The post that asks: should we really be encouraging everyone to join the financial independence movement?
The other week I wrote about embracing your financial vices. My view is that even those of us who are striving for financial independence sometimes need to loosen the purse strings. But this is based on “mindful spending”. Decide what expenditure makes you happy and allow yourself that joy.
Most of us pursuing FIRE will still be keener savers than the average person. We will certainly avoid mindless consumerism. This leads to quite a few posts/tweets from FIRE bloggers railing against their unenlightened neighbours/friends who spend everything they earn on fancy tech, expensive cars, unnecessarily large houses etc.
So far, so smug. I’m occasionally guilty of being bewildered to the point of judgment by other people’s spending choices myself.
Your Investments Need Consumerism
What I don’t understand, is how so many in the FIRE movement (I really hate constantly referring to the “movement” but it gets my point across) don’t see how their success very likely depends on most of the developed world wanting to spend, spend, spend.
Most FIRE devotees follow the basic principle of ploughing all of your savings into the stock market until the passive income you earn from those investments covers your living expenses.
For the stock market to keep growing at a rate that makes this a feasible goal, it needs people to keep buying shit.
I look at the top holdings in the world trackers that I invest in. The US shares are dominated by tech companies. It’s bugger all use for those companies if everyone adopted my approach to technology of holding onto my budget-range phone until it’s too painfully slow to use anymore.
The oil and gas companies that make up a significant amount of the FTSE 100 require people to love their cars – or pretty much anything produced in a factory.
And of course, financial institutions, which probably feature heavily in any tracker portfolio, need stuff to finance. That needs demand for the stuff.
Every commercial company needs people buying its product or service, and the more rampant the consumerism, the better for profits, ergo the better for investors.
Employment Statistics Need Consumerism
The more we consume the more employees companies will need, feeding through into all areas of the production chain. Designing the product, making the product, marketing the product, selling the product.
This all becomes a virtuous circle. Better employment statistics mean more money in people’s pockets, which means more spending and more demand for employees.
So let’s not adopt a superior attitude to the big spenders in the world. It supports a high employment economy.
I’m not an economist and I appreciate that a successful economy is a fine balance of many factors. I am also especially sensitive to the fact that if people only indulge their consumer desires by getting into debt then it is an economic disaster waiting to happen. But let’s not pretend that if everyone lived like the most hardcore of the frugal FIRE community it wouldn’t be disastrous for many of our investment portfolios.
Your Future Retirement Needs Consumerism
In my post on the suffocating dread of the pension crisis and ageing population I touched briefly on how would-be early retirees are part of the problem. The State Pension needs 3 workers to every retiree to be sustainable. The state really needs us to be, not just financially independent, but to carry on working to support others.
Living off of the income from tax advantaged accounts isn’t quite the same as me ploughing money into the country’s coffers as a higher-rate taxpayer.
How is this linked to consumerism?
It is the desire for more things that keeps people working longer than they strictly need to.
Even if you aren’t dependent on the State Pension, the country would be royally screwed if everyone retired pre-50.
Imagine a World Without Consumerism
So let’s imagine a world where everyone has gotten the FIRE message. They are not necessarily living a life of extreme frugality but they keep a careful control over their spending. Gone are the days when they get every latest model Apple release. They stick with the same car until it breaks down beyond repair. They are content with a modestly sized house with simple furnishings.
I don’t know exactly what that would do to stock market returns, but I’d wager that the 4% rule would be out of the window. By the way, I’m very happy for an economist to tell me that that wouldn’t be the case!
I have a friend who is a high earner but still resists the stock market. Like many she doesn’t trust it to keep going up. I pointed out to her that despite peaks and troughs, stock markets have had a general upward trend for some 200 years.
She was still not convinced. “But how do you know that will continue?” she asked. “What’s to say it won’t eventually plateau?”
She wasn’t worried about crashes, per se; she was worried that it was naïve to assume the status quo (in this case a long term upward trajectory of the stock market) would always continue for ever more.
If everyone jumped aboard the financial independence bandwagon, she might just be right.
It is, of course, probably not something that we have to worry about in practice. As big as the FIRE movement has become, most people still seem to go for a “live for today” attitude. But let’s not turn our noses up at them; they facilitate the FIRE lifestyle.