This heading is ambiguous! The current global crisis, triggered by Covid-19, means that many of us have had to significantly change how we live our lives. The virus is a disaster on it’s own but, unfortunately, I believe the current measures taken globally might mean the long term consequences will be even worse…
Still, this post is about why I think many will get a positive realization during these times of social distancing and lockdown. It has to do with your FI-number and what is truly important to you…
Changes brought on to us by Covid-19
Besides from the tragedy of the disease itself (which I don’t intend to go into), a lot is changing in our lives, all over the world. The virus is spreading at an enormous rate and as we are not even testing everyone, we really have no clue as to what extent it has already spread (but guessing a multiplier greater than 10 compared to the official numbers).
The obvious consequence for most of us has been the social distancing, to a small or large extent depending on which country and area you are in, as well as the business you are in.
Many of you are currently in a lockdown situation where you are working from home and possibly even taking care of your kids. Most social venues like restaurants, cafes and bars are now closed as well as most, if not all, sports and cultural events. Basically, this means you are spending more time at home (or close by) and with your family and less time out and about.
In uncertain times like these and as we don’t know the long-term (not even the short-term) financial consequences I recommend having a proper look at ones finances. Financial insecurity is something we all want to stay away from and fingers crossed you have consumed some of our material here and taken some actions to make sure you and your loved ones don’t have to worry about your finances, at least not in the short term.
Some of you might have looked at your costs prior to this crisis and assessed how much money you would need every month to cover your costs (ie the amount you would need passively to be Financially Independent). Basically, if you spent 3,000 USD per month, that would be the amount you would need every month to be financially free.
Within the FIRE community, the 4% “rule” is often mentioned and I have written about it before and also highlighted some of the shortcomings I see. This simplified rule of thumb states that if you need 3,000 USD per month to cover your costs, that equals 36,000 USD per year. By multiplying that with 25 (same as dividing with 0,04) you get the total of 900,000 USD.
This “rule” would then imply that when you have 900,000 USD you should be able to withdraw 4% every year (36k) without running out of money during your retirement if invested in a balanced portfolio. A lot can be said about this rule and remember that it’s based on historical numbers and now we are going through the most volatile period in a century, possibly in the history of the financial markets.
Still, as a rule of thumb this is interesting as it gives us a number to use. Also, it doesn’t matter where your 4%, ie the 36k, are coming from as long as you are generating them every month. The key thing is of course that you get money to cover your costs.
The major reason this has become hugely popular among the FIRE community is because it’s completely passive to invest in this way. One could just invest in an index via ETFs (Exchange Traded Funds) and not have to pick individual stocks.
Don’t get caught up by this “rule” though as you could own a property worth 450k USD and if it nets you 36k per year (8% return), it would really be the same thing since it’s giving you the same results albeit with a bit more work. Anyway, this post is not about the “4%-rule” and it’s pros and cons.
I would recommend you though to read my post on why FIRE aspirants are winners in falling markets.
Lockdown re-evaluation of your FI-number!
For most, a couple of weeks of lockdown and social distancing (or worse), have already passed. Maybe you have already thought about the financial consequences for your family but maybe not. What I want you to do now is to go through the below areas and consider them for yourself and your own situation. I am pretty sure that what used to be your FI-number will have changed once we are “passed” the lockdown and the worst part of the Covid-19 period where life returns to some kind of normality.
Consider these parts of your life and then adjust the amount you feel you need every month to cover your costs. When reaching for FI, the intention is of course to be able to cover ones costs once the trigger has been pulled and the decision to leave the traditional workforce had been made, ie FIREd your boss!
To make it easy, I am mentioning the most obvious ones and writing down a ballpark number which you can then use to deduct from your normal monthly expenditures when calculating your new FI-number at the end. Of course you will have to add any other expenses you envision having once you have decided to pull the trigger and live a FIRE life.
Transportation: No need to travel to and from work with either your own car or public transport. If you can get rid of one car, you will probably save around 500 USD per month (not including parking and fines…), if by public means, make it 100 USD. As you all know, this is a huge one (top three) for most families in terms of expenses.
