FIRE Fundamentals (Financial Independence and Early Retirement)
FIRE has a moment, and it’s easy to understand its call. Financial independence? Sounds great! Retire early? