Have you ever felt you need clarification on all the types of Financial Independence? There are at least six types to consider, and more get defined all the time.
The question of which type of Financial Independence is right for me is likely what brought you to this article.
When I started my financial independence journey, I only knew of one form, which is now known as Lean FI or Lean FIRE. I first read about FIRE on the Mr. Money Mustache blog in 2014. I was blown away.
Before reading the blog, I had no idea that early retirement was possible. I knew I was saving for retirement, but I could not comprehend what savings were required to sustain my lifestyle after work.
Even though the Mr. Money Mustache story educated and inspired me, there we more than a few cards stacked against me to directly follow his plan. First, I was already over 40, and second, I couldn’t imagine how to reduce my expenses to Mustachian levels, often well below $40,000 per year.
Today, there are more recognized types and paths to Financial Independence.
This article will discover six types of Financial Independence (Lean FI, Traditional FI, Fat FI, Barista FI, Coast FI, and Slow FI), their advantages, and their disadvantages. As the FI community grows and becomes more inclusive, more types of Financial Independence get defined. We will stick with these six types in this article.
You will be more informed about the types of Financial Independence and be better prepared to determine which type fits you best.
The good news is that your choice today doesn’t have to be permanent. There are many paths to Financial Independence, and you are always free to choose your adventure and make changes along the way.
Definition of Financial Independence
Financial Independence is a state where an individual has sufficient wealth or income to support their living expenses without relying on traditional employment or government support. It is the freedom to make choices about one’s life and work without being limited by financial constraints.
The state of Financial Independence marks the time when money ceases to influence decisions. Work does not have to stop, but there is no longer a need to do work that does not provide joy and satisfaction.
The trick is determining when you’ve reached this state of self-sufficiency.
The 4% Rule, or Rule of Thumb, is a simple formula to help determine when you’ve reached Financial Independence. The Trinity Study is a paper created by three professors at Trinity University in 1998. They tested safe withdrawal rates for simulated 30-year retirement periods for every year, 1925 – 1995.
The study found that starting each 30-year period by withdrawing 4% and adjusting the annual withdrawal rate by adding annual inflation based on the consumer price index (CPI) resulted in a very high success rate.
the original Trinity study found that a 4 percent withdrawal rate only had a 95 percent success rate. With more volatile corporate bonds, the sustainable withdrawal rate dipped slightly below 4 percent in 1965 and 1966.
– Forbes – The Trinity Study And Portfolio Success Rates (Updated To 2018)
The simulation failures with the 4% rule would have succeeded if the retiree had made minor adjustments along the way. A simple adjustment would be to forgo the inflation adjustment in a year when markets are down. This is why many refer to the 4% Rule of Thumb. It’s a great number to use as a target for Financial Independence. However, it’s not a set-and-forget operation in execution.
You can calculate a Financial Independence (FI) number by taking your annual expenses and multiplying that number by 25.
$1Million has been used as an example FI number for as long as I’ve known about Financial Independence.
If your FI number is $1Million, your annual expenses are $40,000.
$40,000 x 25 = $1,000,000
Your mileage may vary, but $40,000 doesn’t go as far as it used to. Still, plenty of people live comfortable FI lives on less, and in some cases, much less.
Importance of Financial Independence
In a world where fewer and fewer people feel that they will ever be able to retire, the concept of Financial Independence is critical. According to TheStreet, 75% of Americans don’t think they can save enough to retire.
When you talk to friends, family, and even financial advisors, you’ll be lucky if anyone has a clue how much you need to save to be solvent in retirement.
Using the 4% Rule, anyone can estimate what they need to save for retirement. Savers are better informed and able to make adjustments to spending, which can have a profound impact on their FI number.
For example, reducing $1,000 from your annual spending budget may seem like little. That slight adjustment reduces your FI number by $25,000.
When people are aware of the impacts of spending on their retirement plans, they often reduce consumerism and find that they don’t miss the “stuff” they used to waste money on. All the while, they make progress toward Financial Independence.
Purpose of this Article
We will explore six types of Financial Independence to help you determine the best fit for your circumstances. These types are not all-inclusive, but they are all popular forms of Financial Independence.
You will have a better understanding of each of the types of Financial Independence and how they might fit into your life.
