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Heating Up: Business Ownership And The FIRE Movement
March 07, 2020

Heating Up: Business Ownership And The FIRE Movement

Without realizing that there’s a term for their pursuits, most Americans are focused on the FIRE lifestyle. Although more recently thrust into mainstream vocabulary, financial independence is the real American dream. This movement is typically defined as having the income to pay for living expenses for the rest of your life. It comes with the freedom to spend your time as you wish, within reason. Whether you decide to keep working, enjoy hobbies, or travel, the choice is yours.

The ultimate goal is to build wealth, not riches. Financial independence provides the one thing you can’t outright buy: more time. Below, we dig into the FIRE movement, its benefits, principles, and advantages for business owners.

What Is “FIRE”?

FIRE stands for “Financial Independence, Retire Early.” The FIRE movement is dedicated to a focus on savings and investing. This focus allows followers to retire significantly earlier than standard budgeting and retirement planning allows.

Through the intelligent investment of large chunks of their income, FIRE followers can eventually quit their jobs. The goal is to live off withdrawals from large investment portfolios. While financial independence isn’t a guarantee, those who practice wisely have a far higher likelihood of success.

Some Common Terms Defined

  • The 4 Percent Rule

4 percent follows what’s referred to as a safe withdrawal rate (SRR). This follows the assumption that you don’t gain additional funds and can live off the savings for 25 years. This means safely withdrawing 4 percent per year for 25 years.

In 2020, an average number to strive for is $1.5 million. This results in $60,000 per year, every year, for 25 years.

  • FatFIRE:

This is the financial freedom to live at the highest possible spending levels. Those aiming to achieve financial independence will typically want their basic expenses covered. However, with FatFIRE, these individuals are seeking to cover extensive travel, luxury items, and more. This version of FIRE is challenging to achieve, as it goes much further than merely covering expenses in early retirement.

  • LeanFIRE

This is the opposite of FatFIRE. Here, financial independence is done at about 25-times annual expenses. These expenses are trimmed down to speed up attaining financial freedom. LeanFIRE is the standard most “extreme” type of financial independence.

  • BarisaFIRE:

The BaristaFIRE movement is a subset of financial independence known as a hybrid between Fat and Lean. With this practice, you continue working part-time, mainly for social outlets and health benefits. It’s called BaristaFIRE due to the commonality of coffee shop part-time work. However, this movement is focused on any low-stress part-time labor.

  • CoastFIRE:

CoastFIRE is a relatively new facet of financial independence. In this point of the spectrum, you invest and save until you hit a target number. Once this goal has been met, there’s no longer a need to invest. In standard compounding scenarios, this amount will grow into enough for retirement.

Benefits of a FIRE Lifestyle

One of the most apparent benefits of a FIRE lifestyle is cultivating a viewpoint where spending isn’t king. Saving money without being obsessive about “cheapness” is a beautiful lesson in humility, frugality, and practicality.

The pursuit of financial independence is also liberating, knowing that you’re striving for an end goal. Being lost in the monotony of a job with no end in sight can be incredibly disheartening. Instead, working while knowing you’re actively working towards the end of this working life can be very freeing.

FIRE breeds creativity while searching for methods to compound income and savings rates. The pursuit of the side hustle can lead to employees starting budding businesses and becoming wildly successful. The FIRE movement has been one of the most effective catalysts for new small business growth.

Why Business Ownership Can Be The Fast Track to FIRE

There are many methods to achieve financial independence while not owning a business. However, being an entrepreneur can arguably be considered a fast track to success with FIRE. There are ample advantages to savings while owning a business when compared to working for others. Below are just a few examples.

No Income Ceiling in Sight

Regardless of your job, typically, there’s a range for income that determines your ability to earn. Positions might pay an annual range of, say $58,000 to $110,000 for an electrical engineer per PayScale. If you lack extensive experience, you’ll likely be at the lower end of this range. However, if you’re well-qualified and do a stellar job, you’ll find yourself at the upper end.

Yet, this is where things will end, regardless of the expectations being exceeded. It’s highly unlikely your income will push past this maximum when employed by someone else. Furthermore, if it does push past the upper band, you’ll have trouble shifting into comparable roles with other employers. These employers might be unable, or just unwilling, to match the income level you have attained.

However, if you’re a business owner, none of the above will apply. You can earn as much as your effort, talents, and time allow. Even if you reach some income limitations, you can leverage your business acumen and bring others in. This can include contractors, full-time employees, and also partnerships.

As you retain control, you can work in your best interests to compound income appropriately. In the end, it assists significantly in reaching financial independence far faster.

You Get To Do What You Love

Many don’t take jobs because they want that particular job. Instead, they take jobs to pay bills, assuming that their role is just temporary. However, temporary has a way of becoming the status quo, especially when it comes to employment. Once you step onto a career ladder, your workload is controlled by your superiors.

