LeanFIRE or FatFIRE?

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7am on a Sunday morning what do you do?

a) sleep,

b) renovate your property with all the power tools you can find,

c) sleep,

If you chose a or c, congratulations! You are a normal person.

If you chose b, well done! You are my next door neighbour and we look forward to replying in kind.

Sigh, what we get for living in apartments I s’pose.

Normally, I’m an early riser – so the noise wouldn’t be so bad – but not when you’ve been perusing some Facebook FIRE groups until the wee hours.

There’s a few versions of the FIRE (financial independence retire early) movement, largely revolving around leanFIRE (retire as early as possible by finding a number e.g. $40k a yr and live within these means) or fatFIRE (invest/save/work until a “better” lifestyle can be maintained e.g. $100k a yr).

There’s of course no right or wrong answer with either method, everyone’s circumstances, life goals and financial ambitions are different.

However personally, I’ve found that fatFIRE is probably a bit more to my liking.

Why?

LeanFIRE

As the name suggests, it’s about trying to hit a number which can generate the rule of thumb 4% withdrawal rate (25x annual expenses).

i.e.

If you want to retire on $40,000 living expenses – you’ll need 25 x $40k = $1m in income generating assets. $50k p.a. = $1.25m, $60,000 p.a. = $1.5m and so on…

Issue I have with leanFIRE is that you’re trying to make it work within a limit, with an often scarcity mindset.

Like how someone was proud to share a “hack”, by using an iron to toast bread during a hotel visit to save on breakfast cost.

Hotels and cleanliness? Yeah right.

Or when another poster claimed that to save on water bills, they flushed the toilet only a couple of times a day…

Yet another was chuffed to share their daily meal budget containing only mince, bread, baked beans and eggs.

Um that’s what Igor the warrior monk was eating during the Middle Ages sir…

But you know, you’re right – I am being facetious.

Still, I think this scarcity mindset can spiral out of control.

Closer to home, I have relatives who keep old school brick mobile phones, years ago newspaper, used (yes used) water bottles and mouldy carpets, because they can’t bear the (perceived) financial cost of chucking things out.

Hold your horses TheFrugalSamurai, aren’t YOU guilty of this too?

Guilty but to an extent mon cheri.

You see, I have been called many things – handsome, funny, gregarious, altruistic and yes, cheap.

Some of you know the financially difficult formative years of my childhood growing up in Sydney.

And hence my closest and oldest friends have long ago associated me with being “frugal”, and no doubt continue to do so.

However as life evolves, my financial principles have evolved with it.

No longer am I too concerned with spending a couple of hundred for a fabulous meal, or a couple of thousand for a quick getaway for MrsFrugalSamuari and I (don’t make it a habit please dear).

Because dear friends – I now understand the concept of value.

Which is price is what you pay, value is what you get. 

This was attributed to Uncle Warren, but I’m quite chuffed to have understood this concept without knowing he had sprouted it first.

Now when I say value, I don’t mean value as in buying stuff when it goes on sale.

Lawnmowers, buy 4 get the 5th one free? BUY BUY BUY!

Abacuses for half price? GOTTA GET EM!

Lifetime supply of frisbees? YOU BET!

Buying useless items for the sake of it, is just gullible and reckless consumer spending and makes you susceptible to hoarding.

I mean value for items and experiences which actually better your life, like my favourite – investments.

Which brings me to…

FatFIRE

As you can guess, the ideal fatFIRE scenario is one which you have more income than you can spend.

Like how if you can spend $100,000 a year but have dividends, rental income, some residual business income totaling over $150,000 p.a. then you’re doing it right.

There are many ways people aim for this, primarily being:

Earnings: Through work or business.

Profits: Buy and sell products or services.

Interests: Paid by the bank.

Dividends: From shares or ownership of businesses.

Rentals: Usually through real estate ownership.

Royalties: Through your innovations.

Which is why I pay a bit more attention to the fatFIRE groups, especially those individuals who have accumulated significant portfolios yielding enormous cheques every year.

However fatFIRE does take a longer time to accumulate than leanFIRE, because you’re trying to build a larger asset base to rely on.

I think this is a much safer way to approach being financially independent.

Because you know what they say about the best laid plans!

Having kids, rising cost of living, unexpected health costs – these can torpedo any budget, so why not er on the side of caution?

~~~

I think an important distinction needs to be made between the main proponent and media stories of FIRE coming from our American cousins versus us Aussies.

I would argue that it is much easier all things being equal, to achieve FIRE in the States than here, based on the numbers.

Firstly, the main drag on household spending, goes often to purchasing a home.

Compare the median price of a home in America, sitting at USD 226,000, or AUD 330,000.

In Australia, the median price is almost AUD 600,000.

This has a flow on effect with mortgage repayments, deposit requirements and related upkeep expenses.

Secondly, our income levels are similar, with median salaries in the US at USD 60,000 (from US Census) or AUD 88,000.

In Oz, our median incomes sit at AUD 85,000 (from Oz Census).

However cost of living is also more expensive in Australia vs US as seen here. Again constraining household budgets more.

Thirdly, the US stock market has out-performed the Australian in the last decade.

With a scoreline of 253% gain vs 86% (using Yahoo Finance).

This means that most direct investments, indexing, mutual and pension funds should have done better in the US than in Oz, contributing to the wealth effect.

It also explains the rise of indexing – whereby you purchase a low-cost index fund, which replicates the performance of the underlying index.

253% for a set and forget investment? Yes please.

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End of the day, it’s horses for courses peeps, doesn’t matter if you’re on leanFIRE or fatFIRE… as long as you take action to try and FIRE, then you’ve already done better than most!

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