Should you believe everything you hear about Financial Independence?
Most of the folks of the FI and FIRE community have very good intentions. As with any group, there are certainly some outliers. In my reading and research over the years, I have found some common myths that often dishearten the community and the people of the financial independence community.
Let us outline 3 common myths I see continuously emerge and break the spirits of our community members.
The 3 Biggest F.I. Myths Explained...
1. Financial independence is as easy as increasing your savings rate and investing
This is only partially true for some of us.
However, don't be discouraged if you find yourself saying "maybe for them" or "well that's not for me". Everyone, and I mean everyone, has a different starting point. Even siblings can have different degrees of support. These are just the facts of life.
Your friend who retired at 30 because they hit it big on cryptocurrency or another couple who moved their family to the woods after starting a blog, I guarantee they had a different starting point than you did! If you press them on it, I am sure they will admit it. I wouldn't expect that you guys become friends afterwards however. Finances are one of the greatest fight promoters known to mankind.
Perhaps any one of the following is true about your current situation:
Your situation is unique to you. There are many things that will affect your so called "savings rate" and all you can do is strive to improve your situation relative to you. That's it. This is not a competition unless you want it to be and you enjoy competition, in a healthy manner of course.
Besides, maybe your version of "financial independence" is being debt-free and living paycheck to paycheck. If that's your goal and you are fully aware of the risks of living that close to the edge and are content with it, then who cares about a savings rate!
2. Everyone will understand why you practice frugality and will support you in your goals
Mostly false and very, very rarely true.
Most people do not even have an idea of what frugality even is. You will often be called "cheap", albeit mistakenly. You may even have one of the following condemnations thrown your way:
All of these are aimed at indicating that you should just spend more money. Basically, all of these condemnations are aimed at why you shouldn't be frugal.
This is utter nonsense. Again, frugality - to most of us who practice it- adds tremendous value and meaning to our lives. We actually like being frugal (some of us).
A word of caution: try not to spend too much time, or any at all, explaining frugality and your purpose to somebody who is clearly unwilling or unable to understand this way of life. Just nod, smile, and purchase more shares of your favorite index fund with your savings.
3. Real Estate is the quickest path to F.I.
Depends. I mean really, truly, depends.
Transaction costs are typically very, very high when it comes to real estate. Obtaining financing, costs of upkeep, finding tenants, drafting leases, commissions to realtors. Please be sure that you are able to calculate your real rate of return in real estate. Check out road #9 in Ken Fisher's book The Ten Roads to Riches to find out the hard truth of real estate investing, and learn how to do it right.
Sure you can have investors or use other people's money. Leverage is your friend. Be a friend of borrowing to rapidly increase your wealth. Whatever.
Honestly, most of us are coming from significant financial burden and debt. The last thing most of us want is more debt and more borrowing. Perhaps someday I can be convinced otherwise but real estate is not a great investment.
Consider that according to data collected by Jorda et. al. (2019) from the time period of 1870 to 2015, over a century's worth of data, equities beat real estate returns 8.46 to 6.10% respectively after being adjusted for inflation. Although the figure 6.10% does include home capital appreciation--which lowers the total yield of housing return since capital appreciation is less than 1% annually when adjusted for inflation--residential real estate is not the blow-out winning investment it is often claimed to be.
Be wary about real estate. Costs of home ownership are very variable and it's hard to give a true estimate as to your expected rate of return due to the extreme variability in the cost of ownership.
Leave us a comment below on how you feel about the 3 common myths of financial independence.
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Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.