Long story short, FIRE is an acronym that stands for Financial Independence, Retire Early.
Average people, just like me and you, are calculating how much money they need to live the rest of their lives without having to work a single day again, giving you back the freedom and ability to chose what you do with your time.
Over the years, it has since turned into a movement, which is gaining momentum and popularity with the internet and platforms such as podcasting, blogging, and social media.
In essence, people dedicate themselves to a program of extreme savings (typically 50-70%+ of their income) and frugality and working long hours/starting business or side hustles, allowing them to retire at a significantly younger age than the set age of retirement.
Say, for example, your expenses are $40,000 a year. If you were to have $1 million in investments, you could, theoretically, live off the appreciation and dividends indefinitely.
Sound good to you? I know it does to me. Let’s have a closer look at the movement and how you can design a similar program for yourself.
History Of The FIRE Movement
The movement began in 1992, with a book called ‘Your Money or Your Life’, by Vicki Robin and Joe Dominguez. It challenged the status quo of working a 9-5 until retirement age and then living off a pension. Joe himself worked on Wall Street, and retired at the age of 31, never working for money again in his life.
But it wasn’t until the 2008 recession where it finally began to gain true momentum, with the realization that your pension isn’t as secure as it once was.
People realized that the system is falling apart; that it’s not sustainable. When the retirement age was initially set at 65, the average life expectancy was 61. People weren’t expected to live to the retirement age, or much past it.
Now, with the advancements in healthcare, people are living into their 80s and 90s. That means people are drawing from their pensions for 20-30 years, and it was just not designed for that.
People began to realize that they need to take control of their own lives and their own retirement.
Then blogs began to appear. After Pete Adeney retired at the age of 30, he started a blog called Mr. Money Mustache, which quickly gained momentum.
Books began to appear, such as How to Retire Early With Real Estate, ChooseFI, and Quit Like A Millionaire.
Stories of people retiring in their 30s or 40s spread across the internet and on social media. Stories of people reclaiming that all-important time.
The number of people joining this movement has, and continues, to grow as a result.
Why It’s Important and Why You Should Also Consider Joining
As we’ve discussed, the way retirement was set up is not sustainable. Many people run out of money in their pension pot and are unable to adequately live.
State welfare is not sustainable.
Workplace pensions are not guaranteed (look at the numerous pension scams, such as Enron).
People need to be taking control of their own finances and retirement savings. And FIRE allows you to do that. You control your savings and investments.
Also, what would you do if someone offered you $10 million, but to get that money, you had to lose 25 years of your life? Is that worth it? To miss your child growing up? To lose all that travel and family time?
I certainly wouldn’t take it!
But that’s what a career is, essentially. Yes, you have a pension pot at the end of it. But is that worth missed soccer or football games? Missed the first words? Missed vacations? You can’t get that time back.
Financial independence allows you the freedom to choose what you want to do with your time. If you enjoy your job, then it doesn’t mean that it has to stop. But you don’t have to worry about losing it. You can go to that soccer or football game. You can go live in Southeast Asia for a year and not have to worry about the impact on your finances. You can travel and spend more time with family.
That’s worth everything to me, and I’m sure to you as well!
How To Work Towards Early Retirement?
A single article isn’t long enough to cover everything, but this website is based on this concept. This website is dedicated to giving you the foundational knowledge needed to pursue this if you wish.
In essence, you need to reduce your expenses, increase your income, maximize your savings and invest the difference.
Let’s look at each step one by one.
Step 1 – Work Out Your Budget
To know how much you need to save to live indefinitely on the appreciation and dividends, you first need to know what your income and expenses are.
So, the first step first, we need to create a budget.
Grab a piece of paper and list all of your income sources.
Now, draw a line underneath that and list all of your expenses.
Minus your expenses from your income and that will give you your surplus income.
Step 2 – Decrease Your Spending
Now you need to get your expenses down as much as possible.
Do you have subscriptions you no longer use or rarely use? Cancel them.
Could you save on your energy expenses or bills?
Could you cut down on the amount you spend on takeout or restaurants?
