On Episode 52, Brad and Jonathan sat down with Todd Tresidder from the Financial Mentor to discuss the FI State of the Union. They discussed that there was currently a one-dimensional path to FI, popularized by Mr. Money Mustache and widely followed and his fan base that involved stoicism and low-cost index fund investing.
Stoicism from the Mustachian point of view, involves being happy with less and avoiding the endless hedonistic treadmill. Pete’s special spin involves a dose of bootstrapping–don’t just learn to live with less, learn to do things yourself. You can’t find easy, quick fixes, but by empowering yourself, you can be happier. A hallmark of the Mustachian stoicism is also riding a bike instead of driving a car.
When you are crafting your path to FI, we often focus on one approach to FI, but there’s more to the financial freedom path than just the numbers. Often, we fixate on the “F” of FI- the “finance,” but not the “I,” the “independence” part of the journey. Before numbers are crunched and you sign up with Vanguard, it’s critical to really get down with how you define freedom for yourself.
What does freedom and independence feel like for you and your family? If pinching pennies and researching ways to save money by cutting your own hair or biking to work feels like the right way to approach your FI journey, awesome!
But, if stoicism isn’t the life philosophy that truly makes you feel fired up about FIRE, there are alternative paths that can be activated beyond a focus on index funds and a low cost of living to reach FI. Your vision and enthusiasm are critical to your success, and luckily there are many combinations of choice to get you there.
The key point that Todd describes, that he asks everyone to think about is beyond stoicism. If it feels personally empowering to bootstrap and relentlessly optimize, then that path may be for you. If the more popular forms of FI feel more stifling than freeing, then luckily–there are alternative paths.
While this path works for many, and Todd was clear that this path can absolutely be successful for many, he desired to explore other legs of the FIRE stool. For each of the below paths, you can customize your journey with different spending levels, different equity levels, asset classes & investment strategies.
Option One: Passive Index Fund or “Paper” Investing:
Traditional FI, as he previously outlined with influencers like Pete from Mr. Money Mustache, outlines a path of “low costs and passive investing.” Getting to FI is simply a matter of calculating your expenses and multiplying it by 25.
So, to achieve FI , you’d need to get your expenses down as low as possible. Lower your expenses, find happiness with that level and be able to retire early because low expenses are easier to cover overall.
When you get to 25x your annual expenses, and you can begin a 4% withdrawal rate in passive index traditional asset/paper assets, you are at FI. Todd outlined this as “lean FI” and said while there’s nothing wrong with this approach, it’s not for everyone–especially those who do not ascribe to stoicism or have circumstances that don’t lend themselves to a frugal lifestyle.
The following two paths to FI differ in that they aren’t as focused on spending less, but earning more so that when you do achieve financial freedom, even if it doesn’t look like the “traditional FI model,” it will fit your needs and embody what true financial freedom means to you.
Option Two: Real Estate Asset Class Investing
While investing in real estate isn’t as seemingly straight forward as what Todd describes as “paper assets” or “passive investing,” he argues that it can get you to FI faster if you’re in a lower income bracket, as you can get creative with financing or implementing your own skills to develop your asset for less cash.
It can be challenging for a person who is living on a tight budget, let’s say, as a teacher, to be able to hit FI as quickly on a $35,000 a year salary, even with the most frugal of lifestyles. But, in terms of real estate investing–you can house hack, pool your assets with a family member to invest in a rental property, and also develop and improve an existing property while it’s earning you income.
Of course, while there are ways to utilize creativity to access this asset class, there are also barriers and problems. Being aware of your own risk with each property and the inevitable market rise and fall is key.
You can’t time the market, but watching out for signs the bubble will pop (risky financing, high demand and hot markets that can’t be sustained) is a skill everyone should hone in on to make this lever of FI work for them.
Option Three: Business Asset Class
Starting your own business is the third lever of an alternative FI path that isn’t as often discussed in the FI world. To build wealth with the other two levers, your equity/assets must compound, but this isn’t the case with a business. With time, the other two assets classes will begin to compound and grow, but time is utilized a bit differently with a business.
Here, you can create equity with your time–and little else, if you don’t have a huge margin to work with in term of your primary income. By keeping your financial investment low in your business asset, you can tinker, experiment and yes–even fail. It may take a few (or many) tries to get a business model that brings in the income you need, but if you have no money to lose, you have everything to gain.
In the end, your blend of FI should boil down to happiness, even if it doesn’t fit a mold or seem quickly summarized in a blog post. Respect your values and know that the path you take may change over time.
Being clear on what freedom means to you is where you should start, and always, the tactic you should come back to. Your definition of freedom, even if it’s a bit contrarian, dictates the path you can take to get there.
All in all, there isn’t just one path to FI. Your path may look like a combination of several levers, with a bit of penny-pinching and a few areas you simply won’t cut corners. Adding complexity, and nuance to your plans better represents reality and you can be more successful with an outcome that’s personally tailored for your FI goals.