Published in · 6 min read · Nov 22, 2019
Over the past decade, the idea of being financially “free” has really made a name for itself — literally, in fact. What has emerged is the FIRE movement (Financial Independence/Retire Early), a philosophy and lifestyle that has spawned dozens of bestselling books, as well as a proliferation of blogs, podcasts, and YouTube channels.
What does “financial freedom” really mean? In FIRE circles, it typically refers to possessing a net worth of 20 times your annual expenses. Whether or not you agree with that as an accurate measurement of your financial freedom, you may have also heard some of the following myths about financial independence, many of which are mixed in with FIRE information.
These myths should all be dispelled:
This is by far the easiest myth to debunk. Whether you’re talking about early retirement or simply saving and investing enough so that you don’t have to worry about money anymore, becoming financially independent has nothing to do with a specific percentage. This myth doesn’t account for the fact that people have vastly different incomes, start saving at different ages, or want to save different amounts.
Additionally, it’s easy to make the argument that saving is a less-efficient pathway to financial freedom than investing. Regardless, the point is that you don’t need to focus on saving a specific amount of your income in order to achieve your financial goals; it’s going to vary a great deal based on your circ*mstances. It will also greatly vary according to the choices you make in investing your funds. Wisdom in investing and building wealth have virtually nothing to do with saving an enormous amount of money in the hope of financial freedom.
Granted, every little bit that you save can help you reach your long-term goals. But nixing your latte budget and tearing your kitchen towels into half-sized pieces isn’t going to get you from minimum wage to millionaire status. Instead, there are two main things you should concentrate on doing.
One is to make more money, period. The second is to eliminate wasteful spending, focusing on the biggest possible areas of savings. For instance, if you can accept driving a used car for a few years instead of buying a new one, you will not lose money wastefully on the “sticker shock” and immediate financial loss that occurs when you drive the new car off the dealer’s lot.
How about downsizing or relocating your apartment? Leases, cars, luxury items and expensive purchases are long-term decisions that are often made without considering the big-picture commitment. One-time decisions with long-term effects that can make a big impact on your overall net worth are an easier, faster way to create value than battling with willpower on a daily basis over a $3.50 drink. Enjoy the coffee and find a place to network for more customers, better jobs and more creative people while you drink it.
“Debt-free” has a nice ring to it. In fact, it may be a good goal to achieve. Unfortunately, it’s not a great rule of thumb for building up your overall financial strength long-term. When borrowing responsibly, debt is better thought of as “borrowed purchasing power” — and can help lenders, employers and investors (if you’re an entrepreneur) see that you’re trustworthy and responsible.
The biggest deciding factor regarding incurring debt should always be “why.” The purpose of going into debt and the future benefits from it ought to govern the decision entirely.
Borrowing for an education is smart — so long as you intend to use the knowledge to survive by delivering a product or service with that knowledge. Borrowing to purchase real estate, invest in a new “side business” or to start a new entrepreneurial venture may be the only way to get your future moving — in that case, you are borrowing because you believe in your plan.
Borrowing for an expensive wristwatch, on the other hand, is not a wise use of borrowed funds. You may look nice, but you will have a hard time building wealth on credit card bills for new clothes — even if you can make the payments.
It should be obvious that you don’t want to incur debts you can’t repay. But judiciously using your debt-based purchasing power to amplify the value of your investments or business holdings is a wise move, not a foolish one. Like any tool, debt can be dangerous when misused — so don’t misuse it.
So what do you do now? You know what’s not true, but what is? How do you get from where you are now to where you want to be?
The first step is to determine exactly what your current situation really is. This is harder than it sounds, especially if you already feel like you’re in a hole; it might be stressful simply looking at the numbers. However, it’s crucial. Taking a look at your situation in the present, here and now, is a great way to get moving with a future of real wealth.
You need to know how much money you have, how much money you owe, how much you’re saving on average, and how much you’re spending. Where is it going? Figuring out all of these things is a prerequisite to making an intelligent plan of action for a personal financial plan.
Next you need to think about where it is you want to be financially. What is your goal? What is the purpose of your work? How much money will you need to create the future that you desire? This can also be challenging, and it’s certainly not as easy as plucking a number out of thin air. However, you don’t need to arrive at an exact figure, especially since you can begin to make changes to the route you’re on to achieve wealth and prosperity.
With the first two building blocks — orienting to the present scene and knowing your future direction — you can begin to set up some rules for your life and your spending. For example, if you find yourself in uncomfortable debt, making a rule that you will not borrow more unless you have paid down old debts is a good start. Over time, you’ll find yourself making changes to your daily, weekly, and monthly habits that get you moving in the right direction.
If you have the ultimate goal of retirement some day, you do, however, need a decent idea of how much money you need in order to feel that you could safely “retire” from your career (if that is indeed your goal). Getting out of debt and making wise investments to build wealth that you can live on will require a more detailed financial plan. Even if retirement is not your goal — maybe you just want to build enough wealth to take a few years with a “cushion” to start a business or pursue new working purposes, the planning will need to be done.
The ongoing action needed in your financial journey is to embrace education. There’s an infinite amount of money in the world and an infinite number of ways to increase your wealth. To accomplish that, though, you need to have at least a rudimentary understanding of what money really is, and how financial processes work. Without this knowledge, money and financial processes can control you instead of you controlling them.
With these suggestions under your belt (though it should also be said again that education is a constant process), and an accurate, close-up view of your own financial situation, you’re armed to set your goals and imagine brighter ideas to make big leaps forward toward your own financial freedom. In order to create FIRE, in other words, just start with a few small sparks.
