Playing The FIRE Triangle
Finding Your Own Way To Financial Freedom
On my own journey to FIRE’ing at 43 – I read a lot of FIRE blogs. And I mean a lot. I like to read – it’s a good way to gain different perspectives and learn. But at the end of the day – I firmly believe you need to own your decisions. Make your own choices about what you do. Nobody else can do that for you.
The journey to Financial Independence is no different. There’s an awful lot of ideas and information out there and it can get overwhelming as quickly as it is inspiring. 25x what? Safe withdrawal rate? Eh? It’s all good stuff and we’ll go through it all in good time. But what didn’t work for me was it was like jumping in the deep end and following somebody else’s plan without really understanding why. And I’ve never been too good at that 😉
So what I’m going to share here is our framework for working out your ‘magic number’. How we sat down and figured out what was the right balance for our personal journey to FIRE. It’s not got a single number in it – that comes later. Instead it’s the real 101 class of FIRE – but if you get these foundations right – you will have a thorough understanding of why FIRE is ( or isn’t ) right for you. Trust me, it helps so much to keep you going in the tougher times.
Introducing The Fire Triangle
Any project manager worth their salt will recognise this. It’s the basic project management triangle which I’ve adapted for how I think about FIRE. At the heart of the FIRE journey is a very personal decision about what the right trade-offs are for you. How do you decide between time, cost and quality for your life.
This whole framework is about guiding you through understanding each of the three elements in the FIRE Triangle. For the purpose of coming to your own decision on what balance works best for you. I’ll also be sharing the concept of identifying & pulling your biggest financial levers. Plus how to get the most impact with your time and the wonderful power of being in control of your own choices.
So let’s get on with it……
The FIRE Triangle Elements
First up let’s introduce ourselves to this friendly looking guy (gal?). This element of the FIRE Triangle is what I would call ‘life scope’.
This one’s all about working out what you want in life, what’s most important to you
This is the big reason why FIRE is so individual. What’s important to me is unlikely to be the same as what is important to you. And the different choices you make here have a huge impact on the length of your FIRE journey.
What you are trying to estimate in this stage is your annual living expenditure. I’ve seen a lot of people short-cut this step, thinking that they simply need to be able to replace their current earnings. This has two big assumptions in it – both of which I would encourage you to challenge yourself on.
First assumption – that everything you currently spend money is either necessary or brings you happiness in some way. There’s a surprisingly small amount of things in life that are truly necessary. It’s a really valuable exercise to start from the basics and really challenge yourself as to what adds value to your life. The purpose of this exercise is not “how can I make myself really miserable”. It’s to take the time out to really understand where your money goes now & how that’s adding value to your life – or not.
Second big assumption – that your life won’t change post FIRE and you will continue living exactly the same. Even for those who don’t plan on any changes this just isn’t true. Life happens, things change – and everyone gets older. Not planning for change is going to leave you without a whole lot of wriggle room when inevitably, it does. For people like us where the whole point of FIRE was to have more time to do the things we enjoyed, it would have been plain wrong to assume our annual expenses wouldn’t actually increase post FIRE. Avoid using other people’s assumptions without understanding the implications for your own life choices.
No short-cuts - making the numbers meaningful
To avoid these assumptions and in order to get the best idea possible of what our post-FIRE expenses will look like, we slowly worked through each key area of spending in our lives. Noting down what we spent money on now and what we envisioned we would spend after quitting. Following a similar framework should help you focus your understanding of what your target goal for FIRE is. Some people find this exercise easier than others but just try and give it a go and see where you get to. What I suggest is you use these six broad headings as a starter. Then under each one, write down what you currently spend on average. You are looking to get to an annual figure, so if you have a monthly cost , multiple by 12…… Though I figure this is dangerously close to teaching people already into FIRE how to suck the proverbial eggs 😉
Ideally it will look something like this;
A Range Of Predictions
Each of these headings could easily deserve a post by themselves but for now, lets just run quickly through what they mean. Starting with the three different budget columns – these are all about understanding the range of your FIRE options.
Need / Now / POST FIRE: As briefly mentioned earlier, this is an area of FIRE that doesn’t get talked about enough, my opinion. A lot of the suggested approaches take a short-cut in simply using current expenditure and make replacing that the goal-post. I understand people like simplicity and it’s a useful number to know – but it really isn’t the whole story.
First, it misses out on really challenging what you are currently spending your money on. There is a big difference between needing something and wanting it. I need to eat – but it doesn’t have to be fillet steak every night. I need to wear clothes – but they don’t have to have names or logos on to keep me warm. Yes, I know some people may debate this one if being picky and so long as the central heating is on – but you get the idea here.
Don’t get me wrong here – it’s ok to want things. In fact it’s good – it’s what motivates us to try. But understanding the distinction between needing something and wanting it gives you an awful lot of power back over your expenses.
The second assumption that using your current expenditure makes is that you don’t plan on changing your life post FIRE at all. I think this is a pretty unrealistic assumption for most people though, especially if you are looking to FIRE at a young age. A large proportion of people working to FIRE plan on quitting their day job – this is going to give you a lot more free time (yeah!) – and hence a lot more opportunity to do all those things you always wanted to do. I suspect not all of them will come free.
