The Biggest Flaw with the FIRE Movement

Let me start by saying that the FIRE movement has a lot going for it. Sure, the lifestyle choices — like cutting your expenses down to the point where you might be saving upwards of 90 percent of income — may not be for everyone, but who doesn’t want to be financially independent? Who doesn’t want to retire early?

However, as this COVID-19 pandemic continues to roll on, we’re starting to see some far-reaching ramifications including the impact on people who’ve been able to sustain the FIRE life these past few years.

The Collapse of the FIRE Lifestyle

It’s obvious enough that not everyone can achieve the FIRE lifestyle. If you’re barely scraping by to pay your monthly bills, you’re not going to save up the amount of money needed to get to this level. By many accounts, the minimum threshold is to achieve a net worth of at least $1 million. 

If we subscribe to the 4 percent rule, where you only take out 4 percent of your savings each year, that works out to $40,000 per year on $1 million in savings. The idea is that if you only withdraw 4 percent, the nest egg can get continually replenished through investment earnings. But then something like this coronavirus pandemic hits and you watch your investments plummet.

In fact, several FIRE people watched as their net worth plummeted six figures overnight when the stock market crashed. And they retired before they were 40. There are all sorts of reasons why the stock market can crash like that, and they can be wildly unpredictable. The FIRE lifestyle relies heavily on relatively reliable passive income from investments. When that goes sideways, so do your FIRE plans.

Location Arbitrage Falls Apart?

But, it’s not just about investment earnings. That’s a big part of the FIRE movement, but another big part of it something that some people call “location arbitrage.” The idea is because your job is no longer necessarily bound to any single location, you don’t have to live in a high cost-of-living city like New York or Seattle. You can live somewhere much cheaper.

Several of the bigger proponents of this idea may move to places like the Philippines. However, during these times of uncertainty surrounding the coronavirus, just about everyone is being advised to come back to their home country. Canadians are being told to return to Canada. Americans are being advised to return to America. Suddenly, location arbitrage falls apart… or does it?

While perhaps not offering quite as extreme a difference in day-to-day costs, you can still take advantage of this idea via low cost of living cities in the US. Bakersfield, California is certainly much cheaper than Irvine, California in Orange County. You can live well in Dallas or Phoenix too.

The idea of location arbitrage is certainly not reserved only to the FIRE movement either. Indeed, it’s one of the most valuable aspects of the dot com lifestyle, alongside time freedom and money freedom. 

Passive Income vs. Leveraged Income

A large net worth, a modest lifestyle, and self-sustaining passive income are the cornerstones of the FIRE movement. But, when you rely too much on stock market returns, you’re at the mercy of powers well beyond your control. They may work out in the long run, but you need them to work in the short-term too, and you need them to work for you continuously.

To this end, passive income on its own may not be enough. And yes, while I completely understand that blogging is not passive income, it can be a source of continuous income doing something you already love (if you love blogging, of course). The same can apply, in varying degrees, if you enjoy podcasting, YouTubing, or anything else that can be completely digital and totally remote. 

Obviously, it can be a slippery slope leading to another full-time job (even if you’re your own boss). And that’s why leveraged income can be one of the best accompaniments to your other passive income. Diversify your income sources!

Focus on What You Can Control

Not everyone wants to reduce their regular expenses down to the bare minimum, never eating out and never indulging in nice things. The FIRE movement isn’t for everyone. That’s clear enough. And relying on investment returns that can evaporate in the face of a crisis can be remarkably precarious too, as this current pandemic has illustrated.

Your investment returns are, for the most part, out of your hands. So, focus instead on what is in your hands. Do what you can and control what you can. And remember, the dot com lifestyle isn’t about not working; it’s about having control over the work you do and how you choose to do it. That’s the freedom you’re after and it is attainable.