This article first appeared in Personal Wealth, The Edge Malaysia Weekly on August 27, 2018 - September 2, 2018
In 2010, Chicago-based Grant Sabatier found himself hungry, broke and beset with a mountain of credit card debt. The then 24-year-old was determined to turn things around, but the idea of doing a job he did not like just to pay off his debts repelled him.
“I was earning money, but I spent it all. It just felt terrible to be broke. I was also at a point where I did not really enjoy the jobs I had. I was looking at the next 40 years of my life and thought, ‘I do not want to sit in my cubicle for that long.’ I just wanted to have as much freedom as possible,” says Sabatier.
That thought spurred him to make a radical change in his life. He set a lofty goal: he was going to live frugally on 20% of his income, invest the rest and save US$1 million by the time he was 30. Then, he would quit his job and pursue his passion for writing.
This was not easy, however. He took on many side hustles and had to turn down many of his friends’ invitations to go out. As a result, he lost several friends.
“In some of those five years, I worked 80 hours a week and slept the rest of the time. There were times when I thought I should have more work-life balance. But I reminded myself that I was trading my time for a secure retirement in the future,” says Sabatier.
“I wanted to make as much money as I could, and as quickly as possible while I was still young and had a lot of energy, because I knew that the more money I invest earlier, the faster it can grow and the faster the rate of compounding.”
He began his journey by learning about digital marketing, which later allowed him to start companies in that sector. On his way there, he worked several jobs at the same time and managed to save US$1 million by 2015.
“I started a bunch of side hustles. By the end of the first year, I was making more than US$300,000 from my full-time job and side hustles. I invested 82% of my income. To me, financial independence was about having enough money so that work became optional,” says Sabatier.
He is not the only one to use this method of “retiring” early by radically cutting down on expenses and saving aggressively. Jacob Lund Fisker spent five years living on 20% to 25% of his income and sacrificed many comforts to save enough to retire by 30.
He walked 30 minutes to work instead of driving. He repaired broken electronic items instead of buying new ones. He made do with simple living quarters, even living without a heater one winter in Switzerland. He survived on a simple diet that cost US$1 to US$2 daily.
“One thing I did back then, which I have been teased about a lot, was that I ate mostly lentils and vegetables. They are cheap and healthy, but it is unusual to have in the US, where most people no longer know how to cook and mostly eat pre-processed and junk food. People tend to make fun of what they do not understand,” says Fisker.
While this approach may sound extreme, Sabatier and Fisker are two prominent proponents of a movement that has emerged out of the US called achieving financial independence and retiring early (FIRE).
It is proposed as an alternative way of living by those who do not want to be tied down to unfulfilling jobs just so they can pay off their debts. Household debt in the US due to student loans, auto loans, mortgages and credit card debt grew in the last five years to a record high last December.
“It is not just a millennial movement. People of all ages are doing it. I think a lot of it comes down to feeling empowered in a world with so much uncertainty,” says Sabatier.
“In the US, we do not know what will happen with the economy. We have a crazy president and there is a lot of uncertainty with climate change. I think when you can manage your money, you can control a lot of areas in your life, especially time. It gives you options in life.”
There are many types of FIRE adherents. Some focus on earning more income by having side hustles while others focus on radically cutting down on expenses.
In general, they have frugal lifestyles, save rigorously and invest aggressively so they can achieve financial independence early in life. The exact formula for and definition of independence depends on one’s situation. Thereafter, they can choose to “retire” by indulging in hobbies or taking jobs they love but do not necessarily pay well.
The FIRE movement has been made popular by bloggers and authors in the US, some of whom also host online forums to facilitate the exchange of ideas. The more famous ones include blogger Mr Money Moustache; Sabatier, who runs the Millennial Money blog and has written a book about his experience called Financial Freedom: A Proven Path to All the Money You Will Ever Need; and Fisker, author of Early Retirement Extreme (ERE), in which he describes the path he took to achieve financial independence and retire early.
“I have become more popular in the past couple of years. It wasn’t always like that. When I started my blog in 2007, there was less than a handful of FIRE websites in the world. Now, there are hundreds of sites and the number of followers has increased accordingly,” says Fisker.
A quick glance at his online forum shows that there are FIRE followers from countries such as Brazil, Germany and even Malaysia.
“People who are interested in this approach generally have the following qualities: They are independent, curious, competent, driven and disciplined. I suspect that some of the interest in FIRE is because they have not found an outlet for this by working a normal career,” says Fisker.
