Motley Fool Hidden Gems Investing - FI, Not FIRE

Episode Date: July 2, 2023

Over the holiday weekend, we take a break from the cookouts and fireworks to focus on FI – Financial Independence.   Dylan Lewis and Brian Feroldi discuss: - The core principles of FI and the different styles it can take - Why a down market is a great time to check in on your financial independence and retirement progress - Why it’s not too late to get started if you feel behind!   Note, this episode is a re-air of a conversation originally recorded in July, 2022.  Host: Dylan Lewis Guests: Brian Feroldi Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Even if you have no interest in pursuing FI, I still think there's a lot to learn from people that are on the path, that share generously, and that are saving very high levels of their income. To your point, even if you could pick up a handful of tips from them for ways that you can make more, spend less without impacting your lifestyle all that much, that can be a huge win, even if FIRE doesn't interest you at all. I'm Mary Long, and that's Motley Fool contributor Brian Feraldi.

Hopefully, your 4th of July holiday is off to a great start. This weekend, we're revisiting some of our favorite conversations on Motley Fool money. Last July, Dylan Lewis caught up with Brian to talk about the fundamentals of financial independence and how savers of all stripes can put themselves on a better path to reaching that goal. We're taking a little bit of a holiday ourselves. Our next new show comes out on July 5th. We'll see you then.

It's Independence Day weekend. Many of you are probably grilling, watching the fireworks, or hanging by the pool. Over here at Motley Fool Money, we're setting our sights on financial independence with help from Motley Fool contributor, Brian Feroldi. Brian, if listeners are anything like me, they've logged into their brokerage accounts, 401 s, IRAs recently, and seen numbers that are a bit lower than they are used to. But we were talking earlier this week and you said now is the perfect time to be focusing on FI, financial independence. Let's dig into it. What is FI and why is right now a good time to be looking at it? Yeah. Well, you just said it beautifully. FI stands for financial independence,

and it's most commonly associated with the FIRE movement, the Financially Independent Retire Early movement. The core idea behind people that are striving to reach FI is to hyper-focused on saving and investing early on in their career, which in many cases means saving and investing between 25% and as much as 75% of your income. And the idea there is hyper-focused on saving and accumulating, so that way you can retire, and I put that in air quotes, decades earlier than normal. Yeah, I like that air quotes there, because I think FI is related to retirement. Maybe they're cousins. Maybe FI is like the younger cousin to retirement's elder cousin, just because it's not quite retirement in the

conventional sense, and it can mean so many different things to different people. Yeah, there's a really big spectrum of FI, and depending on what stage you're at, people are aiming towards different things. For example, there's people that are pursuing what's called Coast FI, and that is essentially when you front load all of your saving, that way you get compounding working for you later, and then you can go back to spending 100% of your income and know that your retirement is fully taken care of. Other people are really going after what's called the barista fi, which is when you have enough accumulated so that you can go to working a part-time job to really cover your monthly expenses. Other people are after what's called

lean fire. That's when you've accumulated enough money that you can live a relatively Spartan lifestyle off of your nest egg. And then finally, there's what's called fat fire. And this is essentially accumulating so much money that you can comfortably spend $100,000 or more per year indefinitely. So I think to kind of put a summary on that, it's that FI really is choosing how you spend your time and letting money allow you to choose how you spend your time. It can be retirement in the conventional sense where you're just kicking your feet up and saying, you know, I'm going to be relaxing, be hanging by the beach, you know, having maybe a lower cost of living than I do in my earning years. It can also be something where you've made enough that you're really able

to choose how you're spending your time and what you're doing with it. Yeah, that's the real key point here is you get to choose how to spend the rest of your life. You are no longer restricted to working at some job 40 or 50 hours per week. You can choose to do so if you'd like to. And I know many people that are quote unquote retired, but still choose to work simply because that's they choose to spend their time. But it's really about giving yourself as many options to spend the time that you have anyway you want. You mentioned the different outcomes and the different groups that people broadly would fall into with FI. People are also in totally different periods on the pathway to FI. It's a spectrum. You have some people that are

very much in their retirement savings early on, still putting that money away. You have other people that are closer to actually tapping some of that money or maybe you're already accessing that money because they've reached FI. I'm sure that the last couple of months, really most of 2022, has hit very differently depending on where you are on that spectrum. Yeah, for sure. The journey to FI is a spectrum. If you are very early on in that journey and you are in hyperaccumulation mode, but your nest egg isn't that big, the decline in asset prices that we've seen over the last really year or so is a true gift because you're accumulating assets at better and better valuations, which means that your future returns

from those assets will likely be higher. If you're more towards the end of your FI journey, so you have a massive nest egg saved up, well, then a big decline in asset prices is a major headwind. Because just to throw some quick numbers on it, if you've saved a million dollars at this point and you see a 20% decline in your assets, well, that's like a $200,000 hit to your net worth, which is for many people in the FI movement, several years of asset accumulation. So depending on where you are in your journey, this could be either a good thing, the decline, or it could be something that really delays your financial independence. So give it all that. Why do you think right now is a particularly good time for people to be

