Today I wanted to dive into the principles of the FIRE movement in more detail through the lens of a HENRY.
The FIRE (Financial Independence, Retire Early) movement centers around achieving financial independence in order to retire early. Saving is driven by increasing your income, decreasing your expenses or a combination of both. In doing so, you save enough money that at some point you hit a critical mass that is capable of sustaining your lifestyle in perpetuity. When this occurs, you can retire early because work is no longer a requirement. In short, work becomes optional.
For me personally, it is less about “retiring early” and more about work becoming optional. When work becomes optional, I have the freedom to choose how to spend my time. If I want to continue working, I can do so with a new found freedom that I am not required to work. If I want to work part-time, I can do so. If I want to sit on the beach doing nothing, it’s my prerogative. The point is I now have control of my life and where I spend my time.
Financial independence is ultimately achieved through earning more, spending less and saving and investing the difference. I want to cover each of these in more detail starting with your income and your expenses.
Leveraging Your High Income
The first way to boost your savings rate is to increase your income. For many people first discovering FIRE and the possibilities that exist, this area is arguably is one of the most important. However, as a HENRY, you already have an above average income. Anyone can benefit from understanding and leveraging the principles of FIRE but I want to approach these principles through the lens of someone with a household income of $100K – $250K+. Your high income gives you options. Whether you see it or not now, you have choices that others may not. It is what you do with those choices that determine if you ever become more than a HENRY.
Decreasing Your Expenses: Understanding Where You Spend & What You Value
The easiest way to boost your savings rate is through decreasing your expenses. As a HENRY, I don’t want to or choose to decrease my expenses to the extent I no longer lead a lifestyle that makes me happy. I absolutely do not wish to live like a miser. I want to continue the lifestyle of someone who works hard and earns an above average income while also being able to boost my savings rate. I want my cake and I want to eat it too.
So how does one decrease their expenses in order to boost their savings rate while still maintaining their high income lifestyle? The answer is actually quite simple. You must align your spending with your values.
In order to do so, you first have to understand where you spend your money. This can be done by tracking your spending for a set time period in order to understand where you actually spend your hard earned dollars. If you have never done this, it can be enlightening to say the least.
Once you understand where you spend your money, you then have to understand what you value and what brings you true happiness. This is by far the most difficult part. It requires a person to ask difficult questions of themselves in order to understand what you value in life. You will likely identify many things that you value that do not cost money. However, as a HENRY, you will also identify things that do cost money and sometimes significant money. Vacations, nice cars, country club memberships, expensive wine, expensive meals, the latest technology, etc. None of these are inherently bad. In fact, if they align with what you value in life, they are essential because they in some part drive your happiness.
Once you understand where you spend your money and you have defined your values and what makes you happy, you then compare the two. This is where things often get interesting.
- Does your spending align with what you value and what makes you happy?
- Do you spend money in areas that do not align with your values or make you happier?
- Are you getting a measurable return on your happiness from where you spend your money?
All three of these questions are ultimately a derivative of the same question.
Do you understand what you value and what makes you happy and does your spending align with both?
As a HENRY like me, you may discover that your spending does not necessarily align with what you value and what makes you happy. In fact, you may begin to discover that you spend significant money in areas that do NOT provide a measurable return on your happiness. Once you discover this truth, it can change your life if you choose to act upon it.
The Importance of Your Savings Rate
Your savings rate directly correlates to building wealth and your subsequent retirement (work optional) timeline. If you spend everything you make, you will never be wealthy and you will have to work forever. If you save everything you make, you could hypothetically stop working tomorrow because your expenses are $0. The key is understanding the space in between.
The chart below outlines the years you must work relative to your savings rate. The chart assumes a starting net worth of $0 and is based upon an annual household income of $150,000.
- Savings Rate: The percentage of your annual income saved for retirement.
- Annual Savings: The total annual savings derived from the savings rate.
- Annual Expenses: The total annual expenses derived from your annual income less your annual savings. The two are inversely correlated (i.e. the more you save the less you spend).
