Increasing assets and increasing income are two different things

What is passive income?

Passive income is
income earned without working yourself,
such as interest, dividends, and rent.

Specifically, this includes:
• Interest on savings
• Bond interest
• Stock dividends
• Rental income from apartments
and so on.

Passive income refers to creating a system where money comes in even while you are not working yourself. Here, 'not working' means not being employed as a company employee. In reality, since you are gathering information and studying to invest in stocks, it could be said that you are working.

The difference between income gains and capital gains

Income is broadly divided into income gains and capital gains. (In tax returns, it is classified into 10 types of income.)

Income gain refers to the profit obtained by holding assets. This mainly includes stock dividends and bond interest.

On the other hand, capital gain refers to the profit obtained through the sale of assets. It is the margin (the difference in profit) gained when the stock price at the time of sale is higher than the stock price at the time of purchase.

The difference between assets and income

From May to June 2023, both the Tokyo Prime Market and the US stock market were performing well. Many investors likely increased their assets. The thing to note here is that 'assets increased' does not mean 'income increased'.

Income means that cash has been deposited into your hands. In other words, it means that you can use that money immediately. In the case of a company employee, if your salary is deposited, you can use the full amount. Income gains and capital gains are income, so they are cash.

In contrast, assets are just values converted into monetary amounts at market price and are not cash. Assets may have increased this month, but they might decrease next month.

Income is cash on hand, so it does not increase or decrease over time.

Therefore,
'assets increased' does not mean 'income increased'.

You can say that your income has increased when you sell assets and realize capital gains.

What is FIRE?

FIRE is an acronym for Financial Independence, Retire Early. It is read as 'FIRE' and is used to mean financial independence and early retirement.

When I looked up the definition of FIRE on the internet, there was not just one answer.
What defines financial independence?
What age is considered early retirement?

FIRE itself can be divided into four types: Fat FIRE, Coast FIRE, Lean FIRE, and Barista FIRE. Currently, there are many other types of FIRE being named as well.

Traditional retirement after reaching retirement age relied on savings and retirement allowances. The modern concept of FIRE assumes active asset management.

The basic style of FIRE is not to deplete assets like savings, but to live off investment returns while maintaining the principal investment.

The investment returns referred to here are income gains and capital gains.

I have defined FIRE by counting only income gains as income, because the act of selling assets to generate capital gains is extremely difficult.

My definition of FIRE

Annual net dividends & interest income > Annual living expenses

Definitions of terms
・What is annual net dividends & interest income:
Literally, the after-tax amount of stock dividends and bond interest.
Capital gains are not included.
Increases in financial assets are not included.
Of course, labor income is not included either.

・Annual living expenses:
The annual amount of all expenditures, including social security and taxes.

Since I define it as "Annual net dividends & interest income > Annual living expenses," I believe that only Fat FIRE is true FIRE, and other types of FIRE are not.

I am imposing the strictest criteria.

When a friend asks,
"Have you achieved FIRE?"
The reason I answer, "Not yet,"
is because of that.

In the first place, I am not a FIRE believer,
nor am I aiming for FIRE.

Even if I cannot achieve FIRE, I have decided that it is fine if I can live a traditional post-retirement second life, drawing down my retirement allowance while ensuring my savings do not run out.

I don't really understand why people who don't even know the definition of FIRE, and don't even understand investing, are making so much noise about FIRE. It even looks like they have realized that FIRE is very difficult and are choosing the unorthodox path of extreme frugality to meet the criteria.

The goal is to be able to spend your old age without worrying about money, right?
If so, I think it is better not to make FIRE itself the goal.
FIRE is just one means to an end.

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