Three Paths to FIRE
Kristy Shen and Bryce Leung, a financial independence/retire early (FIRE) couple, did a great job framing the three basic ways of pursuing FIRE in Quit Like A Millionaire (in Chapter 22!). (Affiliate link)
In order to achieve FIRE, you are essentially balancing three factors: income, savings, and investments. For those of us still in the 9-5 rat race, the goal is thus: spend less, save more; earn more, work less for someone else. The greater your income, savings, or investment profits increase, the faster you'll achieve FIRE.
Duh. But doing all three things well, at the same time, is pretty much impossible unless you're a unicorn.
In Quit Like A Millionaire, there are three paths to FI, by being excellent at one of the three factors, and average at the other two.
Paths to FIRE, from Quit Like A Millionaire
The Investor earns an average income, has an average saving rate, but makes booku bucks from his or her investment portfolio. Think: Warren Buffet. In our view of the world, these fortunate folks are almost unicorns.
Then, there's the Hustlers, who have an average savings rate and average investments, but hustle their butts off to make big paychecks. They create companies, own rental properties, and rake in passive income while establishing more ways to create more passive income. Think: Robert Kiyosaki. Yeah, these guys are also nearly unicorns, but we could all probably scrape together a plan to become a landlord; check out Bigger Pockets!
Last, but certainly not least, are The Optimizers. With an average income, and an average investment portfolio (sound familiar?), these folks have exceptional savings rates. They hunt expenses to slash, ways to do-it-yourself to avoid paying for the cost of convenience, coupon and bargain barrel hunt, and buy in bulk, out of season, to stock up as much as possible when prices are low. Think: Mr. Money Mustache. Or us.
Or you? We’re betting most homesteaders fall into this category. Why buy organic, cage free eggs from Whole Foods when you can collect your own by just putting your shoes on? Why dash off to the big boxed stores to purchase a solution to every problem when you could repair what broke or DIY a solution instead? Why use your credit card and burden Future You with payments when you could purchase, outright, what you need to purchase?
A quick side-note: Did you notice how none of these paths mention debt? Exactly. Get rid of your debt ASAP, regardless!
You might be wondering how “just saving” can compete with The Hustlers and The Investors on the way to FI. Compete might not be the best frame, but the miracle of compound interest can surely get you there. The thing is, the Optimizers aren’t “saving” in a savings account.
The miracle of compound interest!
They’re also investing, but almost certainly in ETFs, index fund, or mutual funds. That aren’t actively managed (who has money to burn on account management fees?!). These “savings” are squirreled away in a diversified portfolio, to help manage risk, and are left alone to compound and grow. Who runs that portfolio? The Optimizer! Optimizers know that no one cares more about their money than they do, and no one will protect it, or grow it, like they will.
But wait, then aren’t investing Optimizers, actually Investors? Nope.
Sustaining 20% Return on Investment (ROI) rates are The Investor’s territory, not The Optimizer’s
The Investor has a mega portfolio. As in consistently making 20% ROI, not the typical 6-11% we little people average over the long-haul. If you do the math, even that 6% return will make a HUGE difference over a savings account of 1-2%. (Thanks, COVID-19, for tanking this even further closer to zero.)
Pretty neat to see it grow, but you can see how “only” saving $100 a month isn’t going to get you to FIRE. That’s why Optimizers slash every expense they can, to squirrel away as much as they can. They’ve learned that the sooner you have a lump sum earning compound interest, the faster you’ll benefit from compound interest.
To be honest, my guess is Homesteaders would be a fourth path, because we sort of break the rules and Hustle while Optimizing. I’m not saying we’re above average in two categories, and certainly not saying we’re exceptional at both, it’s just that we’re dual track with our focus. We have a mortgage for our homestead, which isn’t very Optimizing of us; a house, let alone so much property, is a liability, not an asset. We’re pursuing passive income side hustles while we continue to run the Rat Race to bump up our income. Hustling while Optimizing is bringing down our expenses as Hustling raises our (side-gig) income, hopefully to the extent that we can kiss our 9-5, goodbye! Lots of homesteaders hustle: selling extra eggs to cover the cost of chicken feed or selling an extra rabbit to pay for your meat rabbit’s feed. You might be able to Optimize this homestead Hustle even more by dedicating some of your land for a State’s tax-reduction program such as participating in a conservation program.
Regardless of where you are right now, you have options, choices you can make, to pursue securing more of your own independence. Dave Ramsey has a quote in Total Money Makeover: “Live like no one else, so you can live like no one else.” You reap what you sow. If you work hard, towards a specific goal, and stop but nothing to achieve it, what do you think happens? If you live like no one else, busting your butt to achieve FI, your homestead, or any other goal, what do you think happens? You get to live like no one else. But until you set out on a path to FI, you’ll be stuck in the Rat Race, just like everyone else.
This article contains an Amazon affiliate link for a product we recommend and use; we may earn a small commission if readers purchase from our links.
