I believe the results will have a profound impact on the trajectory of their life.
The concept of Coast FIRE got me thinking… What would happen if I applied the concept to my children. If I wanted my child to become a millionaire by traditional retirement (age 65), I would need ~ $5,000 invested by 10 years of age assuming a 10% rate of return. If I had invested ~ $2,000 the day they were born, the same outcome would occur. If it was extremely important that they were self-made millionaires, with no help from Mrs. Henry and I, they would need to have ~ $15,000 invested by 21 years of age assuming a 10% rate of return.
Think about that for a minute. $2,000 invested at birth, $5,000 invested by 10 years of age, or $15,000 invested by 21 years of age virtually guarantees a child is a millionaire by retirement age if they allow the money to grow. Think about the possibilities that presents. The options they would have. As long as they have a healthy relationship with money, this initial boost could completely change their life. It could change their career path and everything to follow. The impact could ripple for generations to come… All from $2,000 – $15,000…
I have included some visuals below because who doesn’t like visuals!
~$2,000 Invested at 0 Years of Age with 10% Return
~$5,000 Invested at 10 Years of Age with 10% Return
~$15,000 Invested at 21 Years of Age with 10% Return
