What is Barista FIRE in financial independence? Is it a milestone or a goal?

If you’ve never heard of financial independence, then settle down for a good read. Financial independence is a net worth goal defined by having enough investment income to cover life’s expenses. The exact dollar figure and asset allocation is person-dependent. A person retires when they stop performing wage labor and instead uses the investment income to cover expenses. Most people retire at age 65 or older (or never!).

The financial independence retire early (FIRE) community seeks to (1) achieve financial independence before traditional retirement age; and (2) if desired, reduce or stop wage labor. FIRE seekers optimize cashflow from investment so they have more flexibility in life outside of work. Over the last decade, as the concept of FIRE has gained traction, different varieties have been described.

Barista FIRE means having nearly enough passive income to live, but requiring some wage labor for additional income and to pay for benefits such as health insurance.

The History of Financial Independence

In the 1970s, the forward-thinking duo of Vicki Robin and Joe Dominguez wrote a book called Your Money Or Your Life. In this book, they compared every dollar you spend to minutes of your ever-shortening remaining lifetime.

Then in the 2010s, the next generation of forward-thinkers began publishing their own success stories on the internet. A young Canadian man became both the symbol and the enviable success story when he retired less than a decade after beginning his career in engineering. This was Mr. Money Mustache.

Another man who retired young published articles on how young retirees (like himself!) could best use retirement plans intended for older retirees. This was Mad Fientist.

The most prominent woman in the financial independence space is Paula Pant, a journalist-turned real estate investor who bought up multiple properties in her 20s by living frugally. She used her freedom to travel extensively around the world before settling down and founding a media company, Afford Anything.

Over the years, the financial independence and early retirement movement (FIRE movement) has taken a life of its own outside the original thought leaders. From one monolithic kind of financial independence sprung many.

Let’s define the different types of FIRE

At the close of the 2010s and in the early 2020s, the spectrum of voices about FIRE became more diverse and vibrant. The simple definition of FIRE was inadequate to describe everyone’s experience.

Now, in the community, we recognize several flavors of FIRE.

• Traditional FIRE means saving enough to achieve a modest retirement. Income is adequate to cover healthcare expenses. This may mean $50,000 per year.
• Barista FIRE, as described above; in numbers, may mean $30,000 per year;
• Fat FIRE. This means having enough investment income to live luxuriously, for example, $100,000+ per year.
• Obese FIRE. This is a grander version of FAT fire with investment income exceeding $200,000.
• Coast FIRE. Some people save aggressively enough to build the nest egg that will compound in the future to allow them to retire.
• And there are others!

To make sense of it all, I think of these subtypes of financial independence as milestones. Achieving one may be a goal on its own, but may also represent a goalpost along a journey to ever more flexibility in life.

Why choose Barista FIRE?

For some, Barista FIRE is the first goalpost in the journey to complete financial independence. This perspective is very helpful. It can be a slog to save and invest over the years required to build a nest egg. An early victory is encouraging. And even Barista FIRE offers a degree of freedom unknown to those without any passive income.

Consider two couples.

Couple A for Attached to Work

Couple A makes $250,000 annually. This is about $20,000 monthly pre-tax, but about $14,500 monthly after-tax, considering 401k deductions and medical insurance.

Couple A works full-time and has two children who are young and require extensive childcare. They live in a very big house and try to be careful with their daily spending. What’s more, they still have student loans, car loans, and credit card debt. And they don’t have any sources of income outside of their full-time work. While they have saved into their respective 401k plans, they have little after-tax savings because of their high monthly expenses.

Life is expensive, particularly the upper middle class lifestyle enjoyed by families with income ranging from $150,000 up to nearly $400,000. With mortgage rates nearing 6% and homes remaining stubbornly expensive, housing costs can quickly eat up this healthy income.

• Take-home pay: $14,500
• A home purchased with a $600,000, 30-year-fixed mortgage at 5.5% costs $4,000 monthly in PITI. Without HOA.
• Childcare for two children, at $1,500 each, is $3,000 monthly
• Student loans for professional school, $3,000 monthly (privately refinanced)
• Car loan $600
• Total fixed/debt payments: $10,600

And now after debt payments amounting to $10,600, this family’s $14,500 take-home pay has transmuted into $2,900 take-home. (If they didn’t have the student loans, which some might call excessive, that sum would be $5,900 take-home.) And they still have to pay the utilities, children’s activities, and food costs for their family of four.

This couple has an enviable income, and yet they probably feel as if they have little flexibility. Certainly, with these expenses, they have to be thoughtful or downright careful to save substantial sums of money every year.

If they continue this way, Couple A may live a hectic life with little flexibility for years.

Couple B for Barista Fired

Now meet Couple B. Their total household income is $125,000, or about $10,400 monthly pre-tax. They both work full-time. She is pregnant.

This couple purchased a small investment property they purchased for $250,000 early in their marriage and paid it off. Otherwise, they have savings in their 401K. Now, they receive $25,000 annual income from their investment. This translates to about $1,900 of monthly income after taxes, due to the substantial tax benefits of real estate investing.

• Take-home pay: $10,400 (wages) + $1,900 (investments) = $12,300
• A home purchased with a $300,000, 30 year fixed mortgage at 5.5%, costs $2,100 monthly PITI.
• No childcare costs
• No student loans
• No car payments
• Total fixed/debt payments: $2,100

Couple B has over $10,000 after large fixed expenses with which to buy food, utilities, and entertainment. If they are not extravagant in all of those categories, they have the flexibility to save thousands of dollars monthly.

What’s more, if the pregnant half of Couple B chooses to take an extended maternity leave, she can. Suppose she has no paid maternity leave and suddenly the family’s wage labor were cut in half: $125,000 became $60,000. The monthly wage of $5,000 translates to take-home pay of $3,200.

• Take-home pay: $3,200 (wages) + $1,900 (investment) = $5,100
• Home payment: $2,100 PITI
• Income for expenses: $3,000

They have achieved Barista FIRE. They still need wage labor to survive, but investment income covers a large proportion of their daily living expenses.

In this scenario for Couple B, one member of the couple works full-time while the other does not work outside the home. But it could work differently. If nobody were pregnant, both couples could cut to half time work and earn $30,000 apiece to achieve the same end.

Do you see why Barista FIRE is a worthy goal? And Couple B achieved Barista FIRE with an after-tax net worth off less than $300,000 by buying the right property and paying it off.

The Bottom Line: Barista FIRE creates life flexibility

For those just starting to explore personal finance, setting out to achieve Barista FIRE is a worthwhile pursuit. The benefits of financial flexibility will be tangible way earlier. There will be a sense of relief at having options if health or life require stepping away from work.

And Barista FIRE is achievable at far lower net worth targets, if assets are allocated appropriately. Not all assets create equal income.

Thanks for reading.