A Glossary of Financial Independence Terms
Have you been hearing all of these personal finance acronyms and terms and not exactly sure what they mean? What is Financial Independence (FI), Financial Freedom, or Financial Independence Retire Early (FIRE) about anyways?
Here I will give a top level overview of personal finance terms related to the FI or FIRE “movement”.
Financial Independence (FI):
is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others.
People achieve FI by (1) being in control of their finances, (2) using tools to decrease spending and minimize, and (3) using side hustles to increase income, pay off debt, and invest.
Financial Freedom (similar to FI):
Living a life you love without having to be dependent on a set salary each day or month. Achieved by having enough assets, cash, and investments saved up to pay for living expenses.
Financial Independence Retire Early (FIRE):
Essentially the same as FI, however, in this scenario you are “retired”.
There are 3 types of FIRE: (1) Fat, (2) Barista, (3) Lean.
- Fat FIRE: the status of having enough assets, cash, investments to live anywhere you want (regardless of cost of living) and spend lavishly on whatever you want (of items that are valuable to you).
- Barista FIRE: “Halfway in”, meaning one person may retire early, however, their spouse has to continue working to provide health insurance for the couple. Live in mid-low cost cities, send kids to public school, works as freelancer or does part-time offline work.
- Lean FIRE: may mean deciding never to have kids or if you have kids you may not be able to save up to send them to college. You may have to live in a small living space or in a country with very low cost of living (geoarbitrage). One spouse who works full-time or hustles on the side.
Geoarbitrage is an interesting concept, often closely related to the definition of lifestyle design. It basically means relocating in order to take advantage of the lower costs of a city/country.
Quite a few people are moving away from the F.I.R.E. movement and pursuing just the Financial Independence part instead. Something they call, F.I.O.R. or, Financial Independence Optional Retirement.
Once they hit FIRE, they found themselves desiring to find purpose in life. Therefore, started a part-time business coaching others how to achieve FI.
A side gig or side job where a person makes money to supplement their income or grow their hobby/business.
Including but not limited to:
(1) Active Income Streams (You do the work):
- Being a delivery driver or grocery shopper for Uber Eats or Instacart.
- Physically working extra hours outside of your full-time job (i.e. as waitress or waiter).
- Entrepreneurship. Start a Blog or YouTube channel.
- Taking a course and learn a new skill to start a freelancing business. Such as: (1) running Facebook Ads to for local businesses or (2) being a Pinterest Virtual Assistant (these are two I’m currently working on).
- Selling stuff you don’t USE OR NEED from your home.
- Flipping furniture or other items.
(2) Passive Income Streams (someone else does the work, you get paid):
- Buying a rental property that is managed by a 3rd party.
- Building an online business, then, hiring the work out or turning it into an AGENCY.
- Selling courses and digital products on your blog.
- Making digital printables and selling them on Etsy.
- Investing your money
**To truly achieve Financial Independence, one needs to develop MULTIPLE passive income streams**
Passive Income: income derived from a rental property, partnership, or other enterprise in which a person is not actively involved or makes money in their sleep.
Partially Passive Income: Some work is involved to upkeep the stream of income. However, one can “set it and forget it” and it keeps making money (i.e. selling Etsy Printables).
A tool a person uses to track their income and expenses to better meet their personal finance goals.
I help you figure out how to create a budget in my Budget For Beginners post here.
Expense Tracking: A tool/app a person uses to track their expenses and minimize them.
Expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property.
is an ongoing process that reduces stress about money, supports your current needs and helps you build a nest egg for your long-term financial goals.
Financial Planning involves:
(1) Having Life Insurance.
My husband and I both opted for term policies as they are relatively inexpensive. It’s always a good practice to have something in place in case of the unmentionable.
(2) Setting up investment accounts for retirement and other.
Investing doesn’t have to be JUST for retirement. We have an investment account for our son that he will hopefully use one day to buy his first car or home. I hope to start an investment account soon to buy real-estate property.
(3) Estate Planning.
BOTH parties in a partnership need to have a WILL (i.e. husband and wife). This one I actually learned recently when financial planning with my friend JD at Principal Financial. A will should depict what happens with all of your assets, liabilities, and dependents should something happen to you.
(4) Debt Management.
Having a long term plan in place to pay off debt is key for having control of your financial plan. Use tools like a budget spreadsheet, apps like Mint or Personal Capital, and money dates with your significant other to track income and expenses.
Paying off Debt Terms:
These are terms I commonly hear on podcasts discussing debt payoff.
Debt Snowball: means you pay the smallest debt with the highest interest rate off first. Then, you can use the cash flow from that debt to help pay off the next one.
Debt Avalanche: means paying on the debt with the highest interest rate first. Regardless of the amount the debt is compared to your other debts.
*Debt Avalanche almost ALWAYS works better in your favor mathematically. However, debt snowball is useful for people who need “small wins” by paying off smaller debt faster.
SAVING MORE MONEY
Frugality: I used to think that it meant “being cheap” or “tight”. Now, however, I see it as a minimalism tool. A way of life where I only spend money on items or services that are purposeful and truly valuable.
Being frugal is also about living sustainably. Living sustainably is about getting away from the consumerism mentality and being self-sufficient by growing your own food and being resourceful in other ways. The thought that spending money and buying things is good for the economy. Which it is! But, it isn’t sustainable. Constant consumption of goods without the income to back it up is only good for credit card companies.
Additionally, you might be able to purchase items that are more valuable/will last longer if you changed your mindset to believe you could live better with less. I know it’s a hard concept to understand when you’re in the thick of consumerism. Believe me, I wasn’t sure I could ever get by spending less than 3K a month.
But, I want to be rid of my debt so badly that my values have changed.
I don’t want to go to the store and purchase name brand clothes anymore. I would rather apply that money to debt. Or go to my local 2nd hand store and purchase the clothes for a fraction of the price.
Minimalism: The minimalist lifestyle is about living with only the things you need. Minimalists are free from the desire to buy and accumulate more. Instead, they find happiness in relationships and experiences. Maybe a more intense version of frugality. They kind of go hand in hand.