“That was certainly the case for me. It was just too boring to imagine doing the same thing every day for 30 years. Many just want to focus on something else other than a career. Like building a house, raising a family, travelling or, in my case, writing.”
He writes about skills or DIY projects that FIRE followers can adopt to cut costs. He also spends his time making furniture, gardening (to have free vegetables), doing renovations on the house, reading, exercising and undertaking research for various projects.
On his blog, Sabatier provides many tips on how to earn money from side hustles,
including selling products online and starting a blog. “Making money online has never been easier. I think the lower barriers to making money and being entrepreneurial support the trend too,” he says.
Purchasing your freedom
A good deal of planning is necessary when pursuing FIRE, which explains the active participation in online forums, where followers share their own experiences. First, they have to calculate how much they will need to spend in a year. Then, they have figure out how to save and invest enough so they will no longer have to work.
“Financial independence is defined as the ability to cover all your expenses with capital income from the money you have saved and invested for the rest of your life, so you do not have to depend on any form of employment ever again. The idea is to purchase your freedom from employment. While some people like work for its own sake, most people would probably not show up for work every day if they did not get paid,” says Fisker.
Most of the FIRE followers who achieve their goals do continue working and earning income. Some relocate to other countries or start big projects such as cycling across the continent.
“I think we need to redefine what retirement means. You can retire once you have enough money for the rest of your life. And then you can retire and still keep working — you don’t have to work just for money,” says Sabatier.
Oftentimes, the road to financial independence means radically changing one’s lifestyle and working long hours to increase one’s income. It also takes many hours of reading and researching the best strategy.
Fisker’s motivation came from his desire to disassociate himself from the consumerism culture. He had grown up in Denmark, went to graduate school in Switzerland and pursued post-doctoral studies in the US. He currently lives outside the city of Chicago.
“When I moved to Switzerland, I started reading more about finance and realised that buying a house on a 30-year mortgage meant paying so much in interest over the years that I would effectively be paying for two houses. Thus, I decided to save up so I could buy my first house in cash,” says Fisker.
“I also learnt about the effects consumerism was having on the environment with the massive landfills and pollution we were creating to fuel our consumer lifestyles. So, I decided to stop buying stuff and start prioritising other values. The idea of shopping and buying stuff lost all appeal to me after I realised what kind of impact consumerism was having on the planet. So, it was not hard to stay motivated.”
Initially, his goal was not financial independence. He was already frugal by nature, but reading books like Rich Dad, Poor Dad and Your Money or Your Life inspired him to go down this road.
Fisker worked as an academic researcher, earning an annual income of US$40,000 to US$70,000 over the years. For five years, he lived on 20% to 25% of his salary and invested the rest. He eventually accumulated 25 to 33 years’ worth of annual expenses before he began withdrawing 3% to 4% annually.
“I worked for a few years beyond that point where I was financially independent. Later, I started a new career in finance and saved even more for four years,” says Fisker.
“That is why I currently have enough to cover 129 years’ worth of expenses. My withdrawal rate relative to my savings is less than 1%. This also means that my capital income is almost four times more than I what I actually spend.”
He has focused on reducing expenses rather than increasing income. He currently derives income from book royalties, advertising revenue (through his blog) and capital income from investments. The total amount can come up to US$50,000 a year, he says. He still lives frugally and eats mostly home-cooked vegetarian meals.
Sabatier spent between US$40,000 and US$50,000 a year when he was living in Chicago, which has a relatively lower cost of living compared with other big cities in the US. “You just live and you don’t spend money. I drove a really crappy car. I had a really crappy apartment, which my wife — who was my girlfriend at that time — would not even come over to and hang out because it was so bad. I did not buy much and only focused on my goal,” he says.
“I went a little crazy and do not recommend everyone to do that. I think a lot of people in the US can achieve financial independence in 10 years or less. To do so in five years is a little difficult.”
After achieving his FIRE goal, Sabatier quit his full-time job and sold his companies. Then, he started his blog, signed a book deal, became a full-time writer and started teaching others about managing money.
“It is all about being aware of what makes me happy. It is funny because the more money I make, the less I spend. Just having the ability to buy something is enough for me,” says Sabatier.
“The better you know yourself, the easier it is to save and spend money on things you enjoy and not other things. I think a lot of people chase external success, job promotions and the next salary increase. I think it is a lot harder to stop and ask if this is really what I want to be doing.”
Nowadays, he allows himself to spend more on travelling, which is his passion.
Can everyone do it?
The need to have enough capital to invest in the first place and a heavy reliance on investments that churn out returns mean that FIRE followers in developed countries may find it easier to achieve their goals. After all, developed countries in general have higher average incomes and stable stock markets.