Types of Financial Independence
The first three, Lean FI, Traditional FI, and Fat FI, share similarities in approach. However, the annual spending for lifestyle is vastly different. Lean and Traditional FI embrace an anti-consumerism mindset, while Fat FI is quite the opposite.
The final three types, Barista FI, Coast FI, and Slow FI, are modifiers to the timeline to Financial Independence. In each of these approaches, you receive FI benefits long before achieving Financial Independence. For example, Slow FI, coined by The Fioneers, is about enjoying the journey to FI. There is no rush to achieve Financial Independence. Instead, there is a focus on living and enjoying now.
Lean FI
Definition
FIRE, Financial Independence, Retire Early is the original form for achieving Financial Independence. Many have dropped Retire Early from the term because work doesn’t have to stop when you reach FI. This type of Financial Independence is called Lean FI in this article.
Those who seek Lean FI are often young and willing to forgo spending today in an all-out push to achieve Financial Independence as quickly as possible. Savings rates for this group often exceed 50% and even 70% and beyond.
The target for Lean FI is to spend less than $40,000/yr.
Achieving low annual spending requires frugality and an anti-consumerism mindset. That doesn’t mean Lean FI’ers don’t have fun. Influencers like Mr. Money Mustache and A Purple Life fall into this type of Financial Independence.
This group spends money on only essential things and doesn’t waste money on consumer luxuries. Luxuries don’t add happiness to lives. Experiences do, and the Lean FI community prioritizes them.
Advantages
Lower annual spending means a lower FI number. This means you need to save less to achieve Financial Independence and are likely to achieve freedom much sooner than other types of Financial Independence.
When you spend less on “stuff,” you can focus on experiences and relationships over things. These things often result in clutter and lots of wasted money and time.
The less you spend, the more you can save for Financial Independence.
Disadvantages
Lean FI isn’t for everyone. It wasn’t for me, and I knew it the minute I read about how Mr. Money Mustache lived on less than $30,000 per year.
Those who live in high-cost-of-living areas may find it challenging to reduce expenses enough to fit into the Lean FI model.
Older people who have already established a lifestyle with higher expenses can also find it challenging to reduce costs.
Arguably, everyone would benefit from the low expenditures found in Lean FI. If you are set on achieving Financial Independence, you should work diligently to reduce your expenses, even if you need help to reach the Lean FI level.
Some feel that the sacrifices in the now are extreme, as the Lean FI approach is to achieve FI as quickly as possible.
Traditional FI
Definition
Traditional FI (also known as Regular FI) shares the same approach to Financial Independence as Lean FI. Both seek to achieve FI as quickly as possible and require frugal decisions today to support a very high savings rate.
Traditional FI participants often save 50% to 70% or more of their income to achieve Financial Independence quickly.
The most significant difference is that the target annual spend for this type of Financial Independence is between $40,000 and $100,000 per year. That means FI numbers range from $1M to $2.5M in this category.
Traditional FI’ers still consciously control spending and partake in a general anti-consumerism mindset. However, Traditional FI provides accommodations for those who need or choose to spend more.
Advantages
An increased annual spending limit accommodates more variables in life. If you live in a higher-cost-of-living area, Traditional FI accommodates you without moving to a lower-cost region.
While spending limits are higher, there is still a focus on experience over possessions. Reducing consumerism positively affects this group in similar ways to the Lean FI group.
Disadvantages
As annual spending increases, so does the required savings. If you have a $100,000 lifestyle, your FI number is $2.5M. That’s a considerable number and requires a significant income to reach quickly.
Late starters may find reaching these higher FI savings unobtainable. If you fall into this category and are set on reaching Financial Independence as quickly as possible, you should consider Lean FI as an alternative.
Like Lean FI, some feel the sacrifices required today are too significant.
Fat FI
Definition
Fat FI is much different from Lean FI and Traditional FI. While the latter focus on life experiences over possessions, Fat FI is for people who do not want to let go of their worldly goods.
Participants still save aggressively to achieve Financial Independence quickly. Savings rates for the group can be 50% – 70%+. However, the Fat FI target annual spend is in excess of $100,000 per year. New, fatter FI types have been defined, with even higher annual spending requirements. For this exercise, we will stop at Fat FI.
A Fat FI’er with annual spend requirements of $150,000 per year must save a whopping $3.75M to reach FI. That level of savings requires significant income to produce.
Members of this type of Financial Independence are driven to reach FI for many of the same reasons as those who choose Lean FI or Traditional FI. All three types are looking to remove money from the decision-making equation. They seek freedom to select experiences and work without financial pressure.
Advantages
If you are a high-earner with a lifestyle you love and want to achieve Financial Freedom without restricting your spending, Fat FI is for you.
Fat FI arguably provides the most luxurious life after reaching Financial Independence. In this instance, luxury is a reference to consumerism.
Disadvantages
Fat FI is out of reach for most people. Political Calculations reported the Median Household Income in the United States rose to $78,813 in October 2022. While some people have strong income sources and can make this type of Financial Independence work, it’s not for most of us.
If your goal is a life without financial limits after reaching Financial Independence, you are less likely to be willing to make near-term sacrifices to reach FI. This puts even more emphasis on a very high-income level during the accumulation phase.
Barista FI
Definition
Barista FI is utterly different than the rapid approaches to Financial Independence found in Lean FI, Traditional FI, and Fat FI. Instead, this type of Financial Independence focuses on saving enough to offset living expenses with savings and a job with lower pay and stress. As the name of this type of Financial Independence states, a Barista is one example of such a job.
If your annual spending requirement is $40,000 and your FI number is $1M, you can cover all your living expenses with a combination of a job and much less savings.
Example: FI Savings of $500,000 will result in a $20,000 annual safe withdrawal rate, based on the 4% Rule. In this scenario, you need a job that produces $20,000 annually to maintain your lifestyle.
Expense reduction is vital, and savings is essential also. However, the extreme urgency to reach a FI number that offsets all annual spending is absent. Like Lean FI, Traditional FI, Coast FI, and Slow FI, a general anti-consumerism mindset is involved in this type of Financial Independence.
Members of this type of Financial Independence are still big savers and work hard to reach a point where they can take on a lower-paying job and offset remaining expenses with FI money.
The Barista FI’er enjoys more freedom now because they do not need to rely as heavily on a job to build FI savings rapidly. This allows individuals to enjoy a more relaxed and stress-free approach to retirement while still having a job that provides financial security.
Advantages
In Barista FI, stress is much lower than the rapid approaches to Financial Independence. After saving a percentage of your overall goal, you can find less stressful and potentially more satisfying work and still cover your annual spending requirements.
This type of Financial Independence fits a nomadic lifestyle well. Temporary or digital work with less pay and stress enables adventures that would typically be put off until retirement.
Barista FI can support a period of freedom to explore and could easily be transitioned to another type of Financial Independence.
Disadvantages
Those who choose Barista FI will need to work a long time, potentially to full retirement age or beyond. The FI savings will not cover all annual expenses, and additional income is required
Your health should be a consideration when choosing this type of Financial Independence. Since you will be working for a long time, any health-related disruption could impact your financial situation.
Coast FI
Definition
Coast FI is a strategy that changes the formula for achieving Financial Independence. Instead of a mad rush to hit FI, this type of Financial Independence focuses on hitting a savings goal that, when left to grow, will support the participant at a given age.
The theory is that you only need to save a small portion of your total FI number if you start soon enough and leave the investment alone. After reaching this smaller savings goal (Coast FI Number), you no longer need to contribute to your retirement savings.
Coast FI’ers are then free to take on less demanding or lower paying jobs to cover living expenses until their nest egg matures. Unlike Barista FI, Coast FI requires an income that can fully cover living expenses. Let the investments grow so that you will reach FI by the date you desire to retire.
Euler’s Number is the magic behind the calculation that defines a Coast FI number.
You can create a function in Google Sheets to tell you how many years from now it will take to reach your desired FI number. You need your current balance and the expected return rate to complete the calculation.
Example: Google Sheets Formula In Cell D2: =LN(C2/A2)/LN(1+B2)
You can also use Euler’s Number to estimate the future value of your current savings in a given number of years.
