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FIRE — a difficult path to financial independence

The movement “Financial Independence and Early Retirement” is becoming more and more popular worldwide. The idea to generate independent passive income, which allows to retire in the mid of working age, has always existed. FIRE in its current form appeared in the late 1980s-early 1990s.

The groundbreakers were finance and IT professionals. These people really worked in extreme conditions and made responsible decisions. At the same time, they were characterized by a high level of income. Thus, initially, FIRE implied creation of independent capital by optimizing costs, given a stable high income.

However, today, FIRE ideas are becoming attractive to a bigger number of people. Why is it happening, and is there a real opportunity for young investors to achieve financial independence? Our platform Robo.cash communicates with private investors regularly, so we can give a number of recommendations on what mistakes should be avoided on this way.

Why FIRE?

Just a half century ago, an ideal career did not imply early retirement. A young man started working in a big corporation, where he was gaining experience until the age of 30–45. Then, to implement his ideas, he started a company using the saved money. The practical experience allowed the businessman to stay a competent manager for the next 20–30 years, and retirement was usually associated with the state of health. Personal financial independence was equal to the stability of one’s own business.

What has changed in half a century? First, the level of financial inequality has increased. In 1970, the Gini coefficient in the U.S.A was close to 0.36, and now it exceeds 0.42. For the same time, the income polarization index increased from 0.24 to 0.5. Now, much less employees have a possibility to set up business at their own expense.

Secondly, due to increasing pace of progress, accumulated knowledge is rapidly devalued. To stay competent, a business owner has to keep up with the changes like an employee. Finally, there are ethical requirements for any businessman or a top manager. Managerial positions are not associated with the possibility to make independent decisions anymore. That is why the ideas of self-realization outside of business become popular.

The new path

At first glance, achievement of FIRE goals and the following capital management require even more pragmatism than the classic career. Regular employees separate work from private life and compensate fatigue at work with hobbies. FIRE makes the lifestyle and work equal. However, there are two significant differences. The first is that one determines FIRE goals on his or her own. These can include a certain level of income, creation of a portfolio, which requires minimal efforts to manage it, or investing in an ethical business. Anyway, achieving the goal gives both financial results and moral satisfaction, which modern business and management are lacking.

The second difference is the sincere support by like-minded people. Zygmunt Bauman, in his book Consuming Life, describes the consumption of goods and services as the main mechanism for social integration. The supporters of FIRE avoid the “subjectivity of fetishism” and deliberately refuse excessive consumption. It seems that this leads to a withdrawal from society and loss of identity. In other words, there is a risk of becoming another Ebenezer Scrooge. Yet nowadays, owing to the Internet, there are specialized communities, where it is possible to create a personal social circle without competition or hierarchy.

Financial independence for the younger generation: is it realistic?

There are many examples, which show a successful achievement of FIRE goals. From the books “Your money or your life” by Vicky Robin and “Der Weg Zur Finanziellen Freiheit” by Bodo Schäfer that have become classics to current stories from specialized online communities Reddit FIRE Forum, Mr. Money Mustache, Early Retirement Extreme etc. Usually, it is a story about someone who has already made a career, a professional with a high income of about 100,000$ a year and an equally high level of expenses.

Today, interest in FIRE is shown by people under 25 whose income is much less. Can they reach financial independence? It is obvious that the earlier one starts investing, the higher the chances of success are. However, it is necessary to admit that the majority of existing recipes do not work for young investors. Indeed, it is possible to save much refusing a four-bedroom house in a prestigious neighbourhood, but what if you are renting a one-bedroom apartment?

A new generation of FIRE supporters should create new rules. For example, the 4% rule, also known as Trinity study says that retirement savings are sufficient if no more than 4% a year are used for current expenses. A 30-year-old person has much less necessary expenses than a 50-year-old one. With age, the costs will increase due to medical care or parenting. If retirement is planned at 30 (like Mr. Money Mustache’s), there can be an illusion of a secure old age. The above mentioned Vicky Robin said, “I had several thousand dollars in expenses, then my health insurance kicked in”. Now 73, she is on Medicare.

FIRE is an interesting new alternative to the classic career ladder. The implementation of FIRE ideas allows both to create a passive income sufficient for life and to enjoy the work done. At the same time, FIRE sets high requirements: continuous self-education, responsibility for decisions, ability to create and support the circle of contacts.

The next part of the article will be devoted to the lifestyle of people who have chosen FIRE.