focusing on FI? Well, the typical number that most people in the FI movement throw out is that they want to save about 25 times their annual spending so that they can achieve financial independence. There's no doubt that asset prices post-COVID were inflated. The stock market was at all-time highs and was raging, real estate prices has gone up, and a lot of people saw their net worth just absolutely skyrocket. There's no doubt that that took many people up to their FI number earlier than they would have predicted beforehand. If they were assuming that they had hit their Phi number at that level, perhaps they weren't being appropriately conservative with their assumptions. Now is a really good time to really revisit that calculation because if you can

withstand a 20% hit and you can still hit your Phi targets, that is a much better time to do so. I like that line of thinking. The way that I will generally approach anything that I have, what I would see as an elevated level of risk to is to make the numbers as hard as possible. I would say, quitting especially a high-paying job and deciding to move into something that is more of a passion or just something that you'd rather be spending your time doing and maybe make some money along the way, I'd consider that something that's reasonably risky. You're giving up the certainty of a paycheck for something that's a little bit less known. Knowing all that, I think this is an opportunity for people to have a built-in margin of safety

forced on them rather than have to imagine it themselves. Yeah. Most people that I know that are in the FI movement or pursuing FI are actually really conservative with their assumptions anyway. Nobody wants to pull the plug and then have to go backwards. A lot of people that I know say, I'm not going to pull the trigger on FI until I have, say, 30 times my spending rate and I also want to be completely debt-free. Like you, I like to make really conservative assumptions if I was on the path to FI. The times that we've gone through over the last year really show why that conservatism can pay off because you have no idea what's going to happen to asset prices over any given stretch of time. The more conservative you

can be with your assumptions, the more you can withstand the shocks that we've seen in the markets. You mentioned that 25-30 times number, and the asset prices affect the numerator of it, but we're also seeing things that affect the denominator of it, which is what you'd expect your expenses to be. There are a lot of things that have soared in prices recently, but I think now is another particularly good time to be checking in on where you stack up with FI, if that's something that's a priority for you, because it's a reminder that things may cost very different amounts in the future. Yeah, very, very much so. To your point, we've seen the price of housing skyrocket, of food skyrocket, of energy skyrocket. So,

even if you're very focused on keeping your expenses low, many of those expenses simply have to go higher given what we've seen with the inflation rate. Hence why it's an even better time now to recalculate your fine number based on a higher spending level to see if you can truly make it. Yeah. If you're sitting on a fixed mortgage, you're probably feeling pretty good, especially if you refinanced during the past two years. If that's part of your plan, where you're going to be aggressively paying that down, having zero debt, you know your housing costs are going to be relatively locked in. If you're renting, maybe you're not feeling so awesome about the current state of things. But I think even if you have a vision of FI as you're traveling the

country and you're spending a lot of time on the road, whether it be at a camper, a van, an RV, gas costs have proven that it's maybe a little bit more expensive than it's been over the last couple of years. That might be worth bringing into the modeling that you're putting out for your financial future. Yeah, very much. But we should say, as pushback to what we're saying right now, the whole point of the 25X spending rate was based on the 4% withdrawal rate. In theory, that 4% withdrawal rate was designed to be so conservative that it could withstand really any economic environment, including the one that we are going on now. Perhaps we're being overly pessimistic by saying people should be even more conservative.

Yeah, we're adding conservatism to conservatism there, Brian. I think if we want to take a slightly more optimistic note, for people that are earlier on in their FI or FIRE journey, this is in a way a do-over opportunity for them if they haven't been aggressively investing for a long time. Yeah. Stock prices are where they were back in 2020. So it essentially allows you to rewind the clock and invest as if it was 2020. We should also say that COVID has created some new opportunities for people that are pursuing FI. Lots of companies out there are willing to hire people remotely, which frees up people to live wherever they want, and they can still take a high-paying job in a different part of the

country. So COVID has been a challenge to people in the FI movement, but it's also presented new ways of moving forward. For folks that maybe are hearing all this and saying, this sounds pretty interesting. I'd like to spend a little bit more time digging into this. I'm not as familiar with it. What are the things that people should be focusing on and what resources would you point people to? Well, in truth, the people that are interested in FI now and previously should be focused on the same things that they've always should be focused on. And that is things that are firmly within their control. If pursuing FI interests you at all, you should focus your time and energy on things you can control, which is how hard you work, what you work on, how much you

spend, how much you save, and how you invest your savings. Those things are always within your control, and what asset prices do over any given period of time or what the inflation rate is, is not within your control. But if you focus on the things that you can control, you should be able to reach FI within your timeframe. I always feel like tough periods, particularly in the market, are a little bit easier if you can give yourself the feeling of taking action. I think it can be so hard to just kind of sit there and watch things happen, maybe giving people a sense of control over things they can kind of exert. What steps right now do you think people can take that are actionable to maybe put