Example Google Sheets Formula in Cell D2: =A2*EXP(B2*C2)
If all of that is too complicated, you can use our Google Sheets Coast FI Calculator to determine when you will hit Coast FI and be able to stop contributing to your retirement savings.
Advantages
Coast FI is an excellent approach for someone who is young and has many years to let their investments grow. Reaching Coast FI is less challenging than saving the entire Financial Independence amount.
Work can become less stressful after reaching Coast FI because you only need to earn enough to cover your expenses. Contributions towards retirement are no longer required.
Disadvantages
Long-term returns are historically good, but short-term investment returns can have wild swings. If your timeline to retirement is short, Coast FI may not be for you. One bad year in the market can significantly swing your date to reach Financial Independence. The less time you have before you need to start withdrawing, the more these fluctuations can impact your FI goals.
Slow FI
Definition
On the surface, Slow FI might sound like traditional retirement. After all, you will work for a long time, perhaps even until the conventional retirement age.
There are huge differences, though. The Fioneers originally defined Slow FI as:
When someone utilizes the incremental financial freedom they gain along the journey to financial independence to live happier and healthier lives, do better work, and build strong relationships.
– The Fioneers
The focus is to enjoy the journey and take on meaningful work and relationships while saving for a future retirement date.
Like many other types of Financial Independence, an anti-consumerism mindset is beneficial. This keeps costs low, reduces savings requirements, and lets your focus on the finer things in life.
Advantages
If the thought of diving in head first and saving like mad to reach Financial Independence creates stress in your life, Slow FI is a good fit.
While you are not fully Financially Independent in this type of FI, freedoms come early in the journey. You can be more present when you focus on slowing down and taking it all in.
Disadvantages
Like Coast FI, you still need a job that can cover your living expenses. Depending on your annual expenses and savings rate, you may need to work for a long time.
Factors to Consider When Choosing a Type of Financial Independence
You will need to assess several factors as you work to determine the correct type of Financial Independence for you. Each will have an impact on your selection.
- Current Debt Situation
- Current Savings
- Current Income
- Expected Earnings Trajectory
- Living Expenses
- Desire to reduce consumerism or maintain your lifestyle after FI
- Age
- Desire to retire quickly or work longer in a field you are passionate about
- Your Health
Conclusion
We dove into six types of Financial Independence to help you determine the best fit for your circumstances. We defined each type’s strategy and explored each’s advantages and disadvantages.
The first three, Lean FI, Traditional FI, and Fat FI, share similarities in approach. However, the annual spending for lifestyle is vastly different. Lean and Traditional FI embrace an anti-consumerism mindset, while Fat FI is quite the opposite.
The final three types, Barista FI, Coast FI, and Slow FI, are modifiers to the timeline to Financial Independence. In each of these approaches, you receive FI benefits long before achieving Financial Independence.
Recap of the Different Types of Financial Independence
| Lean FI | Traditional FI | Fat FI | Barista FI | Coast FI | Slow FI | |
| Timeframe to FI | ASAP | ASAP | ASAP | Hybrid/Never | Long Term | Long Term |
| Estimated Annual Expense | < $40K | >$40K <$100K | >$100K | Any/Low | Any/Low | Any/Low |
| Estimated FI Number | <=$1M | >$1M <=$2.5M | >$2.5M | Any/Low | Any/Low | Any/Low |
| Benefits of FI before FI | No | No | No | Yes | Yes | Yes |
| Draw on Savings before FI | No | No | No | Yes | No | No |
| Contribute Savings to FI | Yes | Yes | Yes | No | No | Yes |
| General Anti-Consumerism Mindset | Yes | Yes | No | Yes | Yes | Yes |
| Typical Savings Rate | 50%+ | 50%+ | 50%+ | Any/High | Any/High | Any/High |
Final Thoughts and Recommendations
There is a path to Financial Independence for everyone, even if your approach is different from the six types we evaluated. You may start on one track and change along the way. My steps toward Financial Independence evolved as I progressed in life and my career.
It’s much less important to pick the right path on day one than to start your journey. Every day you sit on the sidelines impacts your timeline and even the amount you need to save to reach FI.
We all make financial mistakes. You can recover from errors, especially when you start saving and changing your mindset about consumerism early on.
I hope this information will help you as you start on your journey to Financial Freedom.
