What is FIRE and why does it matter to a business owner?
(No, I don’t mean the combustion of a material or building, though you should have insurance for that.)
In the financial space, FIRE stands for Financial Independence, Retire Early, and it represents a philosophy of living and earning so popular it has come to be known as a movement.
Popular? Yes.
A principle business owners should adopt? In my opinion, it’s not a wise choice for the majority of business owners. Let me explain why.
The originating premise of the FIRE movement was presented in Vicki Robin and Joe Dominique’s bestselling 1992 book Your Money or Your Life.
The book’s premise is that you should quantify the value of your time and compare the cost of everything you buy to the time it took to earn that money. Following this metric, you adopt a minimalist lifestyle in which you only purchase things you need.
The logic goes like this: the less you need, the less you have to work. The less you work, the more you can enjoy your life.
The authors argue that a person’s time is their most important resource, and if we don’t live deliberately, we will be stuck in a cycle of trading time for stuff, causing us to live unfulfilled and frustrating lives that we end up regretting.
I want to give you my reasoning for why this approach falls short, but let’s first look at some numbers to illustrate the implications of the FIRE approach. (What would a Dri blog be without some numbers?!)
Let’s say I earn $50k per year. Should I buy a car worth $50k?
According to FIRE, the answer depends on whether I feel the cost of the car is a fair trade off…
How would I know?
I take the price of the car – $50k – and divide it by the number of years I will drive the car – let’s say eight. That comes to $6,250 per year, which is 12.5% of my annual income. Following the FIRE metric, I am giving up 12.5% each year, for eight years to buy a car. That’s 46 days per year.
Is it worth it?
Or is there a better trade off out there and I should keep the money in my account?
Pulling back from specific examples, let’s look at how the FIRE mindset would guide me toward achieving financial independence.
FIRE suggests extreme savings of up to 70% of yearly income, with a target of quitting work once you have saved approximately 30 times your yearly expenses.
So, if your annual expenses in retirement will be $50k per year, you will need to accumulate roughly $1,500,000 to retire, which you then withdraw as slowly as possible.
The essence of FIRE’s retirement planning paradigm is to live frugally while you are working and then live frugally in retirement.
With due respect to anyone who embraces this approach to living, my suggestion is that business owners avoid FIRE and adopt my model instead: Live Well, Stay Rich and Never Retire.
Here are 6 reasons why.
1. FIRE ignores work as a primary source of joy, identity, passion and purpose
The fundamental premise of the FIRE ideology is that work is something you should try to get out of as soon as possible. I could not disagree more with this idea – especially when it comes to business owners.
People who start their own business tend to both love their work and build businesses they are passionate about. The idea that they should try to wrap it up as soon as possible doesn’t make much sense to me.
In fact, the Never Retire philosophy is exactly that – a mindset built on working as long and as late in life as you want, while checking every single item off your personal bucket list because you also Live Well and Stay Rich.
2. FIRE focuses on expenses when you should focus on income
To me, the FIRE strategy puts the cart in front of the horse. Building your lifestyle around expenses limits you to the choices and opportunities that come with a frugal approach to spending.
In my life and work, I have always focused my energy on increasing my earnings rather than obsessing about expenses.
I never understood – or supported – the premise that you can control your expenses but you cannot control your earning. I don’t believe that is true. You can earn whatever you set your mind to, especially by owning your own business, which is one of the best ways to generate and sustain wealth.
In his book Think and Grow Rich, Napoleon Hill suggests we need a “burning desire” to become rich. He argues that when we have a burning desire, the universe will present us with a way to achieve that goal. That isn’t possible if you focus your energy on limiting expenses.
3. FIRE invokes a limiting mindset that may hinder your personal growth
Focusing on expenses creates a mindset that centres around limiting, while focusing on income creates a mindset that emphasizes abundance and opportunity.
Steve Jobs would never have invented the iPhone if he had only worried about controlling his expenses or getting to retirement as quickly as possible.
That’s exactly the case for a business owner. We are builders, NOT savers.