- Total Assets Needed: The total savings/assets required to maintain the total annual expenses in perpetuity (i.e. work is optional or retirement). This is commonly referred to as your financial independence number.
- Working Years: The number of years you must work at the respective savings rate in order to achieve the total assets needed. These figures remain the same regardless of the total income.
Note: The figures in the chart above assume a 3.5% safe withdrawal rate (SWR) and a 6% rate of return after inflation. The safe withdrawal rate assumption is different than the 4% rule often cited in the FIRE movement. I prefer a 3.5% SWR to better account for sequence of return risk. The inflation adjusted return is based upon the average return of the market with an additional buffer added. We will get into more detail about these assumptions and how I arrived at them in a later post.
Most traditional financial advisors recommend a 10%-15% savings rate. Assuming a 15% savings rate, it will take 41 working years to save enough money to retire. Sound familiar? It should. 41 working years assuming you entered the workforce in your early twenties aligns with a traditional retirement timeline.
Now look at what happens when you push your savings rate to 40%. By doing so you not only increase your savings, but you also reduce your expenses since the two are inversely correlated. As a result, the working timeline required to save enough money to stop working drops from 41 years to 22 years. Think about that for a minute. By boosting your savings rate by 25% you cut the number of years you and/or your partner HAVE to work by almost half. That is almost 20 years that you do not HAVE to work. Now think about the question posed above again.
Do you understand what you value and what makes you happy and does your spending align with both?
I like spending money as much as the next HENRY. However, I came to realize I was spending money that did not align with my values. I was spending money that did not increase my happiness or increased it only for a short period of time. All for what… Working an extra 20 years! Was it worth working an extra 20 years? For me, the answer was obvious! For you, it may be as well.
Note: At the opposite end of the spectrum, you can boost your savings rate to 65%+ and reduce your working timeline to 11 years or less. Many prominent figures in the FIRE community did exactly that. However, again I remind you, that is NOT my intent as a HENRY. I want to maintain a comfortable, high income lifestyle while also challenging the traditional work timeline.
Investing the Difference
The key to building wealth and becoming rich is the accumulation of assets that can provide passive income. Once you have accumulated enough assets that the resulting passive income covers your expenses in perpetuity, work becomes optional. You have essentially bought back your time. That is why money is extremely valuable. Money can buy time and time is the most valuable currency. It is the currency of life.
In order to accumulate assets, you could stuff your savings under your mattress until you have enough to cover your expenses in perpetuity, but I wouldn’t recommend it. The idea sounds ludicrous but if you are saving in low interest bearing accounts or in assets that do not leverage equities (stocks), you might as well be stuffing it under your mattress. Other than FDIC insurance, you will still be losing money to the silent enemy that is inflation. You can become rich but it will be much harder and it will take much longer.
The key to building wealth is investing your savings in broad based, low cost stock index funds. This investment strategy is a key pillar of the FIRE movement. It has been a key element of my wealth building so far and it can and will be a key element of your wealth building moving forward if you are not leveraging this tool already.
So… What Next?
When thinking back to when I first discovered the FIRE movement, a chart similar to the one above featured on the forum of Mr. Money Mustache was the the straw the broke the preverbal camel’s back for me. In this case, the camel was my previous reality and my understanding of the traditional work timeline. The math is simple. The take-away is actionable. However, there is still a choice.
The reality of it is that many people have seen a chart like the one above and it had no impact on their life. Many people may read this post and it too will have no impact on their life. However, for some people including myself, this simple chart represents a new truth: an alternate reality where the possibilities can be truly life changing.
As a HENRY, you already have an above average income and you have room to boost your savings rate by aligning your spending with your values and what truly makes you happy. As we move forward, we will explore the principles of FIRE, personal finance and investing in more detail. I will share my perspective and lessons learned as I continue my journey along the path to financial independence while still living my best life today. I hope that I can inspire you to begin your journey to financial independence where work becomes optional much earlier in your life.
The choice is yours… You too can take back your time. You too can take back your life. You too can join me in going from a HENRY to FIRE.
Regards,
Henry