Upon learning about the concept of financial independence and retiring early (FIRE), most people envision sitting on a tropical beach somewhere for the rest of their lives, sipping drinks with little umbrellas in them.
That sounds like it would be fun for a month or so, but the reality of financial independence is both more mundane and infinitely more interesting.
Once your investments generate enough passive income to cover your living expenses, you no longer need to work to pay your bills. Your day job becomes optional. At that point, you gain complete freedom over your time.
But both financial independence and your pursuit of it open other doors in your life as well. In many cases, a higher savings rate creates new opportunities for saving more money. Savings beget more savings, and wealth begets more wealth.
Hidden Benefits of FIRE
As you explore the notion of your own financial independence plan, look past the visions of pina coladas on the beach to consider the deeper implications and hidden benefits that the FIRE lifestyle can realize for you.
1. Lower Borrowing Costs
They say lending money is the world’s second-oldest profession. And for the millennia that people have been borrowing, they’ve been making the same lament: The people who most “need” loans are the ones least likely to receive them. When they do get approved, they typically pay high interest and fees.
Are lenders evil? No, of course not. They simply price their loans based on risk, and desperate borrowers make risky borrowers.
The greater your wealth, income, and credit score, the less you pay in loan interest and loan fees when you borrow money. You make a low-risk borrower because you have plenty of financial assets and demonstrate financial stability.
Wealthy people also tend not to carry expensive, unsecured debts like credit card debt and personal loans. They typically carry only low-interest secured debts like mortgages or auto loans, given the relatively low interest.
As you pursue financial independence, one of your first financial goals will likely be paying off high-interest debts. Beyond eliminating the high interest and monthly payments, your ever-decreasing debt and increasing net worth will position you to borrow money at the lowest possible interest rate and fees.
2. Optionally Forgo Life Insurance
Consider for a moment the purpose of life insurance. In a traditional family with one breadwinner, 2.4 children, a dog named Fido, and a white picket fence, the family’s ability to survive hinges on the breadwinner’s earnings. If the breadwinner gets struck by lightning, suddenly the family loses its only source of income.
Enter: life insurance. If your family depends on your income to survive, you need life insurance for sure.
I don’t own a life insurance policy, however, despite being married with an infant child. Our FIRE lifestyle renders life insurance unnecessary for two reasons.
First, we live entirely on my wife’s income, funneling all of mine into income-producing investments. If I die unexpectedly, my family would (hopefully) mourn, but they could continue living the same lifestyle without my income.
Second, because we’ve lived a frugal, high-savings lifestyle for a few years now, we’ve built substantial assets and passive income sources. Even if my widowed wife never contributed another penny, our existing assets would compound into a more-than-adequate nest egg over the next decade or two.
The upside: We can put the money we would otherwise spend on life insurance premiums into investments, to grow our net worth and passive income even more.
3. Optionally Forgo Disability Insurance
The exact same logic applies to long-term disability insurance. When you don’t rely on a single source of income to survive, you don’t necessarily need to protect that source of income with insurance.
Keep in mind that once you near or reach financial independence, you don’t need a cent of income from work to survive. The closer you get to FIRE, the less important your job becomes for your financial well-being.
Neither my wife nor I carry long-term disability insurance for the same reason we don’t carry life insurance. If one of us ceases to be able to work, we’ll be just fine between our existing passive income streams and the other partner’s active income.
So, we put the money we would have spent on disability insurance toward our investments to build wealth faster. Once again, savings begets more savings.
4. Better Negotiating Power for Salary & Benefits
If you don’t need a job to survive, you start from a powerful negotiating position.
You can ask for a dramatically higher salary, or far greater benefits, all without fear of losing your job offer or current position. In the overwhelming majority of cases, employers don’t retract offers out of personal offense taken to bold job offer negotiations by the employee.
But even if you’re negotiating with the world’s pettiest employer and they withdraw their job offer because of your negotiating stance, you can shrug your shoulders and keep living on your passive income and savings when you lead the low-expense, high-savings FIRE lifestyle.
Lowering your living expenses and boosting your savings rate positions you to demand more from your day job — while you still choose to work one.
5. Ability to Live Anywhere
Once financially independent, you can live anywhere in the world because you don’t rely on a job to bring in money.
But even before reaching financial independence, you can still negotiate with your employer to let you start telecommuting.
Or, for that matter, you can become a digital nomad by starting your own online business, taking freelance work, or taking a new job that lets you work from anywhere.
When you can live anywhere in the world, you can take advantage of geoarbitrage: The combination of a low cost of living and strong income from elsewhere.
You can, for example, move to a state with a much lower tax burden, or even move to a country where $2,000 a month buys you a good life.
I earn money in U.S. dollars but I live in Brazil, where I can live a luxurious life on a relatively low monthly budget. A full-time nanny here costs only around $500 per month, whereas we’d pay many times that in the U.S.
6. Eliminate Work-Related Expenses
When you no longer have to work, or at least no longer have to physically commute to an office, you can save a surprising amount of money on work-related expenses.
Take commuting itself for example. According to JobAlign.com, the average American commutes 19.7 miles each way. If they commute to work 21 days per month and incur an average cost to own and operate a car, that comes to an appalling $5,848 per year, based on CommuterConnections.org’s free calculator.