Personally, I monitor my personal and professional expenses (it would irresponsible to ignore them), but I spend my time obsessed with growth, and how I can add value for my customers. By adding value and improving my customers’ lives, I’m adequately compensated.
4. FIRE may strip the enjoyment out of the present
Bill Keane said “Yesterday’s the past, tomorrow the future but today is a gift, that’s why it is called the present.”
How painful would it be to avoid experiencing today because you have made a decision to restrict your lifestyle so you can stop working as soon as possible?
I appreciate that we all have to balance today’s needs with the future – that’s an essential element of my work as a financial planner. But planning – and saving – should enable you to Live Well and Stay Rich, rather than restricting your choices.
Since I was young, I have been obsessed with and anxious about how decisions today impact the future. (Yes, becoming a financial planner came naturally to me!) Over time, I have learned that the point of planning and saving is to enable us to Live Well.
My approach to addressing any anxieties I have about the future isn’t to reduce expenses. Instead, with the help of mindfulness meditation, I have learned to plan for the future but live in the present. I find this approach enables me to relax, live without fear and fully love myself, my family and my work.
My point is that there are many ways to Live Well that I think are more effective and energizing than the restrictive lifestyle advocated by the FIRE philosophy.
5. FIRE may not be sustainable
Having been a CFP and investment advisor for 25+ years, I have seen almost everything the economy can offer.
Euphoric market highs and devastating market crashes. Unsustainably high interest rates and negative real interest rates. Record employment levels and stifling economic contractions. Not to mention the personal and professional ups and downs of business owners thriving and struggling through variations in the health of their business, their families and themselves.
These extremes have taught me one thing: nothing is for sure and things change very quickly.
How can an individual who is planning for a retirement that could start at age 40 and last until age 100 possibly take into account – or accurately predict – every possible economic and personal event? They can’t.
The FIRE movement relies on a series of economic assumptions about the future that fly in the face of historical evidence.
Here’s one example: is it realistic to assume that inflation over the next 50 years will be equal to the historic lows we have seen in the last 20 years? Or is it fair to assume we will see a return to high levels of inflation at some point in the next half century?
If there is a higher inflation rate in the future, it will undercut current estimates about living expenses, which will make it easy to underestimate the necessary pool of retirement funds. Higher inflation may also mean that anyone who raced to achieve FIRE is forced back to work at a time in their lives when their skills and interest are no longer at their peak.
6. FIRE may cause loss of camaraderie
As I get older, I am more and more clear about what I like and dislike, and I use this knowledge to make decisions faster and with more accuracy.
For example, I find athletic apparel very comfortable and low maintenance, so when I’m relaxing at home, I usually wear something from a sports retailer, like Under Armour or Lululemon. I have no interest in a wearing a polo or button-down shirt. I also have favourite shoes, restaurant, vacation spot, car, etc. I find that if I stick to my list of “favourites,” I’m usually very happy with every purchase and experience.
This may seem odd, but I also have a favourite type of friend. My best relationships are with other business owners, and since my practice consists mainly of business owners, some of my clients have become very good friends. If I were to retire, I might lose some of the close friendships that took years to develop and the interactions that fuel those relationships, many of which have to do with supporting each other in the wonderful struggles of business ownership.
I’m sure many of you can relate to this one.
What’s the takeaway?
My personal and professional motto is Live Well, Stay Rich and Never Retire.
I believe successful business owners can arrange for their businesses to be self-managed, so they can live the life they want.
This approach reduces the business owner’s daily involvement in the operations of their business. It enables them the personal freedom they need to pursue every item on their bucket list while remaining involved in what they love to do – envision the future of their business and make it happen.
Aside from any unforeseen health issues, I will Never Retire. My plan is simply to adjust the way I live and work so I can achieve my goals. And it’s entirely possible because my burning desire to support my clients has enabled me to build a thriving practice and achieve financial independence.
What do you think? FIRE or not to FIRE?
source https://richarddri.ca/6-reasons-business-owners-should-not-play-with-fire/
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