The FIRE movement is a new age trend that promotes the idea of having a really healthy and strong financial life to enjoy early retirement. There is no set age threshold for FIRE (Financial Independence and Retire Early). As long as it is before 65, everything is loosely called FIRE. But, most of them who are good with their money aim to retire in their thirties or forties.
How does FIRE work?
Remember, if you need something earlier than others, you need to put so much more hard work. Nothing is easy in this world and there is no free lunch.
To FI/RE, you make an active decision to save a huge portion of your paycheck every month. Many FI/RE aspirants determine to save at least 50 percent of their gross pay. In order to not lose your savings to inflation, you shall start your plan to invest in various investment vehicles.
You should keep pumping money consistently into the asset classes you’ve grown comfortable with. After a point in time, you will reach a level where your passive income or returns from investment matches your monthly expenses.
What is FIRE number?
You decide your own FIRE number and that’s the goal you take your journey towards. You should have two goals, one for Financial Independence (FI) and another one for Early Retirement (RE).
It’s simple, once you hit your FI number, you are now ready to take other risks or do what you love in life, while pursuing your full time job. But, you remember the true freedom comes when you actually reach your early retirement number. You are financially independent and can retire early when you have hit your FIRE goal/ number.
The eventual goal of Financial Independence Retire Early is to achieve a way of life where you can have the choice to do what you want to do. This will let you do things without keeping your financial responsibilities in mind.
For example, if your company asks to come back to office amidst the Covid-19 pandemic , you will have a complete choice on whether you want to quit or not. Instead of worrying about money, you will prioritize your health and say no to the job even if it pays more. FIRE enables you to have more choices in life.
As such, it is no wonder that FIRE appeals to people who are stuck in a rat race. They work their 9 to 5 jobs and build someone else business with not much interest. They obviously want out but cannot do so because of the financial strain. Hence, FIRE gives you a chance to build the life you enjoy, rather than escaping a life with full of hate.
What Are The Different Variations of FIRE?
Some people may like just to attain Financial Independence and not want to retire early. I have seen more people in this stage where they don’t know what they want to retire to. So, they just pursue Financial Independence instead of FIRE.
FIRE is like religion. As it evolves, people start taking different interpretation and forming different principles. Those principles make them go different ways. I am aware of at least four different variations of the FIRE movement. Although, this could make people have different views about FIRE, this makes FIRE more inclusive.
LeanFIRE – Lean Fire followers want to have passive income covering his/her life’s desideratum. They tend to have a minimalist lifestyle. They may want to FI/RE in a low cost of living (LCOL) country, so they don’t have to amass too much. Also, no need to work that job you hate for a long time to sustain your expenses.
FatFIRE – Fat Fire followers generally have a higher paying job and enjoy more comforts of life. For someone who has a higher living standards, they make sure to have the same comforts in their retirement and hence save longer to accumulate their larger FIRE goal. Some people accumulate just to be safe even though they have lower expenses in life. It’s the safety net of a large enough portfolio that gives the ultimate freedom.
Barista FIRE– Barista Fire followers are the ones who quit their regular 9 to 5 jobs (most probably high pay high stress ones). They move to a lower stress lower paying job that covers their insurance. Remember, medical insurance in the US costs a ton. BaristaFIRE people are generally covered by their employers. They let their savings for retirement grow without touching them. Their part-time less stress job to cover their expenses.
Coast FIRE– I consider Coast FIRE folks have enough to fund their retirement on the West and East Coast of the states where the cost of living is higher. They may or may not work part time. I will assume they may use their retirement accounts with huge portfolio to a minimal extent to afford their HCOL life.
Before Looking At The Numbers
It may sound exhilarating to relax in a paradise island and escape the day to day donkey work. Firstly, you need to understand the what, why and how of the early retirement. Otherwise, you will have a lot of time and will blink about what you want to do.
Identifying your passions and pursuing them part time is an important part before FIREing. You need to know exactly what you are going to retire into. Now, you may tell me, I’ll figure it out later after retiring. But, it never works that way. Boredom awaits you soon if you do it that way.