themselves on a better path to FI? One thing that is always within your control is upskilling yourself. Learning and taking on new tasks within your organization or where you work can lead to new opportunities for you down the road, which could potentially increase your income. That can also put you in a better position to negotiate when it comes to your job performance review and perhaps winning a raise in time. Focusing on yourself and focusing on your skills is always something that's a bright idea. Yeah. I think focusing on the top line in general. If you're looking at yourself as a business, Brian, your salary or your hourly wage or however you're collecting your money, that's basically your sales figure. Upskilling

is a way to put yourself in a better position for that. We have seen, there are some stories coming out about layoffs happening at some companies, but broadly, we're still looking at what seems like a pretty tight labor market and what looks an awful lot like a worker's labor market right now, which is also good if you're trying to expand that top-line figure. Yeah, very much. Employers are very willing, I think more willing than ever, to work with employees on either flexible terms or on their pay or on their compensation, because the hiring market has been very, very hard for many, many months. I actually have a friend of mine that recently negotiated working part-time while still maintaining her benefits

and salary, simply because she basically said, I'm going to quit otherwise, and she meant it. But her employer knew that finding and replacing her was going to be very challenging. If you are a highly skilled person and you are in demand at your employer, there's no doubt that you do have some power to negotiate. Yeah. And I think another thing to keep in mind as we're looking at what the future of work might be, we've seen so many things change over the last couple of years. One of the things, particularly as it relates to the FI movement, that has become more approachable

is the idea of where you work and where you live. We're seeing so many folks who typically had to be in coastal cities or places that were kind of hubs sprinkled throughout the country, where the cost of living tended to be quite a bit higher. We're seeing that change pretty dramatically. And really, your living costs, the shelter, the house that you live in, is one of the biggest costs for most people. That isn't as set in stone as it used to be and might be an opportunity for people to save some money. Very, very much. The work-from-home trend has been a boon to people that can find jobs in high-paying areas of the country,

like New York, Chicago, and San Francisco, while simultaneously moving to rural parts of the country that are lower cost. I mean, that is a major win for people that are pursuing FI. I say that as someone who lives in Washington, D.C., and has no intentions of moving. And I'm sure that this may seem a little hardcore for some people. I know, personally, I can't sustain a 60% savings rate or 70% savings rate. I know myself well enough to be able to say that. Brian, the way that I tend to look at FI and the way that I think about the movement is pretty similar to times that I've done diets in the past, where I've tried to diet for a couple of weeks. It wasn't that I had to stick to the letter of that

diet going forward, it was that as I did it, I learned the things that I should be paying attention to, learned the substitute behaviors, things that were a little bit healthier than maybe the default decision I would have made before. That with that background on a daily basis and as you're planning out your months, it's a little bit easier to make some of those healthier choices. I totally agree with you. Even if you have no interest in pursuing FI, I still think there's a lot to learn from people that are on the path, that share generously, and that are saving very high levels of their income. To your point, even if you could pick up a handful of tips from them for ways that you

can make more, spend less without impacting your lifestyle all that much, that can be a huge win, even if FIRE doesn't interest you at all. Brian, you are one of my favorite follows on Twitter. And it's because you're always dropping nice little wisdom nuggets and giving it in nice plain English for people that follow the finance world. And you tweeted something recently. It wasn't necessarily related to the planning of the show, but I thought it was helpful. And you said, small changes that dramatically improve my life. And the things that did not make that list were watching the news and really paying attention a ton to minute by minute what's going on, the things that did daily walks, volunteering, writing my daily goals on paper,

planning time with friends and family. I think, especially as we're heading into this holiday weekend, I want to kind of leave people with that because the whole point of this movement and the whole point of being able to set your money up so that it grows for you is that you have the opportunity to spend more time doing those things that you enjoy. I very, very much so. I mean, those are the things that ultimately bring you happiness in life. It's not necessarily maximizing a number on a spreadsheet. It's really affording yourself the opportunity to spend your time how you want. And if you're after happiness, which many of us should be, a lot of that involves spending more time with friends, family, and on activities that you can enjoy. And if you just get

that by studying the FI movement, that is a massive win. With that, Brian, anything fun planned for the July 4th weekend? We just hang around in my town and we go to a little fireworks display and lots of my friends and family go, watch some fireworks, have some food. It's always a good time. How about you? Probably more of the same. You know, I've got a friend with a roof deck in Washington, D.C. Hoping I can get over there for the fireworks, get a nice view of things, you know, try to do a little grilling. I don't know. Maybe try to go to a park or have some fun. But, you know, just the typical July 4th festivities. Sounds wonderful to me. It does. I'm excited for it. Brian, thank you so much for joining me. Thank you, Dylan.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. Remember, we're off until July 5th. Enjoy the holiday, and we'll see you back on Wednesday.