Absolute Zero: Why I strive for a personal worth $0.00 and why you should too

One of the few concepts of the FIRE community that I disagree with is the idea that as long as your investments return enough to cover your expenses, you have achieved FIRE.  This is commonly referred to as the 4% “rule,” or in sometimes portrayed as having 25 times your annual expenses in savings which hypothetically generate enough revenue to finance all of your annual expenses throughout “retirement.”  I have multiple issues with this theory, which is why I personally believe that true FIRE is never obtained until your actual worth, not net worth, is exactly $0.00. 

The first issue at hand is the 4% “rule.”  First, the 4% rule isn’t a rule at all, in fact, it is a theory.  History has shown us that based upon historical data, you should be able to return an average of 4%, which will provide enough money to cover all of your daily expenses, but there is no guarantee of that return. What happens when you have a decade or more of losses, and your next egg shrinks to 50% of its original value? What happens when your entire FIRE plan is built upon this foundation of the 4% “rule,” and the rule is broken? Look at the bottom of most any brokerage agreement you sign; every one of them has something like the following: “past investment performance does not indicate future investment performance.”  Basically, meaning that even though your broker will sell you the idea that your investments will ALWAYS go up, this isn’t guaranteed, and is just a theory. This is something we will dive into a little deeper in a future article, but will suffice for the purpose of this article.

Second, we need to address the idea that you have achieved FIRE with any LEVERAGED asset.   COVID-19 has taught us the importance of this particular issue, although it goes widely unrecognized.  Many FIRE bloggers claimed FIRE by owning rental and investment properties, or businesses, which were leveraged.  They theorized that since the rent collected from the rental properties or business income was paying the lien on the property, plus generating extra income, they had obtained FIRE.  However, COVID-19, and liberal politicians came and destroyed this idea.  Suddenly, businesses all over our country were forced to shut down, and many renters were unable to pay their rent, while businesses were unable to operate and generate income.  Stocks such as Ford Motor Company which had historically paid a good dividend for a decade, most recently yielding nearly 10%, suddenly discontinued their dividend.  What if you had planned your financial independence based primarily or completely on the Ford stock you owned producing enough dividends to cover your annual expenses including your mortgage, or your business would generate enough revenue to cover your mortgage? My point is you aren’t truly financially independent until you are at “Absolute Zero.”  Due to the magnitude of the situation, many local governments have stepped in and banned or delayed evictions.  Meanwhile, the individuals who mortgaged these properties and businesses still had payments to make to the bank, but no longer had any income to make the payments, forcing them into either foreclosure or deferment.  As I write this, we still do not know the long-term effect of the COVID-19 pandemic on our economy.  My only hope is we learn from the disaster that you are never truly financially independent if you own any mortgaged asset, even if you have other investments that could cover the mortgage, because they may drop in value as well, just like in 2008.  

Along this same line of thought, you haven’t truly reached FIRE if you still have a mortgage on your home.  As we discussed before, your home is only truly worth $1,000.00, as that is the national average monthly rental payment.  Since you will always need a roof over your head for as long as you live, your home doesn’t truly have any real “equity” because if you do sell it, you will take some or all of those proceeds to pay for the next roof over your head.  I understand your home does have a true value of much more than $1,000.00, but you will never actually have these dollars available in your checking account.  In order to obtain true financial independence, you need to eliminate your mortgage payment, because as long as your home is leveraged, should any adverse event happen in your life that causes you to miss payments over those 30 years, the bank will take your home.  Eliminating your mortgage ensures that for the remainder of your lifetime, you only have to worry about the government stealing your home instead of the government and the bank.  

In conclusion, many FIRE bloggers will tell you that you obtain FIRE the second your investment revenues are enough to cover your expenses plus fulfill the 4% rule and using leverage in things such as rentals is a smart FIRE path, and the quickest way to achieve financial independence.  In my opinion, this is a very dangerous FIRE pathway as you stand to lose everything should any of a number of adverse events occur in your life.  The danger is that for any reason ranging from a pandemic such as COVID19, to the financial crisis of 2008, it is likely that at some point in a 30 year mortgage your leveraged investments will not be able to cover the monthly mortgage payments, resulting in loss of the asset back to the lien holder. Should you combine leveraged investments, and a personal mortgage on your home, theorizing these leveraged investments will cover their payment and your home mortgage payment, then you are burning the candle at both ends, and playing with a FIRE that will most likely burn you.  True FIRE is only obtained when your primary home is owned free and clear, and your investments aren’t leveraged.  This way, should your investments go to $0.00, you still own your home and can still pay your electric and grocery bills by bagging groceries at your local produce store, part time.  However if your investments go to $0.00 and you cannot cover your bills when you have absolutely zero debt, then we all have bigger issues as our economy has most likely collapsed.  Owning your home outright not only helps you to qualify for Medicaid for your family under the expansion program, eliminate the possibility to go bankrupt due to medical bills, and increase your quality of life, it also helps you obtain true financial independence by guaranteeing a roof over your head for the remainder of your life, and the life of your children. Don’t focus on your net worth as this dismisses your leveraged assets by canceling them out with hypothetical income, instead shoot for an actual worth of $0.00, because only then will you be truly debt free.