Listen to this article now
Many different projects, an unstable income, and a myriad of business expenses — at first glance, entrepreneurs seem to have too much on their plate to even think of pursuing financial independence. But is there a way they can emulate the famous financial gurus and retire decades early?
When first starting your own business, all you want to do is survive. You are aiming to create an income that is greater than your expenses while covering your business costs, such as staff, office space, and travel. But once a business is stable, entrepreneurs can set their sights higher. While not typically associated with entrepreneurship, following the tenets of the FIRE movement can provide an important financial cushion for business owners and freelancers with an unstable income.
FIRE on an Unstable Income
A person who is pursuing FIRE, which stands for ‘financially independent, retired early’, is defined as someone who has saved and invested enough money during their working years that they now have a passive income higher than their expenses. Even if they never work again, they can support themselves forever, or at least until their pensions kick in.
Pursuing FIRE while being a business owner or a self-employed worker comes with a unique challenge: You have a variable income. There is no guarantee that you will earn as much as you did last month, or — as shown by the Coronavirus crisis — that you will even earn anything at all. This means that you are unlikely to be able to achieve a stable, predictable savings rate, which can make planning for FIRE harder.
However, it can also be a great advantage. As an entrepreneur, you are used to a variable income and are, therefore, more likely to already be financially savvy. You know that you can’t spend every penny of your earnings, as next month might be lean. So, you are more likely to live below your means and have emergency savings, which are two of the most important prerequisites of starting on the FIRE path. Although you might not be able to save the same amount every month, you will have an easier time starting to save regularly than someone who is used to spending their entire income.
Businesses as a Forever Job
But is the concept of FIRE even useful to entrepreneurs? Why would you want to pursue it? You don’t work in a boring office job. Instead, you are running your own company, flexibly working as a freelancer, or pursuing projects you are passionate about. Instead of thinking about retiring early, business owners often work way past average retirement age — and enjoy every second of it.
However, the beauty of FIRE lies in its flexibility. Just because you can retire, doesn’t mean you have to. Being financially independent gives you options; once you achieve it, you know that you are taken care of financially, no matter what happens. For example, if your business is having a tough year, you don’t have to pull a salary. You can live off your FIRE income instead, which will help the business bounce back more easily. In this way, financial independence is worth pursuing even if the ‘retire early’ component is not of interest.
Small Businesses and Financial Independence
This concept is especially important for small businesses and freelancers. Unless your company is very large, small changes in expenses such as increased rent or staff costs can make a big difference in the bottom line. That’s why it makes sense to save and invest as much as possible while things are going well. If the business runs into financial trouble later on, you will have a cushion and be much less worried.
For freelancers, being financially independent means that you can choose how much work you do. For example, if you have a child or one of your family members needs help, you can choose to take on fewer projects and spend more time with your loved ones. The more financially stable you are, the more freedom you have to reduce your workload, take on more risky projects, or work on your passions instead of ‘what pays the bills’.
In these ways, the FIRE concept is not just applicable to entrepreneurs but also essential and liberating. A financially independent person is not just free to retire, but also to accept lower-paid passion projects and to always act in the clients’ or business’s best interests without worrying about financial gain.
What are your thoughts on pursuing FIRE as an entrepreneur or freelancer? Let us know in the comments!
This article originally published on GREY Journal.