Among retirement planning circles there has been this idea of how you are supposed to fund your retirement called the 3 legged stool. This stool is a representation of your post retirement life and the funding sources that support it.
In financial planning circles the seat of the stool is supported by,
One topic that comes up a lot in parenting/FIRE circles is this all-consuming idea that we should start socking away money in a college fund so that the little one can go to school debt-free. While on the face of it this impulse is admirable why wouldn’t you want your kid to have a debt-free college experience? If they graduate without a load of debt on their backs they will be free to just leap off into the working world and start raking in the cash from the great job they got because of their degree.
That is one possible future but what's equally as likely is that instead of getting a more realistic degree like mechanical engineering they instead followed an interest in the poetry of 14th and 15th Spain. While that grounding in poetry makes them a great storyteller and engaging conversationalist it's probably a bit harder to find gainful employment with that degree.
As I write this I am sitting at my kitchen table instead of my office because like a lot of the world right now I am working from home to help stop the spread of the coronavirus. Let me tell you I am not set up to work from home. All my chairs are too hard and the snacks are way too easy to get to. I am watching my waistline grow by the hour and I'm pretty sure I have worked myself right into feeling like crap from the stress and poor diet.
Of course it doesn't help that on top of being pretty much forced to stay home I am watching my investment portfolio take a pounding as the worldwide economy grinds to a halt and all my money loses value.
Notice I said lose value and not lose money because as long as I don't sell anything I am not actually losing money. My money is still in the market and I still have the same shares in the economy that a couple weeks ago were pushing my net worth north of $100,000. What I need and what everyone needs right now is just a bit of patience and long term thinking to look past this current crisis and think about the future.
Recession- a FIRE Perspective.
People that aren't chasing FIRE will typically look at a what happens during a recession and have only one thing cross their minds
Because they have already lost their jobs, will lose their jobs, or there watching their investment/retirement portfolio tank. Now the first two are genuinely terrible things and my heart reaches out to all those that are in that situation. But that last one is a fallacy of the highest order and it is costing people so much money it a tragedy all its own. It is a tragedy because those losses didn't need to happen. Those “losses” you see on the computer screen are not real, they are what are called paper losses. They only become real when you panic sell your stake in the economy in a naive attempt to save your money. By selling at the bottom you are achieving exactly what you are trying to prevent.
This whole thing can be prevented by being aware of this fact and keeping in mind probably the most useful advice anyone will ever give you.
“This too shall pass”
Unless western civilization as we know it comes crashing down around our heads eventually everything will recover and we will get back to living our lives. It might take awhile but we will get there.
So being the savvy adherent to the FIRE principle that I am sure you are(or soon to be) what should you be doing during a recession? Well the simple answer is,
Assuming you have a,
Flexibility is Key
While doing nothing is usually the best course, sometimes you have to make changes to fit what is happening in your life. The obvious and painful thing you need to be flexible around is losing a job. If you lose your job then by all means you should probably cancel automatic investments and take a look at your hopefully plump emergency fund and figure out your next step.
But assuming you don't lose your job and you are confident you won’t then you can actually take advantage of a recession by pumping more money into your portfolio. You are probably thinking why would you put more money in during a recession? The answer is the very thing that has people selling stock like crazy. Stock is losing value as the economy slows down and companies contract. What that means is that stocks or an index fund that cost 100 dollars to buy before the recession now costs 70 dollars. That means it is on sale and you can purchase more shares for the same amount of money.
What this means in the long run once things are on the upswing again is that you own more shares than you could have if the economy hadn’t gone into a tailspin. This means you will get more dividends and more growth into the future which means you will be richer sooner.
But this opportunity to buy shares on sale is not something you should do if you have a small or non-existent emergency fund or if you have a job that is precarious in a recession. I personally am not able to do this in this current recession (spring 2020) because it has already been a expensive year for my family ie. (furnace tried to kill us so it was replaced)
But in the future when the next one hits and another one is going to come I hope to be in the position I can take advantage of this sale on shares.
So just to reiterate what you should do during a recession is the following,
Moral of the Story
This recession and its cause are going to be a temporary thing so there is no reason to lose your wits and act like it is the end of the world. So relax, enjoy the ride and buy some discount index funds as long as you don't touch the emergency fund to do it.
To sum it up it has been one hell of an expensive month. In the past 30 days I have had the following unexpected expenses come out of the blue,
Yah that’s right I have had over 9,000 dollars in unplanned and unanticipated expenses come out of nowhere and punch my bank account right in the face. But despite all these unplanned expenses I am not going to go hungry, I am not going to miss a mortgage payment, and I am not going into any credit card or other debt because of all this.
