The Five Stages of Financial Independence: A Path to Early Retirement

From Debt Freedom to Coast FI, Exploring the Journey to Financial Independence

The concept of FIRE (Financial Independence, Retire Early) has gained significant traction in recent years, captivating individuals seeking to escape the confines of a traditional 9-to-5 job. The allure of achieving financial independence and retiring early by saving aggressively resonates with many, but the path to FIRE is not without its challenges. While early proponents of the movement emphasized living minimally on high salaries, the reality is that most people cannot sustain such a lifestyle. However, a new approach to FIRE, introduced by Jessica and Corey Fick of The Fioneers, offers a more balanced perspective. By breaking down financial independence into five stages, the Ficks advocate for enjoying life along the way, rather than solely focusing on retirement. Let’s delve into these stages and explore the journey to financial independence.

Debt Freedom:

The first stage on the path to financial independence is achieving freedom from debt. While the Ficks acknowledge that certain debts, like mortgages, can be part of a healthy financial plan, they emphasize the importance of eliminating high-interest rate debt. By paying down debt, individuals can create room in their budget to save more aggressively for retirement. Corey Fick highlights that debt freedom not only reduces expenses but also provides the option to save more or work less.

‘F you’ Money:

The second stage involves building enough wealth to have what the Ficks refer to as ‘F you’ money. It’s not solely about reaching a specific monetary figure but also about having the financial security to escape a toxic job or seize new opportunities. The amount of ‘F you’ money varies based on individual circumstances, such as having dependents or the ease of transitioning to a new job. This money doesn’t have to be in cash but can include investment accounts that individuals are willing to tap into when necessary. Jessica Fick emphasizes that ‘F you’ money is only meaningful if individuals feel comfortable using it.

Coast FI:

Coast FI, the third stage, requires a mathematical assessment. It begins with determining the FIRE number, which is the annual income one desires in retirement multiplied by 25 (or divided by 4%). For example, if someone wishes to live comfortably on $40,000 per year, they would need $1 million in investments. If individuals have already reached Coast FI, their existing investment accounts will reach their FIRE number, assuming certain market assumptions, without any additional contributions. By utilizing compound interest calculators, individuals can assess their progress. At this stage, all income can be directed towards funding the current lifestyle, allowing individuals to “coast.” For the Ficks, this meant investing in a profitable business that enabled them to leave their day jobs and embark on a travel adventure in their camper van.

Barista FI:

While individuals can theoretically coast all the way to retirement, continuing to contribute to retirement accounts and living below their means may lead to a state of semi-retirement, also known as Barista FI. At this stage, individuals can work less or pursue lower-paying but enjoyable work, such as making cappuccinos at a local café. Withdrawals from investment accounts supplement living expenses, with only a small percentage being withdrawn while the rest is covered by active income. Jessica Fick emphasizes that even with withdrawals, investments will continue to grow, providing the traditional retirement nest egg for later years.

Financial Independence:

The final stage is reaching complete financial independence. At this point, individuals have amassed enough wealth to sustain their desired lifestyle without the need for active income. They can retire early, pursue passions, and enjoy the fruits of their financial independence. While the journey to financial independence may seem daunting, breaking it down into these five stages offers a more holistic and realistic approach.

Conclusion:

The path to financial independence and early retirement is not a one-size-fits-all journey. The traditional model of FIRE, characterized by extreme frugality, may not be feasible for everyone. However, the five stages proposed by Jessica and Corey Fick of The Fioneers provide a more balanced and sustainable approach. By focusing on debt freedom, ‘F you’ money, Coast FI, Barista FI, and ultimately, financial independence, individuals can create a roadmap that aligns with their unique circumstances and goals. The key is to find a balance between saving for the future and enjoying the present, making the journey to financial independence a fulfilling and rewarding experience.