The 9 pillars of FIRE

There are a set of core ideas that help anyone heading for financial independence and early retirement. I thought it would be useful to gather these into a single list. These are the 9 pillars of FIRE:

Savings Rate

There is one single number that tells you how far away from financial independence you are: that number is your savings rate as a percentage of your net income.

At a 10% savings rate you will need to work for 51 years to reach retirement.

With a 50% savings rate this reduces to 17 years.

Whereas a 75% savings rate will see you financially independent in just 7 years!

The more you save, the less you spend, so the smaller the FI pot you need and the time taken to reach financial independence drops exponentially.

More on savings rates here: Closer to Freedom

Tracking Spending

This one isn’t for everyone but I found it incredibly useful to write down all my spending in a note on my phone. It gives a moment to reflect on how you truly feel about that spending. Integrity will kick in quickly and automatically reduce any spending that doesn’t make you happy or give you value.

If you’ve worked out your real hourly wage (after taxes and any spending related to the job have been deducted) then any spending can be quickly converted into the number of hours it cost you.

Ultimately the exercise of tracking gives you a deep understanding of what you value. As an additional benefit you’ll know exactly how much you spend each year which helps define your target FI pot.

More on Tracking here: The tracking game

Simple Investments

Once you begin to increase your savings rate you’ll need somewhere to invest your FI pot.

Different FIRE proponents have different strategies and use a wide range of investments: from real estate to peer-to-peer lending, from stock-picking dividend-yielding shares or building a tech-focused growth-share portfolio to buying slices of government debt in the form of bonds.

At the core of a lot of strategies though are simple tax-efficient investments into low-management-charge index tracking funds.

More on why it is a good idea to choose good value passive tracking funds here: Fund charges matter

Safe Withdrawal Rate

To reach financial independence, and live off the money we have saved and invested, we’re going to need to know how much we can safely withdraw each year from our investments.

Luckily there have been numerous studies into how much can be safely withdrawn from a share (or share & bond) based pot.

The most famous of these studies, the Trinity Study, looked at different retirement dates over a 70 year period (1925 to 1995). The study worked out the worst-case scenario that would ensure a retiree didn’t run out of money over a 30-year period (taking into account market returns and inflation rates).

Based on US data this historical worst-case scenario ended up yielding a safe-withdrawal-rate of 4% (this is the withdrawal in the first year and withdrawals are increased with inflation (CPI) in each subsequent year).

Arguments can be made for lower safe-withdrawal-rates of, for example 3%. For those invested in markets outside of the US, history produces different SWRs.

Part of the process of getting to financial independence is working out the SWR you feel comfortable with and this then gives you your target FI pot:

25 times your annual spending for a 4% SWR
33 times your annual spending for a 3% SWR

More on Safe Withdrawal Rates here: The 4% safe withdrawal rate

Assets vs. Liabilities

An understanding of the difference between true assets and liabilities can greatly help someone heading for financial independence.

The most useful definition of a true asset is anything that puts money into your pocket. A liability is anything that takes money out of your pocket.

By these definitions your home (even when the mortgage is paid off) is a liability rather than a true asset. This is an important distinction because it can help you reduce the ongoing cost of the liabilities in your life (especially your home and cars as they can be expensive to buy and have high running costs).

Living in a smaller house than you can afford and reducing the miles you drive are two of the biggest wins on the journey to FI.

You can also look to build or buy true assets in the form of businesses you create, art you make and sell (books, paintings, photos, craft, music, software …), and investments you make (shares, bonds, investment property, peer-to-peer lending, venture capital …).

More on Assets vs. Liabilities here: Assets vs. liabilities

Frugality

When you start to evaluate the true value you get from purchases a strange thing happens. You begin to appreciate the simple things in your life much much more.

The essence of frugality is the full enjoyment and appreciation for everything in your life.

For example: every time you pull on your walking boots you appreciate the feeling of their warmth, their weight, and you notice the frisson of excitement at the beginning of a new adventure in the world.

“To be frugal means to have a high joy-to-stuff ratio.”
– Your Money or Your Life

This is in direct opposition to the continual chase for more that characterises conspicuous consumption. People don’t stop for long enough to enjoy what they already have before looking ahead at the next thing to buy.

There is a feeling of having enough that is hard to describe. You end up feeling like the richest person in the world. Full of incredible gratitude and appreciation. You have an ever-present feeling of underlying peace and joy.

Enjoying everything that is Free

Taking frugality further you notice that the most fulfilling ways you spend your time are totally free. You begin to feel gratitude for the abundance surrounding you in this beautiful world.

Activities that are totally free often bring the most joy:

As the sun streams through your bedroom window early in the morning you can’t wait to get out into the world. Spending time playing games with the children. Reading another inspiring book or blog. Having time to chat with your partner on a walk. Learning. Creating. Listening to music. Time with family and friends.

The most valuable experiences in life are totally free. And enjoying free things is the fastest route to freedom.

More on enjoying the free things in life here: All the best things are free

Minimalism

Frugality, the full enjoyment of everything in your life, and the realisation that the best things in life really are free, seem to lead to a degree of minimalism.

Ownership works both ways. When you own something it also takes up space in your mind and puts demands upon you: to maintain it, or replace it, insure it, or clean it, or buy extra things for it, etc.

In a small way everything you own, owns a little bit of you.

So be careful before letting any new object into your life.

Things can be tricky and time-consuming to get rid of as well.

When you realise there are things that you have bought that didn’t give you value in proportion to the hours you had to work to buy them, then you begin to clear them from your home.

There is an incredible feeling of lightening as each item that gives you no value or joy is either sold or recycled.

Life becomes easier, smoother, and happier the fewer objects you have in your life. The things that remain are often high-quality high-value things that are a pleasure to use; things that genuinely improve your life.

The fewer objects you own in your life the more freedom you have to enjoy the world.

Happiness

We’re all ultimately seeking happiness. Most of our decisions in life stem from the belief that our actions will bring us more happiness.

Bringing science into the mix and looking into what truly brings happiness into a life, we can find a much better route than working longer and longer hours to earn more and more money, that is then given straight over to others for things and experiences that do not make us happier.

An 80-year Harvard study found that the quality of people’s relationships was the most important factor in their happiness and their long-term health.

The following seven simple things also have a large impact on happiness:

Listening to a favourite piece of music
Spending five more minutes with someone you like
Going outdoors
Exercise
Kindness to others
Having a new experience
Gratitude for the good things in your life

Information is Beautiful also confirm the best things in life are free:

A cycle ride or hike with family and friends can hit every single one of these happiness triggers (and is completely free): achievement of a goal, enjoying the moment, bonding, exercise, leisure, being in nature, and even building affection towards each other.

More on happiness here: Money can buy you happiness

Each of the pillars is an idea that helps you gain your freedom. Brought together into your life they will lead to a happier, more fulfilled, and more balanced life and ultimately to financial independence and, if you choose, to early retirement.

I wish you well on your journey to freedom 🙂

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