An important part of the FI/RE process is setting goals. The FI/RE number is often referenced as the paramount goal to be achieved and once it is achieved, a world of possibility opens up. While I think having a FI/RE number is fine, I think there are several possible problems that you can run into if you calculate a single long term goal. The first of these problems is that you can actually end up feeling dejected or depressed. This can happen because the goal that you set out for yourself is so far off in the distance that it isn’t motivating, like a goal is supposed to be, but rather it can have the opposite effect and demotivate you. This happens because there is a natural tenancy, when a goal is far off, it feel like small changes now, won’t really have an impact on the big picture. The analogy for this is if you knew you had to walk a thousand miles to get somewhere you wanted to be, then whether you take one step directly towards your destination, or one to the left or one to the right or even one backwards, it would have a negligible impact relative to the overall job to be done. And that may be true for one step, but if you continue to have that mentality step after step, then the compounded impact of the small decision will result in a drastic difference in how close you get to your goal.
The second problem with setting such a long term goal like this is something called life. Life happens to you in between the time you set out on your financial independence journey and the time you reach the summit. And what happens in your life can change any number of the many assumptions that went into the FI/RE number you initially calculated. Say your plan for FI/RE was to travel the world and take advantage of the power of the US dollar abroad. Then you take a couple trips and realize you don’t feel comfortable traveling and don’t like it as much as you first thought. Or maybe your plan was start up a company to keep a few dollars coming in, but you find that you don’t get enjoyment out of working for yourself. Changes like those have significant implications on the FI/RE number and your path to financial independence. So you calculate a new FI/RE number and now realize that you need to add another 5 years of working before you can reach your goal.
I liken this traditional approach to an engineering process (used mostly in software) called waterfall. The basic concept is to gather all your requirements, analyse what needs to be done to meet those requirements, design a system that meets those requirements, implement it and when it is done test it to make sure it works the way you want. The particular problem with applying this approach to financial independence is that the requirements gathering, analysis, and design portions can all be completed in a matter of days or weeks. But the implementation typically takes years.
For many years, the waterfall process was the go to standard for software developers. But somewhere in the early 2000s the tide started to shift from the waterfall approach to a new approach called Agile. What made this approach different was the fact that it took large projects and broke them up into smaller time-boxed chunks. The goal was at the end of each chunk of time you would have something “potentially ship-able”, meaning it might not do everything you wanted it to do but it at least did something of value. The big benefit of this approach was that it allowed rapid feedback and flexible (or Agile) adaptation based on that feedback.
I believe that the same Agile approach that took over the waterfall method in software development can also be applied quite effectively to FI/RE. Rather than setting one grand objective and setting out on the long journey to achieve it, set many intermediate goals that help to break up the journey. At each milestone you have a “potentially ship-able” FI/RE plan. It may not be your ideal goal for financial independence, but it is something that you can use and rely upon. Let’s take a look at a specific example to make it more concrete. Let’s say your current budget
(made very rough for illustrative purposes) looks as follows :
|Bills (Electricity, Cable, etc.)||400|
Over twelve months that results in an annual spend of $31,800. A typical financial independence calculation would take the $31,800 and multiply it by 25 (whether or not the 4% rule is correct is not relevant to this point in the conversation) to get $795,000. That is a huge goal. Not something that can likely be tackled in a couple years.
Now let’s apply an Agile approach. The first step is to come up with the MVP. In software land that is what makes up the minimum viable product, but for this example let’s call it the most valuable priority. So what from the budget above is most important. Well I can live without all the things on that list except for one, food. So that is my most valuable priority. If I run the same “FIRE number” calculation I come up with $120,000. $120,000 is still a pretty lofty goal, but depending on your income and savings rate it is something that is achievable inside of 3-4 years. If I can save $120,000 I know that I will never have to worry about food again in my life. I might not be able to pay for anything else on that list. I might even end up homeless, but I can take comfort in knowing that I will have money for food.
The next biggest ticket item on the list is rent, or housing. The approach I am personally taking on housing is to break the goal up into two parts. Currently I have a mortgage and I am paying about $1800 a month towards that mortgage. The payment is split almost down the middle $900 principle and interest and $900 into an escrow for taxes and insurance. The first goal that my wife and I set for ourselves is to pay of the mortgage. We are currently doing that as aggressively as possible. It was amazing the difference once we discovered FI/RE and set this out as our strategy. In one month we paid off more of our principle than we paid off in an entire year of paying just the minimum mortgage payment. Now I know there is some debate in the FI/RE community as to whether this is the best way to be applying the money we are saving, but for us it is the right decision. We believe that in roughly the 3 year time frame we can pay off our house. At that point a few things will happen. #1 we have the mental win of setting a goal and being able to hit that goal. #2 we know that we own our house and basically no one can take it from us. #3 we lower our monthly budget by $900 which gives us $900 extra to save/invest. #4 it gives us a clear goal for how much we need to save in order to know that we can basically stay in our house forever (even if we don’t have money to pay for electricity or heat yet). That number is $270,000. With that, we should have roughly enough to pay for taxes and insurance indefinitely. There is some risk in that taxes don’t always track with inflation, but we are still quite a ways away from retiring, so from a ballpark perspective it’s close enough.
The interesting thing about taking this Agile approach to FI/RE is that as you check those goals off the list you might find that you feel empowered to make more bold moves. Let’s say you had planned to get all the way down the list and reach the original $795,000 FI/RE number, but at some point in your journey you find that you have gotten through food, housing and utilities. Take a moment to assess, do you really need more than that? Sure you might want more than that, but just getting through those key needs really means you are set for life. When you get to that point, even if you had planned to check entertainment and travel off the list, you might find that the lure of freedom is too attractive. Or you might find that your passive income streams in addition to your savings/investment accounts give you enough for the other categories.
Alternatively, let’s say you got all the way down the list and hit your FI/RE number. Should you immediately stop working? If you are enjoying what you are doing, I would say no. Every day you work beyond hitting your FI/RE goal does one of two things. It increases your certainty of success and/or it means you can afford luxuries that you had foregone up to this point. For me, at least as of today, I plan to get to my FI/RE goal and spend at least another year or two working. One year to make a few luxury spends and also pay for all the long term high dollar investments that can crop up unexpectedly. New computer, new car, new hot water heater, new A/C, etc.
What got me started down this path is that I read a post on Reddit recently where someone had posted a question as to whether other people felt as depressed as they did about their financial independence goal. I couldn’t believe it, because I have had the complete opposite reaction to FI/RE. I don’t think I have ever been more motivated and driven in my life. The demotivating feeling of facing a seemingly insurmountable task is amplified in the financial independence space by the fact that many who first learn about the concept of financial independence learn about it through the success stories. They hear about people who have retired at 30 and think that there is some secret sauce that can take them from whatever position they are in today and magically put them on the fast track to retirement. The reality is that there is no secret sauce, just hard work, frugality and sometimes a little luck. Second to that, they envision “retirement” as sitting on a beach, but for many in the FI/RE movement, it seems that retirement is less about sitting and doing nothing and more about working, but doing what you are passionate about at your own pace. The truth is, the people who are able to achieve their goal in their 30s likely had one of a few things going for them. Either they gained an understanding of the importance of frugality early in life, they are actually continuing to work for themselves, they were able to get into a high income position and not inflate their lifestyle or (most likely) all of the above. Just because you didn’t have those advantages doesn’t mean you should feel disheartened. Set shorter achievable goals and start working towards them.