But Fisker says FIRE principles can be applied anywhere in the world since it is fundamentally about developing skills, decreasing waste and cutting down on expenses. “However, for FIRE to work, it is necessary to live in a stable country with a market that makes long-term investments possible. All that matters is the savings rate. If you can make money at the 50% percentile with a good job while spending at the 10% percentile like a college student or an apprentice, you will have a high savings rate and FIRE is possible.”
People in developed countries may have higher incomes, but so is the cost of living. “Some of the technical details will be different, depending on where you live. For example, the US has low tax rates, but it also has the highest healthcare costs in the world. So, what you save on taxes, you spend on health insurance. Europe has socialised healthcare, but that comes with higher tax rates,” says Fisker.
In conjunction with the launch of his book, he created a ERE Wiki page, which lists the most affordable cities in the US. He has also written on how to get cheap health insurance.
Sabatier acknowledges that it could be more challenging to achieve FIRE in developing countries due to the difficulty of saving much money. But with a reasonable goal and perhaps a longer timeline, it is still achievable, he says.
“There are many stages of financial freedom. FIRE is just one of them,” he points out.
“With each level of financial freedom, you should feel less stress and have more clarity on money. So, there are definitely benefits on the path to FIRE and you do not need to get to the end to experience them.
“At the end of the day, it depends on how much money you need to live a life you love. For some, this is a lot. For others, it is very little.”
Relying on the stock market to maintain one’s wealth is also a risk if there is a downturn. Sabatier’s advice to FIRE followers is to practise the basic financial planning principle of diversifying their investments and ensure that they invest for the long term.
“You should not take much risk for money you will need in the next five years. But for money you won’t need for a long time, downturns are normal and should be expected. The nice thing about investing in the US stock market is that over the long term, even when it is up and down year to year, it grows about 7% adjusted for inflation and dividends per year. Play the long game,” he says.
The uncertainty excites him, however. “In the worst case scenario, if I stop making money tomorrow, I can live for at least 20 years. I can always spend less and go out to make more money if I need to do so,” says Sabatier.
“But the one thing you can never get back is time. Life is about growing and I am really growing a lot. I am meeting a lot of people and that is what excites me more.”
Key principles
The FIRE movement advocates saving and investing enough early in life to achieve financial independence. Here are some of the key features of the approach:
Each practitioner has his own method of calculating how much he will need to save to achieve financial independence. The most basic principle is to save and earn enough passive income to cover one’s annual expenses.
A common method to achieve that goal is saving at least 50% of your income and investing the rest. The amount varies from person to person and some reduce their saving rate once they are further along in their journey.
Many FIRE followers live frugal lifestyles. Some focus on reducing expenses drastically while others take on side hustles to earn extra income.
After achieving financial independence, many adherents do not “retire” in the conventional sense. Instead, they pursue their passions — which could be writing or performing, for example — with the peace of mind that comes with knowing that their expenses are covered.
Can you do this in Malaysia?
There are mixed views on whether Malaysians can successfully adhere to the principles of achieving financial independence and retiring early (FIRE). For one, the higher cost associated with investments can be hurdle for those who want to join this movement, says Lee Han-Ming, a certified financial planner and the operator of the Dividend Magic blog.
Lee himself subscribes to this lifestyle, although he emphasises financial independence over retiring early. He hopes to earn enough passive income by age 35 to cover his annual expenses, which he calculates is RM36,000 a year. With six years to go, he has grown his portfolio of dividend-yielding stocks to provide him about RM20,000 a year.
“It is more practical in, say, the US because the fees to invest are much lower. Also, there are exchange-traded funds, which only charge 0.1%, that invest passively for you,” says Lee.
Despite the challenges, the interest in FIRE is growing in Malaysia. In early July, a thread on this topic was posted on the Lowyat.net forum on finance, sparking a heated and lengthy discussion about the feasibility of this approach in Malaysia.
Lee first heard about FIRE when he was a university student scrolling through Reddit. The peace of mind that comes from having enough passive income to cover one’s expenses attracted him. After graduating, he joined the finance industry, saved 50% of his income for five years and invested the money.
“I lived with my parents at the time so rent was covered. For my meals, I ate economy rice. It sounds bad, but I actually enjoyed it over time. I did spend some money for things like going to the gym,” says Lee.
After his passive income grew to RM10,000 a year, he reduced his savings rate to about 20%. His background in finance gives him an advantage as it helps him to pick stocks and avoid investing in unit trusts, which could charge fees of up to 5%.
