In the first part of this double post I talked about what is the second part of FIRE—Retire Early—and explained why, for me, addressing that element is more important than the first one—Financial Independence—for achieving FIRE successfully even if it is the Financial Independence part the one that usually gets all the attention. I assume it is because answering complex philosophical questions about what do you want in life is harder and less interesting for people than talking about how to get big amounts of money and stalking finances from other people. Let’s go for it.
If you look on the internet, it is very easy to find posts and information with ways and strategies for becoming financially independent. Still, all of them have the same objective: maximizing saving rate by lowering your expenses and/or increasing your income. You can also try to win the lottery, but with that strategy, you have even fewer chances. Really.
The basic rule of Financial Independence is to accumulate enough wealth invested in different sources so that withdrawing a small percentage of it periodically gives you enough money for a living while losing none or almost none overall wealth.
It is usually assumed that these investments need to be money. You can have that money invested in the stock market, in real state, in cryptocurrencies... But you should possess all the money you need, and you should be able to get or withdraw the money you wish for living without doing anything at all. This is the purest concept when thinking about Financial Independence, because
Some would argue that there are other ways of passive income. But not really if you think in passive income as not doing anything at all. Any other way of income requires a certain amount of previous work. For example, writing a book or creating a business. It is not passive. With time, if you are successful, the time spent per dollar decreases and dilutes, but it is always there. Those 80 hours you needed to write the book, recording that video or preparing that template you sell are not going to disappear. And that is only if you are successful. Many people are writing books or blogs—☝️ hehe—and they do not have any revenue at all. The time spent there counts.
In the other side, if you put your money in the right place in the stock market, for example, an ETF that follows the global economy, you do nothing and get money in return while sleeping by both, dividends and value growth. Of course, you need to get that money, but that’s another story.
Calculating how much freedom cost
There are rules to calculate the amount of money you need to achieve financial freedom. Some are more complex than other ones. The simple ones allow you to have a raw idea of how much money or time you need, although they are not suited to very personalised cases. And if you want to know specifically how much money or time you need, you will need to do more complex calculations. The following is a simple example that assumes you withdraw 4% from your investments during retirement every year.
Invested Money Needed
= Desired Yearly Income * 25
If I want to retire in Portugal with a salary of 2000€ / month, I would need to multiply that number by 12 months, and again by 25. That makes 600.000€. With that money invested, and comparing it with different economic scenarios of the past, it is assumed you will have enough money for a minimum of 33 years of retirement in the most conservative calculations. It takes into account the returns of your investments, inflation costs and a withdraw rate of 4% from your investments.
If you want to play a safer game and withdraw only 3% of your investments, it would be necessary to multiply by 33 instead of 25. Giving the number of 792.000€ for a 2000€ / month retirement.
Another easy way to have a general idea about your retirement age is to calculate your savings rate. The percentage of the money you save comparing it with the income you have.
= ((Total Income - All Expenses) / Total Income) * 100
Once calculated, it is possible to see how many years of work you need until retirement in the following graph:
This model assumes that the withdrawal rate is, again, 4% and that you will maintain the same lifestyle you currently have, or that you are living in the same country you are going to retire. It is a limited model for people that work in a different country than the one they are expecting to retire. For example, working and living in Switzerland and saving 30% of a 7k / month salary, gives you 28 years more of working for retirement in Switzerland. But that’s 2.1k / month of savings, which makes roughly 17 years if you want to retire in Portugal in the same scenario than before. In a theoretical calculation, if you are saving 2.1k / month and you want to retire with 2k / month, it’s like if you would be earning 4.1k / month instead of 7k / month and saving 2.1k / month, which is a 50% saving rate.
The amount of money becomes very scary quite fast. More if we do the calculations for retirement with the same standard of living of those 2k / month in Lisbon for cities like Zurich or San Francisco, 2.000.000, or even Munich 1.200.000. But it is also very nice to know that with only 400.000 you can already retire in Bali. ☀️ 😎 🏖
In summary, you need money invested. A lot. But accumulating that amount of money is possible. Far from reality, those numbers are close to the price of buying a house in the centre of Madrid or Zurich city. So it is a matter of choices that, of course, depend on the priorities of each person. Do you want to buy a house? Or do you want to buy your financial freedom?
I want to buy my freedom, and this is its price
There are different levels of Financial Independence. From just having enough money to cover the basics in a cheap country to being insanely rich having luxury parties every day. For me, there are many greys in the middle that are the way to go. I will probably not want to live my entire life in Chiang Mai with a basic but enough income that covers food, an apartment and basic health coverage, but for experiencing it during some months, would be amazing. Also, I don’t need to have millions of dollars to spend on expensive cars and parties, but I really want to have a custom motorcycle again in some years.
So, after doing my calculations and considering it carefully, my honest objective for achieving FIRE is 1.000.000 €. With that amount, I have a minimum of 30k € / year, or 2.5k € / month, withdrawing 3%. Or 40k € / year, 3.3k € / month, withdrawing 4%. With that amount of money I have these options:
- Go to a very cheap country and grow my wealth, doing nothing by withdrawing even a smaller amount of money. The magic of compound interest. Poland, Costa Rica, Philippines...
- Retire in a cheap European country, such as Italy, Portugal or Greece.
- Half retire in an expensive European country, such as France, Germany or Norway.
