“Money is a terrible master but an excellent servant.” –P.T. Barnum
We might love money or hate money, but we all spend money. There might have been times when you found yourself wishing that you did not have to work for money, that you were able to retire early without having to rely on outside financial help, or that you could live life on your own terms even when continuing to work became impossible.
Real wealth, therefore, is about freedom—being free from the control of money, independent from anything financial. That aspiration has led to a financial movement called Financial Independence, Retire Early (FIRE), which has gained traction through online discussion forums, blogs, podcasts, and social media in recent years. The movement is defined by a frugal lifestyle and extreme savings and investment. FIRE practitioners first try to calculate their FIRE number (they aim to save 25-30 times their annual expenses) and then reduce their spending until their “independence day” arrives.
The FIRE math and method look straightforward. However, given that we are all different, can the same formula apply to everyone?
The term “financial independence” has a different meaning for everyone. A comprehensive financial planning process will help you prioritize your needs and wants in life. Not everyone wishes to retire early. And depending on where you are in your plan and various factors in your unique situation, not everything has to be sacrificed. Maybe that dream beach condo, which seems to cost a pretty penny but would bring you abundant joy, does not have to wait. Perhaps you can help the charities you care about when your gift will have the most impact. Generally speaking, opportunities for making money will continue to arise, but money cannot buy back time.
At Resource Consulting Group (RCG), we believe your financial independence journey needs to start with you, not a number. Money is only a means to support your goals and objectives in life. It is unwise to live beyond your means, yet the FIRE approach might lead you to presume that all your dreams must wait until you have achieved your financial independence number and “declared” your independence. This does not always have to be the case.
A simple FIRE number and a budget are insufficient as you work hard to build up your nest egg and juggle several moving parts. Before embarking on your journey to financial independence, consider these critical points to help you avoid blind spots that could sabotage or hinder the financial plan you have created for yourself and your family.
1. Investment and tax planning
Many people know they should stick to a budget and invest their savings. But, not all penny-pinchers know how to make the most of their savings. Proper discipline in investing is just as important as discipline in saving and spending. Many do-it-yourself investors follow and copy what other investors are doing without an evidence-based investment philosophy and a sound allocation strategy. Having an appropriate investment philosophy and sound allocation can help investors balance between risk and return. Many are unfamiliar with essential investment processes such as rebalancing among various asset classes and tax-loss harvesting to take advantage of the ups and downs in the market. Others are unaware of the costs of investing, negligent of the high management fees, or unreasonable expense ratios in the investment products sold to them. Don’t let these expenses eat into your investment growth and significantly impact your portfolio’s performance over time.
Life does occasionally throw us curve balls. Unexpected death or disability might turn the world upside down for families. Extreme savings used in the FIRE method might “burn” everything you have put in savings and leave you and your family in a vulnerable situation due to the lack of protection against “acts of God” if you haven’t purchased the right insurance coverage. On the other hand, having more insurance coverage than needed results in less savings for your desired financial freedom. Therefore, reviewing your insurance plans, including life, disability, and property and casualty insurance, is advisable.
3. Estate planning
Estate planning can often be a neglected part of financial planning. It is easy to delay answering uncomfortable questions such as, “What happens to my assets and my loved ones when I die?”, “Who will make decisions for me if I cannot make them myself?” etc. Can your current financial independence plan give you peace of mind when these critical “what if” questions pop up in your mind?
To avoid all of the aforementioned blind spots along your path to financial independence, it is crucial to create a comprehensive and holistic financial plan that addresses every element of your finances.
Keep in mind that life is a moving target. Life events such as job change, marriage, divorce, childbirth, retirement, etc., often result in significant changes in people’s financial situations. As a result, financial plans often need to be monitored, reviewed, and adjusted to continue to be helpful and successful.
Creating and reviewing a financial plan can involve sophisticated analytical work and require you to make crucial decisions during different stages of life. It requires a competent financial planning professional’s knowledge, expertise, and experience. A professional should be able to provide you with the guidance and support you need to navigate your financial independence journey with confidence and peace of mind.
Contact an RCG advisor to discuss your financial plan and let us guide you in your journey toward financial independence. We’re here to help.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.