For years, my wife and I each owned our own cars. Then we got rid of one and shared. Then we got rid of the other, going completely carless.
We can do it because we intentionally chose my wife’s employer and city as conducive to walking and biking everywhere, and because I work remotely as a digital nomad.
Work-related costs don’t end at commuting. Consider clothes — white-collar workers routinely blow several thousand dollars each year on suits, shoes, accessories, and other symbols of their professionalism, taste, and success.
I wear the same athletic clothes to work every week. Although I own a few suits, I only wear them to weddings, funerals, and the occasional upscale social outing. The last time I spent money on professional clothing was — actually, I can’t remember.
The money I don’t spend on work-related expenses, I funnel right back into investments, further ensuring I never need to spend money on work clothes again.
7. Follow Your Passions
Most people work to earn a paycheck to cover their living expenses. When they get a raise and start earning more, they immediately go out and start spending more, in an endless cycle of lifestyle inflation.
The closer you get to FIRE, the less your work revolves around that paycheck. You don’t need it the same way most people do. Instead, your work increasingly becomes about spending your time meaningfully, allowing you to pursue passion projects that don’t necessarily pay huge salaries.
Want to work for a nonprofit helping to prevent tropical rainforest deforestation? Or perhaps you’ve always wanted to do more creative work as an artist or writer or designer? Go for it.
The FIRE lifestyle involves low living expenses, a high savings rate, and increasing passive income from investments, all of which combine to offer you more freedom from the “golden handcuffs” that bind so many people to their high-stress jobs.
8. More Flexibility to Stay Home with Kids or Aging Parents
With lower living expenses and higher passive income also comes more flexibility for one partner to stay home with kids or aging parents, if desired. Or, for that matter, for both partners to eventually stay home.
As part of your financial independence plan, you can opt to switch to a single-income household as a milestone along your journey to FIRE. But you don’t have to.
My wife and I both enjoy our work and plan to continue working indefinitely. Once again, you create that freedom to do what you like with your time by building more passive income at a younger age.
And long before you actually reach financial independence, you can create far more flexibility to support your kids as needed by negotiating a flexible or remote work schedule while you continue working full-time.
9. Lower Effective Tax Rate
With a higher savings rate, you can better take advantage of tax-sheltered accounts like IRAs, 401(k)s, ESAs, and HSAs. These accounts can both help you reduce your taxable income this year, and lower your taxes in retirement.
But the tax benefits of the FIRE lifestyle don’t stop there. The IRS often taxes income from investments differently than salary income — to begin with, you don’t have to worry about payroll taxes (FICA taxes).
When derived from capital gains, you also pay the lower capital gains tax rate on investment income, rather than the higher rate for regular income. And you can use strategies to reduce your capital gains tax even further, such as 1031 exchanges to defer taxes after selling large assets like real estate.
Some income-producing assets also come with their own unique tax advantages. Take rental properties, for example. Real estate investors can lower their taxes through a wide range of tax deductions and rules designed to promote investment.
The more of your income that you generate from investments, the more flexibility you have to slash your income taxes.
10. Ability to Capitalize on Cost-Saving Investments
Sometimes savings require an upfront investment that then pays for itself after a few years.
Take energy-saving home improvements for example. Homeowners can invest in a one-time cost to radically reduce their home energy usage, but it often costs thousands of dollars initially.
Over time, however, you can save massive money on utility bills once these improvements are in place. And, for that matter, you can save even more money on taxes through green energy tax credits.
Or take electric vehicles versus traditional gas cars. In some cases, electric cars cost more money to purchase but cost less to operate and maintain, saving money in the long run. One study by the University of Michigan found an average annual savings of $632 for electric vehicles compared to their gas-fueled counterparts.
It cost my wife and me time and money to move overseas initially. From paying for the recruiting network to help my wife find a placement, to setting up a mailbox with a scanning service, to the initial banking headaches, to moving my cellphone number to operate 100% digitally, it all took labor and money.
But today we enjoy a 65% savings rate, largely because we live overseas.
Final Word
Everyone’s financial independence plan looks different because everyone’s ideal life looks different. That’s the beauty of lifestyle design: You create the exact personalized life you want.
My wife and I happen to use our marriage and dual incomes to our advantage and to enjoy the expat lifestyle path to FIRE. But being married can be just as much hindrance as help if your partner doesn’t share your goals, and living overseas is only one strategy among infinite options.
I know others who worked high-income jobs for a few years, saving and investing most of their income to then quit in a blaze of glory.
Still others use leveraged real estate investing as their FIRE strategy, start a lifestyle business on the side of their full-time job, or forge some other unique path to FIRE.
Regardless of how you get there, both the journey and the destination of FIRE bring plenty of benefits besides the ability to storm out of your cubicle, never to return.
With every dollar of passive income you add, you become less dependent on your job. And in doing so, you can negotiate more flexibility, more income, and more benefits, all while reducing the need to shell out costs like life insurance, disability insurance, work clothes, commuting costs, and taxes.
All of which only accelerate your progress to financial independence, wealth, and complete freedom to spend your life however you like.
