What does it really mean to be Financially Independent

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You might have heard of the term ‘fire in the belly’ meaning being highly self-motivated.

However, there is a different kind of F.I.R.E that is gaining traction in the world of finance.

Yes, that’s right, we are referring to F.I.R.E- the acronym for Financially Independent, Retire Early.

While there is no shortcut to success, FIRE is believed by experts to be one of the many ways which can aid in accelerating the progress towards financial independence.

Let’s find out the deets about FIRE and why there is no harm in trying to adopt some of FIRE’s financial habits into your daily life - to the extent possible and on your terms. 

How do you define financial independence

Imagine if you had all the time in the world and a comfortable amount of money to choose, pursue and afford all your hobbies and follow all your passions throughout your lifetime.

All of this without the worry of ever falling short of money or without feeling the need to start looking for employment again or without depending on another person’s earnings?

Achieving this would be financial independence in the true sense. 

When one is young, healthy and has an income, the importance of building a sizeable monetary corpus and achieving financial freedom at the earliest might not seem something to worry about.

However, as one grows older and assumes greater financial responsibilities for self and family with multiple expenditures or the retirement age nears, the significance of being financially independent dawns upon us. 

Instead, there are a few who choose to follow the less trodden path and adopt FIRE.

FIRE requires a change in perspective and evaluating of the core priorities in life for each individual.

FIRE is all about building sufficient wealth for oneself as early as possible.

Accomplishing FIRE means the accumulated wealth and assets should be able to generate adequate inflation-adjusted income that would last an entire lifetime. 

No pain, no gain

In simple terms, FIRE is a new-age monetary movement that encourages investors to lead a frugal, minimalist lifestyle by curtailing expenses and enhancing income streams -either from returns on passive investments i.e. house rentals or dividends, part-time jobs or gig projects towards building a sizeable corpus. 

Once the monetary goal is achieved, the investor can then opt for early retirement.

Thus by ensuring a high savings and investments rate as a per cent of the income and reducing the expenses, an individual can fast-forward the journey to financial independence. As per FIRE, financial independence is basically becoming work-optional or taking early retirement. 

A Forbes article mentions the following 3 broad paths to FIRE:

  • Fat FIRE: This is about retiring while maintaining the same standard of living, without any lifestyle compromises due to financial constraints. This translates into extreme savings levels and intensive investment strategies.
  • Lean FIRE: This involves adopting a minimalist lifestyle and considerably cutting down expenses to build wealth for retirement.
  • Barista FIRE: Under this, the investor would strike a balance between Fat and Lean by enhancing income streams through higher savings as well as taking up part-time jobs or gig projects.

FIRE up your finances

Like any other route to attaining financial freedom, FIRE too requires a lot of financial planning. 

The core tenets of FIRE are:

  • Save: Save a lion’s share i.e. almost 50-70% of your income. This would ensure that the cash inflows are being channelized towards building a future monetary corpus.
  • Reduce expenditure: Exercise financial discipline i.e. drastically cut down on discretionary expenses and spend only on the bare essentials. This would ensure that cash outflows are minimized so that the surplus at hand is maximized. 
  • Invest: Invest in low-cost index funds, ETFs etc.

    It must be remembered that most investment securities have an associated cost of exorbitant charges, high fees or steep interest penalties upon premature closure.

    By following this rule of FIRE, one can grow money in an inexpensive manner without bearing high fees on investment instruments.  Digital gold on the Jar App is another example of a zero-charge investment avenue that delivers superior returns with the option of anytime exit.
  • Start Early: Start your financial planning early. By this, you can take advantage of the power of compounding and be financially better off. When the monetary target is clear, it is easier to build a plan and work towards achieving it.

How is the progress tracked?

An ET study reveals the math behind the financial independence ratio, the key metric that most FIRE followers vouch for.

This is the ratio of one’s monthly passive income compared to one’s monthly expenses.

Say the passive income is INR 1.5 lakh each month and the expenses are INR 75000 per month, the FI ratio works out to 200%.

Any value (the higher, the better) over 100% reflects good progress towards the goal of financial independence. 

It’s your life, you decide

Easier said than done, you would say.

We agree. However, these rules are not set in stone.

There is room for flexibility.

Since saving a massive 50-70% of the income is not everyone’s cup of tea, one could enhance income streams by starting a side gig, taking up part-time jobs, upskilling to command a higher pay package etc. 

On the expenses side, it’s important to segregate spending into essential and discretionary, while cutting down on the latter.

The third route and best strategy is to make investing and saving a regular habit.

Is FIRE meant for you?

It is possible to attain financial freedom by starting investing early, even if the investible amounts are nominal.

For example, by offering investments in digital gold as low as INR 10, Jar is helping inculcate the healthy habit of regular savings.

The following 5 steps sum up FIRE in a nutshell

  • Define what financial freedom means for you: Whether you wish to stop working altogether after reaching a certain lumpsum monetary amount or wish to save money and spend on your hobbies. 
  • Know your financial position: Get a good understanding of your expenses and financial commitments relative to your income streams - both from business or employment as well as passive income sources like interest, dividend or house rentals. By knowing the monetary outflows and inflows, you are better prepared to plan your finances and retirement accordingly. 
  • Simple living, high thinking: Adopt a simple lifestyle and live within your means. This means curtailing expenses, aggressively saving and diversifying alternative income streams. All of this would ultimately contribute towards a larger retirement kitty.
  • Start investing early: Invest in instruments and assets that offer high and stable returns with low fees or charges and minimum risk. The Jar App enables investors to build a corpus in equivalent digital gold. Gold has been touted as an inflation-proof, safe asset with high price appreciation potential. 
  • Pay off your debt: Settle your financial borrowings, especially high-interest-bearing loans that burden your finances.  

While F.I.R.E requires small sacrifices in terms of lifestyle choices and financial discipline, the broad principles of boosting income levels, reducing expenditure and increasing investing are of universal value for all investors.

About Jar App

Jar App is an automated Investment App that enables investors to securely invest in 24K Digital Gold, offering unimagined convenience, absolute safety of investments and superior gains.