Stay with me for a second, you work hard from your teens till whatever age you achieve FIRE, earning from your day job and saving money and investing like crazy. Once you hang your boots, do you think you will transition into your new found passion right away? Happens probably for 10% people and not for everyone.
You may want to start thinking seriously now of what is next for you to build in retirement phase. It will help you with motivation towards achieving it faster. Finally, doing these prerequisites will help you get a clear vision to estimate your expenses and understand your FIRE number better.
How to calculate the FIRE number?
Alright, now that the prerequisites are already in your mind, let’s get to the actual FIRE number calculation
FIRE followers like to keep it simple and stupid. You just need to know basic multiplication and percentage math to determine your FI goal number and RE goal number.
Firstly, we commonly have the 4% rule. It’s a simple math where you can only withdraw 4% of your portfolio any time in the year. People with some kind of early retirement (not too early) and normal retirement have always survived with the 4% rule.
In other words, you simply need to accumulate 25 times of your annual expenses before you decide to retire. You invest and make inflation beating growth from your portfolio to support your life forever.
For example, you need to have a portfolio of $2.5 million if your annual expense is $100,000 every year. If you need $25,000 every year to live, you need a invested portfolio of $625,000 to retire.
The 4% rule predominantly determines the amount you can withdraw from your portfolio once you retire. FIRE Movement recommends to withdraw around 3% as there were some edge case scenarios in which the 4% rule failed. Play defensive and go for 3%, if you can.
Join the FIRE Movement
Let’s take a good look at the pragmatic and data driven ways to achieve Financial Independence Retire Early
Step 1: Estimate Your FIRE Goal
It may be scary to look at number like million dollars but you are doing a disservice to yourself, if you don’t calculate your FIRE goal. You can’t retire early if you have not achieved your goal to retire safely.
Firstly, you need to choose what variation of FIRE you determine to achieve.
Secondly, consider your current expenses and project an inflation adjusted expenses for your year of retirement.
Finally, determine your yearly expenses and use the 4% rule (25 X yearly expenses) to arrive at the portfolio size. That’s your FIRE number.
Do you know where it gets interesting? Determining your retirement year and the inflation part. Most people assume lower inflation. But, I will suggest to keep a conservative eye on your number with assuming higher inflation. Run your numbers with different sets of scenarios.
Step 2: Pay Off Blood Sucking High Interest Loans
Debt or loan can put you off track from your FIRE goal easily. Don’t make just minimum payments. FIRE community is not about that. You need to save up as much as possible and finish off your high interest debt as soon as possible. High interest debt can be from any source. The most common ones are credit cards or personal loans or student loans.
If the loan is for an appreciating asset like real estate with low interest debt, then decide what works best for you. Sometimes, paying it off might be worth it. You don’t have to see the debt dangling over your head. It won’t keep you at nights. But, mostly real estate is cash flowing asset, so you don’t have to rush and put that liquid cash to better use. As I said, decide what is best for your personal scenario.
Step 3: Check Your Budget and Spending
FIRE aspirants are good with keeping their spending at the minimum. You need to question at least your big purchases, if not every dollar. Is it really making your life better? Then, by all means, go ahead. But, most purchases just gather dust after a few months. Make sure you are smart with your hard earned money.
Lower you need to spend, lower is your expenses and the faster it is to reach your FIRE number
Come up with creative ways to reduce your spending. Something that works for me. Stop taking your car for every trip and carpool if possible. Get a used not too old car and spend less on the car and save yourself from depreciation cost. Eat at restaurants less and learn to cook healthy food at home.
Talk to your internet provider and tell them you want to move to their competitor. See how they are willing to work with you and reduce your internet bill.
Is your credit card annual fee payment due? Call your credit card company and tell them you want to close the card. Sometimes, they waive the annual fee totally and most other times, they give you some kind of attractive retention offers.
The truth is, most companies don’t want to lose your business and will do anything to keep you happy with lower rates. It just takes a minute to call them and ask to lower rates. At worst, you can get a no. You have nothing to lose.
Step 4: Increase your Savings Rate Gradually
Don’t think you are depriving yourself, if you are not spending money. Keeping up with joneses effect is real. But, as a FIRE aspirant, you gotta show middle finger to that.