He advises those who do not have high-paying jobs to focus on reducing expenses. Those who want to achieve FIRE should start early and invest for the long term, he says.
“Don’t do it for five years. That is still short term. Do it for at least 10 years,” he adds.
“Don’t buy penny stocks. Go for the good companies. You need to earn money and save to invest. Once you hit the minimum threshold of financial independence, why stop there? If you are young and still working, you can put your passive income into investments so that it grows again.”
Lee now spends his time investing and starting his own business, which is something he enjoys. Even if he reaches his goal of financial independence, he has no plans to stop working.
“I don’t think anyone will just stop working once they hit their target. Why stop when you can do other stuff you like that may not earn you as much money? Or [you may end up earning] more because if you like something, you will work harder and you won’t care about your hours,” says Lee.
But not everyone thinks FIRE is a practical plan. Rajen Devadason, a licensed financial planner with Manulife Asset Management Services Bhd, says that as people live longer, the risk of not having enough to support their retirement is becoming a problem.
“In principle, relying on a diversified portfolio of investments encompassing, say, three to five asset classes, makes perfectly good sense. However, to imagine that a portfolio actively built up over 7 to 20 years can fully fund the retirement needs of someone who relies solely on that portfolio for four or five decades of pure retirement — meaning no ancillary work is picked up during that so-called ‘retirement’ — seems impractical to me,” he adds.
When the investment climate changes, when there are extended periods of market weakness or when long-term returns start to decline, individuals who rely on investment income for a living may face issues. With inflation, the cost of living continues to rise.
“So, I would advise most people against early retirement. Instead, I recommend that during their prime working days, they set aside chunks of money from their active income into a portfolio of savings and investment vehicles that will generate passive income in the form of interest, dividends, distributions (from unit trusts) and rental,” says Devadason.
He adds that individuals should not go beyond a 50% savings rate. “Even though longevity risk is the most likely challenge humanity will face in retirement in the 21st and 22nd centuries, none of us knows how long we will live. So, do not save so much that you subsist like a hoarder and settle for a miserable excuse of life.”
Felix Neoh, a certified financial planner with Whitman Independent Advisors Sdn Bhd, shares Devadason’s concerns about whether Malaysian capital markets can support a longer retirement period. But the concept of retirement will change in the future, he observes.
“With people living longer these days and the growing desire to do something different over time, which includes finding new meaning in life or work, as well as the need to re-skill to remain relevant in the workforce, it is said that mini-retirements will become more common in the future,” says Neoh.
“Thus, I don’t think there will be a need to demarcate between full-time employment and full retirement. A combination of both will likely be the norm going forward.”
He acknowledges that FIRE has some attractive features such as growing your income while managing lifestyle inflation and becoming less reliant on active income. The important thing is to adopt good financial habits and plan for different financial goals at various stages of life. Malaysians can also achieve financial independence if they take advantage of the global economy, he says.
“Nowadays, Malaysians can gain access to investment and business opportunities globally more conveniently than ever before. Thus, given the state of the globalised economy, I don’t think one’s current location is an impediment to attaining early financial freedom.”
How to achieve FIRE
One of the first things a FIRE follower does is to estimate his annual expenditure. Jacob Lund Fisker, the author of Early Retirement Extreme, calculates the price of financial independence by ensuring that he saves 30 times what he spends annually.
“If you spend US$1,000 a year, the price of your freedom is US$30,000. If you spend US$6,000 a year, like I do, the price is US$180,000. If you spend more, the price is correspondingly higher. Financial freedom is simply a problem of math,” he says.
Fisker’s current net worth is 129 years’ worth of annual expenses. The savings are invested and he only withdraws 3% to 4% a year.
Grant Sabatier, who runs the Millennial Money blog, estimates that he spends about US$50,000 a year. He multiplied that by 25, which came to US$1.25 million, and saved up that amount over five years. After that, he only withdrew up to 4% of his savings annually.
“Focus on your net worth, as opposed to just your income. What matters is how much money you are saving and investing, not your income,” says Sabatier, who invests all of his savings, even though some people recommend putting aside three to six months’ worth of expenses in an emergency fund.
He has not withdrawn any money from his investments since 2015. He currently lives off the money he made from selling his digital marketing firms, signing a book deal and advertising revenue from his blog. He expects to earn about US$150,000 this year. His net worth is close to US$2 million.
“It is definitely more than enough to travel all the time. My one complicating factor is that I am moving to New York City in two months and living there is more expensive than where I live now [Chicago] — it is 2.35 times more expensive. I do not know if I have enough money to live there forever, but I am not planning to do so,” he says.
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