Our Financial Independence Dictionary

The Financial Independence world is FILLED with acronyms. This can get quite confusing for those just starting out. We’d like to help make your research experience a little easier!

Below are our own personal definitions of commonly used terms. Though everyone within the FI community will have their own definitions, here’s our version.

Financial Independence (FI)

The point at which your passive income streams produce sufficient funds to cover your annual expenses in perpetuity. This allows you to withdraw enough money from those investments to cover your expenses each year for life (accounting for inflation), without running out of money and thus eliminating the need to ever work again.

Financial Independence Retire Early (FI/RE or FIRE)

You may still be working once you reach FI and plan to work for years to come. OR you may scale your working efforts down to part time so you don’t lose the social aspect of it. OR you may foresee upcoming one-off expenses in your near future that may keep you working a bit longer. OR you just love you job and don’t want to leave just because you not longer have to be there for the paycheck. OR you want to keep working for the benefits its provides to you and your family. OR you may want to keep working to collect additional funds to support your kids, parents, friends, other family members, the homeless or for charities.

FIRE stands for “Financial Independence Retire Early”. I’ve also heard the term FI/OR which stands for “Financial Independence Optional Retirement”. Either way, the idea is that once you reach Financial Independence, you can then retire early if you WANT to as you will no longer NEED any additional income to support yourself. Early retirement could be at any point before the typical retirement age of mid to late 60s.  This is essentially when work becomes optional.

There are some retirement police out there saying if you reach FIRE, quit your job, then start making income some other way, then you aren’t really retiring. My argument to this is, if you end up spending your free time on a side hobby that you are PASSIONATE about and it ends up bringing in an income, you aren’t really “working”. At least you are no longer tied to your 9-5. You aren’t spending time on this hobby BECAUSE of the money it generates. You are spending time on it because you CHOOSE to and ENJOY it.

After reaching FIRE the idea is that you will have the TIME to learn about something you are truly interested in and passionate about. It may or may not make money. If it does, great. If it doesn’t, no sweat, you didn’t start doing it with the purpose of making money off it in the first place.

As humans, we are naturally curious individuals and will likely find SOMETHING to spend our free time on. You can only be a couch potato for so long before you get the itch to do something else. Be it traveling, volunteering, coaching, building, writing, crafting, designing… And that’s the beauty of FIRE. You free yourself from the Monday-Friday 9-5 grind with 2-4 weeks of vacation a year to instead decide what you WANT to do EVERYDAY.

Passive Income

Income streams that provide minimal to no effort from your end. Examples include: selling stocks and bonds from your investment portfolio, collecting dividends from your investment portfolio, collecting real estate income from renting out homes/duplexes, or flipping houses, etc.

Safe Withdrawal Rate (SWR)

The rate in which you can safely withdraw your passive income streams to ensure you do not run out of money during your lifetime.

Most of the FIRE community lives by the 4% Rule as their SWR which is based off the Trinity Study. This study looks at a 30 year period of a retirement portfolio that consists of 50% stocks following the S&P 500 index and 50% long-term high-grade corporate bonds. This study looked at all 30-year periods from 1926-1995 and determined that you can withdraw 4% of your investments each year and not end up under the $0 mark at the end of this 30 year time frame 95% of the time.  When looking at an example portfolio of a starting size of $1 million, the median ending balance of the portfolio was just under $2 million, and 10% of the time the ending balance was over $4.4 million.

The idea is that on average, it’s safe to assume your portfolio will return 7% annually and that 3% will be accounted for inflation and the remaining 4% can be withdrawn.

Personally, I am a bit more cautious due to Sequence of Returns Risk and the crazy 10+ year bull market run we’ve been experiencing and believe a SWR of 3.5% or lower is the way to go.

Early Retirement Now provided a fantastic and extremely thorough series of posts on this which we highly recommend to take some time to read through.  You can always mitigate Sequence of Returns Risk by having an extra stash of cash on hand so you do not need to deplete any investments right away, or getting a side gig to offset some of your expenses, or keep working for another year or two to build up your cushion (which in turn reduces your SWR).

Once you’ve decided on your SWR, you can then use your SWR to calculate your golden FI number. All you need two inputs; your SWR and your annual expenses. Ahem, might I add in a VERY important point here in case it hasn’t clicked yet, you need to know your annual expenses! Track your spending. To the penny. This is step one to gaining control over your finances.

