Imagine traveling the world, spending your days on a beach sipping margaritas, and never having to work again - all by the time you’re 30. This dream has become a reality for many as a result of the FIRE movement, an extreme savings and investing plan for early retirement.
What is the FIRE movement?
FIRE (Financial Independence, Retire Early) is a movement that has become popular in recent years with the younger generation to achieve financial freedom and retire in their 30s. A key aspect of the FIRE movement is saving as much as possible, from 50% to 75% of their salary. This frugal [1] approach allows individuals to invest more and eventually have enough to pay for their living expenses. In order to achieve this, FIRE guides people on how to reduce their costs in order to maximize their investment potential.
Types of FIRE
LeanFIRE - This is the most extreme form of FIRE where people live a minimalist lifestyle and invest the maximum amount possible. This requires people to live on the bare minimum in order to reach retirement sooner.
FatFIRE - Less extreme than LeanFIRE, individuals set aside a certain amount of their salary for retirement but make fewer sacrifices. Because the amount saved is lower, it will take longer to achieve FIRE.
BaristaFIRE - This method is for those who do not necessarily want to do nothing when they retire but rather allow a comfortable lifestyle while working. These individuals use their financial independence to enjoyably work part-time, engage in hobbies, or pursue a dream career without worrying about paying the bills at the end of the month.
How can you get started?
Make a plan: As with anything financial, it is important to write down all your expenses, income, and financial goals. Putting this all down on paper allows you to see where your money is going and how you can cut down on costs. Once you know how much you will need in order to retire, you can calculate how much you need to save monthly.
Reduce your spending: Itemize [2] your monthly and annual costs, including regular costs like bills and one-off expenses like holidays. Finance tracking apps, many of which are available on smartphones, allow you to breakdown your spending habits.
Stay out of debt: As personal finance guru Dave Ramsey says, “your income is your best investment tool.” When you have to pay a certain part of your salary toward paying back credit card bills or making car payments, that is money that could be going toward your FIRE goals.
Increase the amount you save: As you make your financial plans and eliminate debt, you have more to save. Create monthly or weekly goals for yourself and stick to them. Increase this amount gradually as you feel more comfortable saving.
Invest your savings: Generating passive income is the end goal for FIRE seekers, meaning that the money you save continues to work for you, long after you have earned it. Money just sitting in a savings account will not get you to where you want to be.
How much do you need to retire?
Most retirement investors say that you need 25-30 times your annual expenses for retirement, providing you with enough to cover living costs. Annual withdrawals of 4% of the amount saved is recommended so that your investment account does not run out of money. While that is standard advice, every person’s financial situation and goals are different, so those numbers will change depending on when you retire, how long your retirement lasts, and what lifestyle you want during retirement.
The benefits of FIRE
FIRE, first and foremost, encourages people to think about their money differently. Rather than just a way to pay the bills, money can be used to generate passive income for the future. It also gets people to understand how money works and better understand all the investment tools available. If early retirement is achieved, FIRE gives people their time back. Instead of spending their days at the office working for someone else, they can spend their time on hobbies, more meaningful part-time work, or with their families.
Downsides [3] to FIRE
Many people have criticized the FIRE movement as being too extreme and having a negative impact on people’s happiness. While many people saw their net worth climb, the sacrifices people made in their lives have caused them to suffer. After cutting expenses, many people no longer engage in the activities that once made them happy, like going to the movies, eating out with friends, or taking vacations. People can also feel defeated when they are not able to achieve their FIRE goals, causing them to give up entirely on their retirement goals.
FIRE is also not realistic for some lower-income individuals who can barely cover their basic needs. How can a person living paycheck-to-paycheck afford to save for retirement?
Final thoughts
While the FIRE method is a great way to plan for a stable financial future, it is not for everybody. Some people are not willing to give up their Netflix subscriptions or Friday night pizza - and that’s okay. What is important is to plan for your financial future in a way that fits with your goals and expectations. You do not necessarily have to start saving 70% of your salary tomorrow but take the time to think about the future, how you are currently spending, and how you can make moves toward financial independence.