Being frugal doesn’t automatically mean you don’t have a good life. Remember, the money you save by not splurging on a fancy restaurant dinner or buying highly costly branded outfits every month is taking you one step closer to the freedom goal.
There are so many fun and cheap events. Lookout for those websites to maximize your social activity and fun in life. Let your money work for you, while you’re enjoying your life outside. Finally, do something that is free or low fee like a trip to the library or picnic day at a lush park or a stroll along the beach.
Once you get a hang of these frugal events, you’ll love them more and appreciate them. You will naturally be introduced to much more similar events which you would have never thought before.
Step 5: Learn How To Invest
Since you have already developed the saving habit, the next real step is to think how to invest in stocks, bitcoin, real estate and beat inflation. If you just keep your savings in a savings account, it will lose value against inflation. General US Inflation target by Fed is around 2%. Although, real inflation is much higher.
There are so many ways to generate passive income from your investments. You need to understand the level of risk in each asset class. FIRE Movement aspirants are generally good with money management so I am assuming you know the risk = reward mantra. Check with a financial advisor if you are not confident with yourself.
Stock Market Investing – Carefully understand and pick a basket of individual stocks from different market caps and different verticals. This might be tough for everyone but this gives high rewards. If you’re not comfortable, go for as index fund that tracks the whole index. This way your downside will be limited and you won’t ride the stock to zero. Upside is also limited since it is a weighted average of all stocks in the index.
Bitcoin and Cryptocurrency – These are the newest asset class that have huge promise. Every other asset class is centralized and Cryptocurrencies want to be the decentralized solution to the world. Centralization generally leads to corruption. In a decentralized world, we don’t have to trust anyone and instead just verify things on the blockchain ourselves. If you are novice investor, don’t go beyond the top 10 cryptocurrencies by market cap. DYOR before investing and HODL to the moon!
Real Estate Investing – This is probably the most illiquid asset class. You stand to gain from appreciation and cash flow in case of rental properties. Make sure your mortgage rate is not higher than what the home can fetch as rent. If you don’t want to go for physical real state, you can still go for Real Estate Investment Trusts (REITs) which does all the hard work of purchasing or developing or renovating or rental real estate investments and provide you a monthly regular dividend for your share of investment. Remember, these may have 5 year lockins and you will pay higher fee if you want to get back your investment within 5 years. But, the positive side is by law, they have to return 90% of all profits as dividends back to investors. So, you tend to gain a lot. Do your own due diligence before getting in.
Money Market Funds – If you want to park your cash into a fund that gives you dividends, before actually investing in the individual stock or index fund, you can choose money market funds. They are generally safe investments and are always pegged to a dollar. Breaking the buck can happen in case of a financial crash like in 2008.
Royalty Or Passive Business Income – If you build a great, profitable business that generates passive income, then you are set for life. Concentrate on this portion since this makes money work for you while you are sleeping. You could build your brand in social media and start charging businesses that want to advertise. Start a blog with a field that you are passionate about and add the amazing Google Adsense program to get paid on costs per thousand impressions on the page views.
Step 6: Increase Your Income
There is a limit to decreasing your expenses. After that, you need to earn more active or passive income. That way, you get into a vicious cycle of savings and investing to get even more money in the future.
Some quick suggestions that come to my mind listed below
- Talk to your manager and tell him why you deserve a raise
- Jump ship to a higher position with a competitor or another random company
- Apply for a new job posting that’s at next level in your company
- Build a profitable side business
- Sell unwanted things in eBay or Amazon
- Acquire other profitable business and add to your income potential
Step 7: Keep Chugging Along
You need to know that there is no get rich quick scheme in building wealth. Get rich slowly, with consistency. You ought to keep financial independence as the primary goal and continue with sheer discipline. Keep an eye on spending and savings rate. Invest smart into markets and make your strategy stronger every day.
FIRE Movement is gaining pace with many focus groups and meetups. Be part of one and stand to gain from like minded people.
Best Communities on FIRE Movement
Alright, if you have read so far, you are now ready to join the FIRE Movement! Overall, Reddit community and Facebook groups are the best communities to have conversations with like minded people. Hope to see you discuss, learn and share with our fellow FIRE tribe soon. Keep the torch of FIRE Movement glowing!