This is where I may differ from others. Some will tell you to be ruthless in this. And if you want to reach financial independence as early as possible, then go ahead and do that.
For me, you should still have some life. You never know when it might end, after all.
But you need to be living below your means. The lower the better.
Step 3 – Calculate Your Number
Now it’s time to discover the total value of investments you will need before you can live indefinitely on those investments.
Historically, the S&P 500 (an index fund made up of 500 of the largest companies on the stock market) has provided an annualized average return of 10%. This means that if you invest $100 now, in a year (based on historical data), you should have about $110.
Now, this is not consistent. Some years it’s more, some it’s less. We are looking at averages, however.
Therefore, if you withdrew 3-4% of your total investment every year, your total investment should never fall.
So, take your yearly expenses and multiply this by 25. This is the rule of 25 or the Financial Freedom Formula. It essentially gives you a number at which you would be able to withdraw your annual expenses without the fear of ever running out of money.
For example, if your annual expenses total $40,000, this will give you a figure of $1 million.
This is your ‘FI’ number. When your investments reach $1 million, you can effectively retire, withdrawing $40,000 a year from your expenses indefinitely without ever running out.
Step 4 – Set Your Goals
Now we need to know how much we can save each year and how long it will take to reach financial independence.
I could give you the rundown of the figures, including the concepts of compounding (which would effectively shorten the number of years it takes for you to save your FI number), but save time and click here to use a FIRE calculator.
By inputting your current age, income, expenses, and current net worth, as well as current asset allocation and expected returns (if you’re unsure, keep with the defaults), it will then tell you how many years it will take for you to reach your FI number (if you were to save the difference between your income and your expenses).
Play around with this to see where you need to increase your income or cut expenses and set a goal for both how much you need to save every month or year and when you will reach financial independence.
Step 5 – Increase Your Income
To lower your projected retirement age, you are going to need to increase your savings. And you can only cut your expenses so far.
So the next step is increasing your income.
This may be by gaining a promotion at work. It may be with a career change. It may mean going back to school to advance your career.
Or, it could be starting a side hustle or a business to supplement your income (or perhaps in the future replace your career).
Look around this website, specifically, the ‘Increase Your Income’ section, for some ideas on how you can increase your income.
Step 6 – Invest As Much As Your Can Until You Reach Your Number
So, now your expenses are as low as possible, and your income is growing.
Well, now you should be investing the difference between your expenses and your income.
Well, investing is the way for your money to work for you, through the power of compounding. Investments will typically provide you an annual return. Using the S&P 500 as an example, you should expect around a 10% return. That means $100 invested now will grow to $110 in a year, growing by $10. Without touching it, or adding to it, a year later it would grow to $121. That means it grew by $11, an extra dollar from the year before!
That’s what compounding is, now let me explain the power of it. If you were to put $10,000 a year in a savings account, after 25 years, you’ll have $250,000. Not bad.
But what if you invested that same $10,000 a year? Instead of $250,000, you’d have $1,091,817.65! That’s most people’s FI number. Only investing $10,000 for 25 years!
The safest way to invest your money is through index funds. These are similar to a stock but are a partial share of several different stocks. For example, the S&P500 is the 500 largest stocks on the New York Stock Exchange. By investing in these, you’re able to mitigate the risk of investing in a single stock, as your investment is spread over multiple different companies. If one goes down, it doesn’t harm you too much.
However, other options include individual stock investing, real estate, bonds, angel/private equity investing and so much more. Head to the ‘Investing’ section for more information on your options when it comes to investing your money.
Why I Prefer ‘Optional Retirement’ Instead
I am a firm believer that you shouldn’t do a job you hate now, just because it will provide you benefit in the future.
I am also not a person that plans to ever retire (in the traditional sense, whereby I play golf all day and never work again).
I will most likely work in some capacity until the day I die. It’s just the way I am. But I do want to reach a point whereby I can quit if I want to. Whereby I am working not because I need the paycheck, but because I want to work.
Therefore, I like to call this ‘Optional Retirement’, and that’s how I will refer to it mostly within this website.
Do you want to join me?