As you probably know by now the acronym F.I.R.E stands for,
Financial Independence Retire Early
On the face of it this is great acronym because it really sums up what the movement is in neat little phrase you can use to remind yourself what you are trying to do. The first part of the acronym is pretty clear to most people I think. Financial independence basically means you want to have enough money coming in from investments or other sources of passive income that you do not need to work to make ends meet.
The second part of the acronym is less clear to most people since what they understand as retirement is not what they want to do or what they see financially independent people do. When most people consider the phrase retire early they think,
· Lounging on a beach
· Playing endless rounds of golf
· Constant traveling
· Other leisure related activities
But if you are only 45 years old when you retire do you really think that you are going to just play golf or sit on a beach all day.
What’s more likely is right after you “retire” you will take some time off to sit on a beach or play lots of golf but after a couple months of that you are probably just going to be bored of doing that. Humans beings are not wired to just sit around and do nothing and people that were able to work hard and retire much earlier than usual are even less likely to just sit around.
So get they get off their duff and they pursue what they enjoy doing. Well a funny thing happens when you get to do something you enjoy all the time. You tend to get really good at whatever it is you are doing. When you are good at something people take notice and if that something you are good at can be sold as a product or service pretty soon you have people asking you to do that very thing you enjoy doing for,
So now you are “retired” but every now and then you get asked for help with something and then you get payed for your time or what you produce.
Does that mean you are still retired?
A lot of people out there will start to cry foul right about now saying that no you are not retired because you are getting payed to do work. But that is very narrow way of looking at retirement. Why does retirement mean the absence of work? All retirement really is is that you don’t have to work to meet your living expenses. By that definition once you have reached financial independence you are retired. What being retired really means is that you are free to pursue what you want to do. That can mean sitting on beach or traveling but it can also mean starting a 2 acre urban farm (my dream by the way) where you spend all summer growing and selling delicious food. Just because I don’t need the money from my farm that doesn’t mean I don’t deserve to profit from my time and expertise.
So yes, you can be “retired” and still make money there is nothing wrong with that. But since there is so much hang up on the term Retire Early it might be time to ditch the retirement part of FIRE and call it something else.
To that end I give you
Financial Independence Freedom Early
Because that is all it really is you are pursuing financial independence so you can have the freedom to live your life that way to want to live it. FIRE is not about retiring it is about buying your freedom from the rat race of having to do something you don’t enjoy doing anymore. So if you get hung up the retire portion of the FIRE movement then just substitute the R for and F and you will get to the exact same place without the emotional angst.
I however will be sticking with the acronym of FIRE because I have no problem understanding what the retire early portion of it really means. Plus I really like how it sounds in my head when I am considering a potentially superfluous purchase. When I am considering buying something useless I just whisper,
To myself which reminds me what I really want from my life and to not waste it on something that wont bring real value to me.
So you have been bitten by the FIRE bug and now you want to do your best to try to minimize your expenses and save more of your hard earned money. But since you are currently reading this post I would assume you need a few ideas for what to do.
If you have done any reading at all into what the FIRE movement is all about you will know by now that reducing how much you spend is key to building your money pot. But this idea of cutting expenses while usually a good idea can be taken too far when you go from decisions like,
“Should I get another one of those 10 dollar beers?”
“Should I buy this bag of apples instead of the cheap Raman?”
The 4% rule and its findings are critical to the success of the FIRE principle and understanding it is the key to being able to retire much earlier than you thought. I will try to give you a clear explanation of what the 4% rule is and how it can be applied to your life.
I have come to a realization recently after the deep dive I have done into the FIRE movement.
What is FIRE you might be asking?
“well when a spark and pine needles love each very much…”
Just kidding yes that is what fire is but what I am talking about is F.I.R.E or Financial independence Retire Early. For the longest time like most of us out there I assumed I would have to work a long career till I was 65 or more to be able to enjoy my golden years in relative ease. But I have recently discovered that it is simply not true assuming you can extricate yourself from the mindset of the average wage earner out there. Achieving FIRE done through the power of the following things,
· High savings rate as much as possible without compromising quality of life
· Lost cost index fund investing
· Reducing Expenses
Hello my name is Josh Larson and I am the creator of the Green Living Library. Here on the blog you will find updates to content found in the Green Living Library as well as stories from those living the sustainable life already.