A different approach for reaching FIRE
Whoever deals with the FIRE Movement will sooner or later come across the 4% rule.
This rule is used to achieve the FIRE state.
What is behind it?
First of all, we have to ask ourselves the question “With how much money could we easily make ends meet per year?”. The answer to this question is, of course, individual. Everyone has different levels of expenses. Some people only have to provide for themselves, while others have a family to feed. But whatever amount may come out. For the sake of simplicity, let’s call it “annual expenses”.
We then calculate this “annual expenditure” by a factor of 25.
Example:
20,000$ (annual expenses) x 25 = 500,000$.
We now refer to this $500,000 as the “savings amount”. This amount is necessary to be able to reach the FIRE state. Now the 4% rule comes into play.
If we take 4% from our savings amount (500.000$) every year, we would get 20.000$. This means that we would now get by with the amount for about 25 years — as soon as this amount has been reached and the capital does not generate any losses. Depending on which investment one chooses, this amount can even last until the end of one’s life. Provided that the capital is not consumed and becomes the same or more.
So much for the theory.
Now what if I told you that there would be a way to achieve FIRE without the $500,000?
Now, of course, that sounds too good to be true. Most of the time it is. Nevertheless, I’d like to present my approach to you and ask you to read it with an open mind. At this point I would like to say that I am not a FIRE opponent by any stretch of the imagination. I find the movement exciting and it may actually make sense for many individuals to go the classic FIRE route.
My approach:
My approach has less to do with the classic path of investing in the capital markets or real estate. My path has something to do with what many would declare as “passive income”.
Another “passive income” article?
Yes and no. I see it much more as a concept built on passive income models. You can make up your own mind about it. I would be very interested in what you think about it.
At this point, let’s revisit the 4% rule and examine what exactly it’s all about.
We need a correspondingly high savings amount in order to subsequently withdraw 4% of it annually. If this 4% covers our total expenses per year, we reach FIRE or are at least financially free. This works from the theory.
One could also formulate this fact like this: If we generate a cash flow that is higher or equal than our annual expenses, we would be financially free!
Cash Flow: Cash flow is nothing more than the income per month/year that we generate from assets.
Expenses: Our variable as well as fixed expenses per month/year.
In the classic FIRE principle, assets are mostly investments in the capital or real estate market.
But what if we were to choose an entirely different asset for achieving the FIRE state?
We are talking about the classic online business, which has a main focus on generating passive income channels. I don’t even want to go into detail about the individual possibilities at this point. A simple Google search will throw up hundreds of possible models for generating passive income.
A brief summary of possible passive business models:
- E-books
- online courses
- affiliate marketing
- DropShipping
- niche sites
- SaaS
- …
Now these are just a few of many more possibilities we would have in this area — passive income.
Now let’s assume that we choose the e-book and the DropShipping approach. So we pursue these two business models more intensively and try to scale them as best we can. Let’s further assume that after two years, these business models will bring us around $1,666 per month in cash — and almost completely passively. This value looks familiar, doesn’t it?
No? At first glance it doesn’t but it has something to do with our annual expenses. Because in the example above, we assumed $20,000 per year. 1,666$ x 12 month = about 20,000$. Our annual expenses.
Now an interesting insight comes to light: we don’t now have to calculate by a factor of 25 and then save for years or even decades to generate the savings amount to reach FIRE. No, not even at all. Because as I already described in the assumption, we reach the $1,666 per month after two years.
This means that therefore our cash flow per month is equal to 1,666$ and our expenses per month are also about 1,666$ high. At this moment, would you say that you have also reached the FIRE state?
Personally, I believe that you have reached the epitome of financial freedom. Your income is covering your expenses without you having to do much about it. After all, these are passive income models and not active ones! With a little automation know-how, you can even tweak it to the point where you’re generating almost entirely passive income. Even though the name passive income always sounds utopian, most models are of course not 100% passive. There is always something you still have to do yourself (customer support, bookkeeping, etc.). But, as described earlier, certain automation mechanics would help.
Another plus point, in my view, would be the cash flow surplus. Assuming our passive assets do not generate us $1,666, but $2,000. That would therefore be a surplus of $334 per month. That would be money you would no longer need to cover your total expenses per month. Now how about investing in the capital market? After all, we have already covered our expenses, and that all largely passively. Or how about a short vacation? Here one has different possibilities at one’s disposal.
From my point of view, the state described above is equivalent to the state of withdrawing 4% annually from the savings amount from an investment fund, etc.
The advantages:
- No extreme savings rates per month necessary
- It is possible to build up some models alongside a full-time job
- Possibility of diversification is given (by setting up several passive income channels)
- The FIRE state can be reached faster
Why I think this approach is a good alternative to the classic FIRE approach:
I think many people read about the classic FIRE approach and some are excited by the idea. However, not every person is fortunate enough to be able to come up with correspondingly high monthly savings rates. After all, not everyone earns appropriately well or is able to save a certain amount extra each month.
I also see less cluster risk in my approach than in most propagated FIRE methods, where everything is often invested in two, maximum three ETFs. Of course, you have such a risk also with my approach: If you decide for affiliate marketing, for example, and set up a website that plays $1,000 into the coffers after two years, that is of course a great thing. But if something should happen to this site (the affiliate product is no longer available, we lose our Google rankings due to the latest update, etc.), we also run the risk of a total loss. But here we would have a relatively quick solution ready: instead of a single page, we set up two, three or even 10. This defuses the risk of total loss — at least in theory.
Summary
The classic FIRE approach has its raison d’être, of course. But in my view, it is an extreme form of saving and automatically forces many people into frugalism. For some, this approach can be ideal. Not only from a financial perspective, but also from a personal one. I, for example, have been living pretty minimalist for the past 8 years. This leads me to feel more comfortable personally.
For those who are enthusiastic about the classic FIRE approach in theory, but are not in the situation to raise corresponding savings rates, the approach presented in this article offers a possible alternative.
The alternative at a glance:
Instead of accumulating a certain amount of savings for years to reach the FIRE state afterwards by means of the 4% rule, the alternative enables a different approach.
We build our own digital assets. These are not investments in the capital or real estate markets. No, we focus on digital business models with a passive nature. This means that these models — at least to some extent — generate passive income for us.
Once the income from these assets covers our expenses, we would also have a form of financial freedom. In case of a surplus, i.e. when the income of the assets exceeds our expenses, we have further options to either spend the money on consumption or to invest it. Maybe even into our own business?
Final questions
What do you think about this approach?
Are you already following the classic FIRE approach and would also consider the approach presented in this article?
Disclaimer
This article/blog post and the information it contains is for informational purposes only. It should not be considered financial or legal advice or the like. Not all information is accurate/correct. Before making any major financial decision, please consult a financial professional.