- Continue working towards a bigger FIRE because now I want to retire in Switzerland, USA or New Zealand. Life happens 🤷♂️
I’m not very creative with the 1 million milestone. Many people have it, but that’s because it is really the milestone with which you can decide what do you want to do and have all the freedom you choose to have.
How the fuck do I plan to earn 1 million in 10 years?
Short answer, with compound interest.
Explaining further, when people think and talk about compound interest, they usually refer only to money and the stock market. But compound interest is not only about that. Many things work within the compound interest concept. Creativity and innovation are about compound interest in doing things that don’t have a clear outcome and feel like playing for nothing. Happiness is compound interest of small things, details and people around you. Personal relationships are also compound interest. All of these things don’t usually evolve linearly. You need time to cultivate them. Little by little, detail after detail. And the next second, boom. That can happen in a big time frame or suddenly after one special day or moment. Some people would say you were lucky, but the truth is, most of the times, you build your own luck. The continuous small details are the ones that make the difference. It also works in the opposite direction, though. And it can also never happen.
Translate now this into lifestyle, creation and diversification. For example, you may need to create 20 small things that are not successful, or just slightly successful, and improve them over time until you really start seeing the hockey stick graph going up. Creating one thing and selling it is good. Creating two things that are related is better. One product can increase the sales of the other product so that 1 + 1 = 3. And if you can build one thing, and selling it multiple times, even as something different, it is way better. 1 + 0.1 + 0.1 = 4. The important thing is to be patient and to continue doing things in the same direction so that they feed between each other continuously and draw the hockey stick graph.
Lowering expenses optimizing for good living
One of the pillars to have that money is not expending it. But far from other FIRE references, I don’t plan to cut my expenses extremely. It would be challenging to do so moving around so much... 😅 I’m not going to cut them in such an extreme way that I spend my time trying to save money. I’m going to optimize for saving my time to make money and enjoy life.
Putting a limit to your expenses has a bigger impact and is more important than earning more. Until certain limit. Living a frugal life, or something close to it, it is crucial from a lifestyle point of view to learn how not to overspend your money in a stupid way. There have been many cases of people that won millions on the lottery or famous football players that after two or three years lost all the money they had. Doing small changes cutting unnecessary expenses in your everyday life makes a huge impact in the long term. But as I said, until a certain point. This point depends on your personal situation. Does it make sense to spend 5 hours trying to optimize my bank fees by 5€ / month? Not in my case. Charging 75 € / h, only working half of the time, that 5 € will be compensated in 37 months without taking into account compound interest or if that work has leverage and can create more money. And the other 2 hours and a half I can be on the beach.
Having a temporary baseline income
Having a basic income from freelancing work for clients or from one of my own businesses if they work and I can pay me a salary from them. This basic baseline, especially on the side of the income from freelancing work, is aimed to disappear or dilute as soon as possible.
The objective of this baseline is to have peace of mind at the beginning and act as a safeguard in case something bad happens. It’s also very important being freelancing already and knowing that you can increase the hours you put on it whenever necessary versus the fact of thinking “I could do freelancing if I need”. The initial barrier is already broken. Besides that, not being so much worried, scared and stressed about financial problems while seeing the money in your wallet going down is also very important for being productive in the other bets I have. Remember compound interest.
Making small bets with small digital products
These are the kind of projects and small digital products I’m starting to do by myself as a solopreneur. I’m not completely closed to do them with more people, one or two if needed, but with the condition of maintaining them as small as possible and not being in a hurry. At least at the beginning. Indie projects like a small piece of software or a plugin, this blog, maybe writing a book or create design-related libraries... Who knows?
Many people are doing this kind of projects nowadays, and they earn just some money or hundreds of thousands. You can also earn nothing. But the point of this small bets is that they are small, only take the time I want to put on them, they can be completely different, change with time as I please, they provide me with real work experience, and I’m learning a lot with them...
As an example, with this blog, I’m not only helping myself putting my thoughts on paper and pushing myself. I’ve learned how to work with Cloudfare workers to modify or run an app that can be hosted somewhere else, I have researched and discovered many Notion solutions for doing things that I need, and I’m waiting for its open API for trying to make some money here, I have learned how to use Ghost and Heroku to have a 100% free of cost JAMStack blog/website and I’m fighting with React to make it happen... Sorry for the tech talk 😅
Making big bets with startup projects
These projects are the big ones, projects I do with other people like wetipi and GouBlue. They usually require to be done in bigger teams. The strategy is different, and you can put many hours here. Working in a team, for good and bad, puts on your shoulders more pressure to do things on time. Sometimes it is amazing because you give 300% in half of the time, other times you think is too much and you feel a huge weight over you. If you want investment, it is even worst with investors. You need to work hard. The good thing is, if they work, they can provide insane amounts of money. Many startups are sold nowadays between 5 to 500 millions... FIRE achieved in one step!! The bad side is, only 98% of startups survive the first 3 years... A fucking rollercoaster.
Investments are the key to producing money doing nothing. The only real passive income. The most money I put on investments as soon as possible, the better. After a perfect timing investing post Covid, I’m going back to the initial low profile, boring, safe, non-time-consuming and long-term strategy of putting money regularly in ETFs that mirror the world economy. Adding a little bit of spicy going back to buy some Bitcoins regularly.
Let’s see how it goes!
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