New to the world of financial independence?
Want to understand the buzz words being splashed around by bloggers?
Keen to know how these terms are defined for financial independence seekers in Australia?
Never fear! Here is a handy glossary for reference as you browse this and other blogs.
Let me know if you’d like any other terms defined. For more local FI content, subscribe to the regular Australian FI Weekly enews – out each Monday.
Financial Independence (FI)
The state of having sufficient passive income, typically through investments, to cover your expected annual expenses on an ongoing basis, without the need to work for money. It is often estimated with the 25x rule defined below.
FI is the big goal, but there is plenty of freedom to be gained along the way as your investment portfolio or ‘FI Stash’ grow towards this!
Passive Income
Income that is now received with no (or little) effort on your part. Examples include dividend income, rental income, royalties, bank interest, information product fees, etc. Note: there is usually a component of “frontloaded” work and time invested to get this passive income flowing in (eg. earning a salary to invest in dividend earning shares; spending time to write a book or music that now earns royalties).
FIRE
A common acronym for Financial Independence / Retire Early. It is often used as shorthand to describe financial independence, but the “retire early” part is contentious and open to misinterpretation, so the term seems to be falling out of favour.
Early Retirement
As included in the FIRE acronym above, early retirement suggests stepping away from full-time paid work before traditional retirement age (eg. 65 years). Early retirees leave the mainstream workforce in their 50s, 40s or even 30s. Retirement (early or otherwise) does NOT require lazing on a beach with cocktails or playing golf for the rest of your days. It CAN include doing some work, but often this is done in a flexible way, on passion projects, as side hustles, or on a voluntary basis.
Internet Retirement Police
The tongue-in-cheek term for internet trolls who are quick to point out when early retirees are not “actually retired,” if there’s even a hint of money coming in from retiree’s hobbies or projects. As mentioned above, retirees are not required to be unproductive and never earn another dollar in their lives. So IRP: just cool it.
Semi-Retirement
A state of being intentionally partially retired from mainstream work. This could take the form of deliberately downsizing to ongoing part-time work, only taking on occasional casual work, or alternating between periods of seasonal work and intentional time off.
Frugality
Here at Frugality and Freedom, I define this as being efficient with use of resources, in alignment with one’s values; typically associated with money, but also describing economical use of time, energy, and mental bandwidth.
4% Rule (aka. Safe Withdrawal Rate)
In the simplest of terms, 4% is the estimated amount you can withdraw from an investment portfolio containing a balanced mix of shares and bonds, without running out of money in retirement. For example, if you have a cool $1,000,000 invested, you could safely withdraw 4% = $40,000 in your first year of retirement to maintain your portfolio for future.
There is much more nuance to it than that and other bloggers have interrogated this in detail, but this figure of 4% offers a handy estimate of what you can expect to take out each year in retirement. This is based on academic research by William Bergen and expanded on in the Trinity Study in 1998. It was determined from looking at 30 year periods from 1926 to 1995, a retirement portfolio of 50% stocks and 50% bonds would hold up in 95% of cases where 4% (inflation adjusted) of the total portfolio was withdrawn at the start of each year.
25x Rule
A common mathematical way to estimate if you are indeed financially independent, for those who are aiming to do so on investments in shares and bond-type products. It is the flipside to the 4% rule; if you can safely withdraw at 4% = 4/100 = 1/25th of your portfolio each year, this means you need to have 25x your annual expenses in your portfolio to call yourself “financially independent”! Eg. If you plan to spend $40,000 annually, multiply this by 25 and you need $1,000,000 invested this way to do so.
Lean FI(RE)
A level of financial independence when passive income from your investments can cover your basic annual living expenses, without extra luxuries or much additional discretionary spend.
(Note: The above is my preferred definition. Others suggest that Lean FI is having 20x your expected annual expenses, or that a Lean FI portfolio allows for living expenses of less than $40,000 per year. As everyone’s comfortable cost of living is different, putting numbers to it is problematic. $40,000 would be pretty luxurious for me!)
Fat FI(RE)
A financial independence level that covers your anticipated annual expenses, with plenty of room for added indulgences and extra comfort. The sky is the limit for Fat FI!
(Another note: Some definitions estimate a Fat FI portfolio as having 33x annual expenses, or having in excess of $100,000 to spend each year = $2,500,000 portfolio. Interpretations may vary.)
Slow FI(RE)
Taking an intentionally slower approach to accumulating your portfolio for financial independence, in order to enjoy the journey more along the way. It still involves actively pursuing a goal of FI, but doing so at a more leisurely pace to enjoy more freedom and less stress now. This could involve saving at a lower rate or working fewer hours along the way.
(See The Fioneers Slow FI series – you might find a familiar name there too.)
Vanguard
A large low-cost provider of investment products, which comes up often amongst many US FIRE bloggers due to its low fees and simple index funds. Vanguard also operates in Australia as well, offering ETFs and managed funds. (I have most of my investments in Vanguard.)
Index Funds
A favourite of many FIRE enthusiasts for their investments. You buy units in index funds, which are each made up of groups of shares matching specific “indexes”. For example, an index might be the Australian Stock Exchange’s top 300 companies, shortened to ASX300. Much of the activity in the Australia stockmarket comes from the movement of shares in these largest 300 companies; so as the overall market moves, the ASX300 moves in a reasonably similar way. Buying units of index funds takes the guesswork out of buying individual company’s shares in the hope you’ve picked the winners.
ETFs
“Exchange traded funds” are funds bought and sold on the stock exchange. These are often (but not always) index funds. For example, Vanguard VAS is an ETF index fund tracking that ASX300 that you buy on the Australian Stock Exchange. Buying on the stock exchange involves using a stock broker (such as ComSec or SelfWealth) and paying a small brokerage fee.
Managed Funds
These can include index funds (which are known as passive funds, as management firms don’t do much) or actively managed funds (which have managers handpicking a selection of shares they hope to do well; these have higher fees for their efforts, but returns don’t often exceed those of index funds when fees are taken into account!) You buy units in the funds directly from a fund manager. For example, Vanguard has the “Vanguard Index Australian Shares Fund”, following the ASX300.
LICs
A common investment product in Australia, LICs are Listed Investment Companies which you buy on the Australian Stock Exchange through a stockbroker, in a similar way to ETFs. Some low management fee options include ARG or AFIC. These usually have managers actively picking stocks within the LICs, so aren’t index funds. (Strong Money Australia has a good article on ETFs vs LICs).
Side Hustles
Activities and projects done with the expectation of earning money, outside of your main job. These could include having a second job, paid babysitting, doing gig economy work (such as delivering on UberEats), or earning money with time online (such as teaching English).
Housesitting
Caring for other people’s homes and (usually) pets on a live-in basis, while the homeowners are away. This is typically done for free, with the housesitter having the benefit of free accommodation during their stay. (Read more about how I use housesitting to save money on travel.)