This part is both the exciting and perhaps daunting one for some. It’s thinking about and imagining how you want your post-FIRE life to look. If you are stuck in a job & routine you really don’t enjoy, that’s stressing you out badly – it can be really tempting to simply want out. I get that. Likewise if you’ve never had the chance to find out what you enjoy as work has been pretty much your life – don’t worry about being specific on what you want. Whilst the better you understand yourself, the easier this one is – it’s good practice to leave room for the unexpected either way
Therefore our approach was a little different, in that we looked at current expenses on a need & existing cost basis – but then also considered how each area would change after we pulled the FIRE trigger. This is why FIRE is so individual and why going through this exercise alone, or ideally with your partner if you have one, will help so much in understanding why your eventual financial target is what it is. Just don’t blame us for any divorces as a result on the way.
Common Elements Of Life
Life is made up of many, many things but can usually still be grouped under some common elements. Let’s now go through each of the different budget areas listed;
Family – For us this one is reasonably simple as we don’t have any kids and no plans on doing so. There are several well-known bloggers out there who have FIRE’d with kids so it’s absolutely possible. It’s just another choice with financial implications for your FIRE budget. Our ‘Family’ budget is therefore pretty simple, just covering gifts & spending time together, either in or out. We also didn’t see this one changing much over time. Sorry Dad, no Jag turning up on the drive 😉
Friends – Pretty similar to family, again this is simply costs we associate with friends, so going out, having fun – you know, the good stuff in life that you want more time for. Again, not one we saw changing much post FIRE but thinking about it now, we could have probably expected this one to go up a little as we had more time for this.
Health – This one’s all about what you spend on you, from the necessities such as at least some clothes and things like our bikes, treadmill etc. Being in the UK we have the benefit of the NHS (for now at least ) . If we ever move abroad like we’re musing about then we’d include health-care coverage here. The post-FIRE budget was an interesting one, as it’s really easy when you are still fit and well to underestimate how getting older will impact your costs. We had a stab at including an amount for future old-age care as a general cover.
Home – For a lot of people this will be one of the major categories. Having a roof over your head is pretty high up on most peoples wish-list for sure. It’s also an obvious one where there’s going to be a huge range, depending on your personal circumstances & desires. For us, we were always going to want to own our own home but renting works for a lot of people. Again, this about recognising what costs you have associated with your home now – and what you would like to have in the future. This is where you add your beach villa if that’s your inclination 🙂
Leisure Time – Another big one for most people – and one with another huge range of possible answers. This one is for all the stuff you do in your free time. And all the things you dream about doing once you have the time to do so. For us, this was a big one as we planned on doing a lot more travel & eating out once we were no longer tied to a desk. Plus we knew/hoped that we’d finally have time to get into our hobbies, like brewing, which would need funding. So we planned for this area to quadruple from our existing expenses. After all, this was the main point of FIRE for us! Have fun with this one and just imagine what you’d really like to spending your time doing – it’s fine to start big here – we’ll get round to how it balances against everything else later.
Work – Last but not least, this one’s all about capturing expenses directly related to your current employment/business. For me with my crazy 2hr+ commute to work, this was a hefty cost that I knew would disappear once I quit. If you have kids, things like childcare is probably going to be another big line item here. The great thing about this category though is it’s one that will actually decrease once you quit!
Putting It All Together - Your Personal FIRE Range
Bewildered by numbers and bogged down in details now? One thing worth mentioning at this point as you work your way through your own version of this – don’t get too hung up on being totally exact, down to the precise £/p – or whatever your local currency is. This is all about understanding what your big ticket items are. That way – when we get to the fun part of playing the FIRE Triangle – you know what your biggest levers are. Hang in there – it’s coming..I promise…
Obviously, if there are headings missing that are important to you – add them. Likewise don’t labour over trying to decide which bucket something fits in if you’re unsure. So long as it’s on your list somewhere – that’s what matters at this point.
Once you have had a first stab at drawing up your own list and putting numbers against them, it’s time to pull all this together. What you need to do is simply add up all the items to come up with three annual expenditure numbers – one for absolute Needs, one for ‘Now’ and one for ‘Post FIRE’. Don’t worry too much about how they compare or whether they look ‘right’ – we’re going to be playing around with these guys a lot in a while. Ball-park is just fine to start with here. What you have now though is your own personal FIRE range – something which will help you figure out your own FIRE goal.
For some people, the three numbers may be exactly the same. These guys are already living on their bare bones budget and they’re happy to stay that way. This approach is the one which tends to get called ‘LEAN FIRE’, with minimalism a strong supporting theme. As the gap between your Need number and your post-FIRE grows, you are moving away from purely the essentials of life. You are choosing to spend time earning money for the additional things & experiences that you believe will add value to your life. Some people will have their Post-FIRE disappearing way off to the right. These peeps want all the finer things in life and lots of it please. With cream. This one’s usually called ‘FAT FIRE’. It’s an imaginative crowd 🙂
Most people tend to fall somewhere in the middle, like us. The point is, it doesn’t actually matter – what’s important is that you now understand your own personal FIRE range. You have been doing the exercises – right 😉
In which case – congratulations – you’re now ready for ‘Money – Playing The FIRE Triangle II’…