The math works like this:

Divide 100 by your SWR and then multiply that figure by your annual expenses. So if your SWR is 4%, and your annual expenses are $40,000, then your FI number is $1 million (100/4 = 25 and 25 x $40,000 = $1,000,000). The flip side calculation is to take your FI number and multiply it by your SWR, as a percentage, to get your annual expenses. So $1,000,000 x 0.04 = $40,000.

**Note: Your annual expenses should be your expected annual expenses once you reach FIRE, not what your current annual expenses are today. Chances are your future expenses will look different. Maybe your house will be paid off so you don’t need to include a mortgage, or you will need to account for supplemental health insurance, or you plan to travel more, or maybe you plan to drop to a one car household. Also, your FI number and your Net Worth are NOT the same thing. We will cover this in a lot more detail in a further post.

Savings Rate

The percentage of your income that you are saving, not spending.

The way I calculate income is net income (gross income minus taxes, social program contributions (i.e. Social Security, CPP, EI, etc.), any health insurance premiums, and any automatic deductions to your employer sponsored tax advantaged accounts) and then I add back in any money that’s automatically going into my tax advantaged accounts (either from the employer match or employee). So any money that is automatically coming out of your paycheck and going into your tax advantaged account, such as a 401k/RRSP, gets included in your income along with any employer match. Your income can be money from your primary job, secondary job, rental income, alimony, etc.

Your savings is any surplus left in your bank account after accounting for all expenses.

I recommend you calculate this on a monthly basis to keep yourself accountable. For example, let’s say you earn $4,500, spend $3,000, and save $1,500 each month – then your savings rate is 1,500/4,500=33.33%.

There will be some months where your Savings Rate dips if you have a large expense that month, like paying your annual home property taxes or car insurance in full. There are other months where your Savings Rate will soar if you have a large one off income, such as an annual bonus from your employer or a three week pay period month. You can then average your monthly Savings Rate for the entire year.

Many of the FIRE community members have a Savings Rate of 50% or higher, this is awesome but not always achievable. Striving to get your Savings Rate as high as you comfortably can is the goal.

Personally I think everyone should know your own Savings Rate, as it’s one of the most important calculations when it comes to early retirement. I don’t care how you calculate it.  Just be consistent with you formula and track your progress.  Our current Savings Rate has varied from 50-80% over the years.  Check out this great a great post by Mr Money Mustache on the Shockingly Simple Math Behind Retiring Early.

F-U Money

To me, this is a point in which you have enough money saved up where your job needs you more than you need your job.

This could be a 6-12 month emergency fund in which if you are unhappy with your job, you can quit right then and there and have a buffer to figure out your next move. Or being mere months away from Financial Independence.

Having F-U money gives you OPTIONS. Options to get out of your rut and to instead shift to something more meaningful to you or to switch employers to go work for a company or person whom you respect. Those who live paycheck to paycheck likely feel trapped.  Those who carry debt are even more trapped. Don’t think for a moment employers don’t realize this is the reality for most people.

Having F-U money puts you in the drivers seat to steer you towards a life that brings you joy and happiness.

House Hacking

The art by which you have figured out how to have shelter at a very minimal cost or for free.

This could mean renting with roommates vs living by yourself, buying a house and renting out the additional rooms, buying a duplex and living in one half and renting out the other half, etc.

We house hacked by buying a 3 bedroom townhouse with an additional large den that was used as another bedroom and rented out 3 of the rooms.  This rental income covered everything from our mortgage, property taxes, home insurance, HOA, and all utilities. We threw our own money to the mortgage as well and we were able to pay off the mortgage in 2.5 years. That’s 27.5 years faster than the typical 30 year mortgage!

The idea is that you can put additional savings either towards supercharging your mortgage payoff date or throwing it into your other investment vehicles to propel you to your FI number much faster.

Travel Hacking

The art by which you have figured out how to travel at a very minimal cost or for free.

Typically the easiest way to do this is with the large point bonuses offered through credit card sign ups offered by most major banks.

**Note, this is NOT for everyone. This is ONLY a good strategy if you can pay off your credit card in FULL each and every month. If not, skip ahead. If so, this is an extremely lucrative way to travel the world for free.

Through travel hacking, we’ve been to Europe 8 times, Israel, Costa Rica, the Caribbean, Hawaii, and all over mainland US and Canada on over 35+ flights within North America. And we still have over 1 million points accumulated in our “travel bank”.