It’s here that business ownership is advantageous because you get to choose your field. Do you want to sell a product or provide a service? Go for it! Remember, as an owner, you retain control.

From here, things get interesting. Working for yourself provides a far higher level of commitment to yourself. This, in almost all circumstances, will translate into higher income opportunities.

Stronger income potential is the bedrock of the FIRE movement. Doing what you love and getting paid for it? That’s just the icing on the cake.

You Might Not WANT To Retire

Knowing that you have the ability to retire is terrific. However, it can be just as encouraging knowing that, if you don’t want to retire, you don’t have to.

Many self-employed individuals don’t, choosing instead to decrease their working hours. Their businesses play a crucial role in their lives, and they don’t have the desire to leave it all behind. This opens up some exciting opportunities for building wealth.

Imagine a financial independence scenario where you could retire at age 55, but instead, you opt not to. Maybe you’ve accumulated a good bit of wealth, but you’re not interested in quitting at any point.

From that point on, how much more wealth could you potentially create? Maybe you’ve already reached the FIRE point. However, having additional money for your children, or supporting a beloved charity, would make things that much sweeter.

As a business owner, you have this option. In many employed positions, it’s expected that you’ll be retiring in your 60s at the latest. Quite a few career fields are starting to try and force people out in their fifties!

While running your own business, nobody is going to force you into retiring when you aren’t ready. You choose when that time comes, and the circumstances from which it arises.

Selling Your Business Can Lead To A Massive Windfall

Most businesses, even some of the smallest ones, can be sold for an incredible sum of money. In fact, it isn’t uncommon for companies to sell for double to triple their annual revenue. What does this mean for your financial independence?

Let’s say you have a business that has a $300,000 annual gross income. With the numbers above, you could potentially sell that same business for between $600,000 and $900,000. While the exact amount is dependent on the type of business, these numbers aren’t pocket change for FIRE practitioners.

The sale of a business can lead to an immediate injection of cash into your coffers. It provides an instant increase in wealth and helps propel you towards ultimate financial independence.

Retirement Plan Options Are Far Stronger

With many retirement plans sponsored by employers, there are extensive contribution limitations. For 401(k), 457, and 403(b) plans, those under 50 can only contribute a maximum of $19,500 in 2020. If you’re over 50, that number increases a bit, but not enough to make a sizable difference.

Sure, there are employee matches. However, these match percentages usually fall far below planned contributions for FIRE practitioners. In addition, employer matches tend to come with vesting schedules, which are their own animal.

However, if you’re self-employed, you can easily take advantage of additional opportunities. For example, both Solo 401(k)s and SEP IRAs come with far less stringent limitations to contributions.

  • Solo 401(k)s work like standard 401(k) plans. However, in this case, you represent both the employer and employee. For this reason, your contributions can more than double.

In addition to the employee max, you can contribute up to 25 percent of self-employment income. This means total Solo 401(k) contributions can be well over $50,000 per year.

  • Under SEP IRA plans, you can contribute up to a quarter of your income. The maximum noted for 2020 contributions is $57,000 per year.

An additional benefit of self-employment retirement plans is the fluidity of investing decisions. Some employers lock retirement plans behind single funds or target retirement date structures. When running your own business and seeking financial independence, you have authority on where your investments go.

Where To Put Your Money?

The most reliable opportunity for reaping safe, consistent passive income for financial independence is index funds. We have an extensive guide to our recommended index funds for 2020. Index funds are massive mutual funds that track hundreds to thousands of different stocks. These stocks are aggregated into a single fund, which helps limit risk, exposure, and seasonality.

Two of the largest providers of index funds are Fidelity and Vanguard. They provide an incredibly hands-off approach to passive investing opportunities. Sure, you are more than welcome to work in a more do-it-yourself type investing strategy. However, these more passive options are ideal for both belabored business owners and financially independent.

Note, though, that not all investing for FIRE purposes has to be focused on the stock and bond markets. One of the most popular alternative non-stock investment options is real estate. Passive real estate investing is a wonderful way to compound income while providing tangible assets for future use.

Additional Tips for Financial Independence

  • While it’s essential to keep a budget while practicing FIRE, don’t complicate your life with a difficult to manage budget.

In addition, once you get to the point where your budget is second-nature, do away with it! If you know your savings are increasing rapidly, why deal with the stress of constant financial micromanagement?

  • If you’re looking for a way to kill FIRE goals quickly, get into unnecessary consumer debt. Between debt-related interest and payment issues, your net worth can take a real hit. While there is plenty of “good” debt, it’s that bad debt to watch out for.
  • One of the best things you can do to assist in your pursuit of financial independence is always to keep learning. Practicing financial knowledge is an excellent method to keep your head above water. It also helps to ensure you make proper business decisions when the time comes to do so. If you’re looking for regular tidbits of financial knowledge delivered straight to your inbox, check out the Fora Financial newsletter.

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Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].