Food: You are now unlikely to eat out every day, nor do take-away coffees or food etc. (well hopefully still to some extent to support your local restaurants). You for sure still have to eat but it’s likely a fraction of the cost you would normally spend during “working hours”. Only you know how much you are saving on this one.
Clothes: You have probably already realized that you are using way less clothes when you are staying at home versus going to an office… How much you are saving is of course individually but on average I would guess at a minimum 100 USD per month.
Housing: Once this pandemic is under “control” and we can travel freely again and if you have no employer to take into consideration (or if you continue working from home), you can geo-arbitrage. Basically re-locate to an area where you want to live and where the cost of living is lower (but has higher quality of life). This is a massive post for most so depending on your flexibility we are talking about hundreds if not thousands of dollars in lower costs. As with all of these, it’s completely flexible and based on your requirements.
Car: On top of the point on transportation, once you have FIREd you might not care that much about what car you drive. This might easily save you hundreds of dollars per month. Check out this post: Buying a new car – wake the fck up!
Socializing: As we discussed earlier, most venues are now closed and the socializing aspects now include physical distancing. This likely means more time spent outdoors (I hope!) which often is completely free. How much you save whilst not going for drinks etc. again is completely individual.
Handyman: Do you need one? Seems like one of the few winners in this crisis are the “do it yourself shops”. You can youtube anything and you have more time at your disposal. How much can you save here?
Kids at home: This varies massively from country to country but if you are at home with your kids, you might be saving huge amounts. Ones this is over you are likely to have a much better relationship with your kids. Do you know what most kids wish for if you ask them when they are older..? That their parents had spent more time with them whilst they were growing up. This is your chance, or when you reach FIRE!!
Subscriptions: Just spend an hour to go through all of them and cancel the ones you don’t need or use. Compare all the others and I am sure you will find huge savings fast!
Travel… Well, not now of course. But when you have summed up your “new” monthly number (FI-number) have a think about how much lower you could make it if (when) you resigned. Why? Because then you can travel wherever, whenever and not on the most expensive public holidays! You will half (or more) your current travel expenses for trips as you have the flexibility which means more money staying in your pocket!
Also remember that every dollar you save (spend less) is worth 1,2-1,5 USD in terms of income as the savings you make are on taxed money! So if you pay 50% tax you would have to make 200 USD for every 100 USD you spend and if you spend 100 USD less, that means your income need is 200 USD less! The same goes for everything you purchase as it’s always based on taxed dollars. Never forget that and try to keep it in mind every time you spend money and maybe you will think twice prior to that purchase..!
Let’s sum it up!
I will make it easy and use the same example as in the beginning of this post but of course I want you to do your own numbers. You are likely in for a surprise as your FI-number will be years closer than what you anticipated!
I the above example, the person needed to cover 3,000 USD per month and to make it easy, yet realistically. Let’s say that person now realizes the expenditures in fact are around 2,000 USD.
Using the same rule of thumb as before (4%), the annual expenses would be 24,000 USD. If we multiply that with 25 we get a total sum of: 600,000 USD. So instead of needing 900,000 USD, the same person now realizes that 600k might be enough for a comfortable life they would be happy with. Of course it would be much faster to reach 600k than 900k which means that time to FIRE would be significantly reduced!
Only you can answer what your number is but I do believe that many of us will see things quite differently once the worst of this pandemic has passed. We will prioritize differently, we will place value on different experiences and I do believe that the consumer in us will forever change as this period will be a time of transformation on many different levels.
The pandemic is catastrophic and the consequences are likely to be very, very severe in human, social and economical aspects and it will take a long time for things to get back to “normal”. At the same time, it is a perfect time to reflect upon our lives as many of us now have more time at our disposal with ourselves and with our families. You are free to use this lockdown to your advantage (or not) and if you are new to the “FIRE-community”, check out a few of the Action points below because FIRE aspirants are winners in falling markets and they have created super skills which means that they will come out of this crisis much better than most!
Actions to take:
- FIRE aspirants – winners in falling markets!
- The bear is here – FIRE dreams in flames?!
- JOMO a natural thing for a fire aspirant!
- How soon can you FIRE your boss?
- Low costs the effortless way to creating wealth