The key here is to ensure you do not ensue any additional spending just to reach the credit card bonuses. We are strategic about when we sign up for new cards and tend to line it up time wise with an upcoming big annual expense (i.e. home insurance, car insurance, dental bills, etc.) or we will also buy gift cards to places we normally go to and know we will use (grocery store, gas stations, etc.) to get to the minimum spend.

Geographic-Arbitrage (Geo Arbitrage)

Geographic-Arbitrage is when you use geography in your favor financially.

An example could be using the exchange rate in your favor to convert your savings into another currency where your money goes further and living there once you reach FI. Or working in a high cost of living country where your earning potential is higher to boost up your savings rate (assuming you don’t let lifestyle creep in) and then moving to a lower cost of living country once you reach FI. Or moving to a lower cost of living town within the same country once you reach FI. Or if you’re a remote employee, you could be earning your income in a strong currency (say USD) but be living in a low cost of living country (say Panama) where the cost of living is lower while still working. 

Side Hustle

A side hustle, or side gig, is an additional income stream, in addition to your day job.

This could be any number of things like; walking dogs in the evenings, or renovating antique furniture and selling it at your local farmers market or online, or mowing lawns in your neighborhood, or getting a paper route. You get the idea.

Any additional income can be used to boost up your savings rate. The best kind of side hustle (in our opinion) is a passive side hustle. An example here is selling digital printables on a platform like Etsy that customers buy and print out themselves like Julie over a Millennial Boss does. Therefore there is no need for you to deal with inventory or shipping once you’ve designed the item.

Expense Ratios (or Management Expense Ratio or MER)

The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative, management, advertising, and all other expenses. Similarly, a MER is the amount that is will cost you to own an index fund, mutual fund, or exchange traded fund. An expense ratio of 1% per annum means that each year 1% of the fund’s total assets will be used to cover expenses. 1% may not sound like a lot, but it’s HUGE when it comes to your investments. We will dig further into this on another post.

We are HUGE fans of investment products that offer low expense ratios as high expense ratios can greatly eat into your earnings over the years (anything over 0.5% is high in our books). We use Vanguard where we can find index funds and ETFs with less than 0.20% expense ratios. If you have investments, are you aware of their expense ratios?

Index Funds

An Index fund is a mutual fund or exchange-traded fund designed to follow a certain preset rules so that the fund can track a specified basket of underlying investments. For example, you can invest in a low fee index fund that follows the overall US stock market, or the overall Canadian bond market, or the overall International stock market, or US Small Caps, or High Dividend Yields, etc. There are some Socially Responsible Investing index funds too.

In short, index funds are a low cost, hassle free way to diversify into several different investment types at once, and for the long haul. There are several brokers out there who offer a great selection of index funds including Vanguard, Fidelity, and Charles Schwab in the States and you can find Vanguard and BlackRock iShare ETFs via Questrade in Canada. 

Lifestyle Creep

The idea here is that as your income increases over time, it’s likely that your lifestyle follows suit.

Someone in their 40s likely couldn’t imagine going back to the lifestyle they were living just out of school in their early 20s. How many 40+ year olds do you see in a hostel? Not many. If you can figure out how to NOT let lifestyle creep impact you, this will supercharge your path to FI.

My recommendation is whenever you get a bump in pay you automatically set a large percentage of this bump (if not all of it) to be sent into investments, so you don’t even see it in your bank account and thus are not tempted to spend it.

This final topic is SO important. I think the hardest thing to figure out is how to live an intentional and purposeful life. Let’s face it, no one is going to remember you by the type of kitchen counter-tops you had in your home when you die.

All of these items above are so important to anyone aiming to reach FI and we will be sure to dig further into all of these topics on the blog. Now that you’ve gotten your feet wet with all these FIRE terms, head on over to our favorite FIRE resources post and get fired up about FIRE!

Any terms that we’re missing? Leave a comment below!

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• Investing Newbies: Check out our free Investing 101 Series.
• How much are you paying for your phone plan?  Canadians, learn more about Public Mobile, and see how we are paying $3/mo for our cell phone plan.
• How much are you paying for internet?  Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
• How much are you paying for home insurance?  We were able to reduce our rates by 25% by switching over to Square One Insurance.  If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and/or tenant insurance.  Use this link to receive an extra $15 off your quote.  (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)
• How much are you paying for your monthly utility bills?  See how you can likely save on this monthly expense.

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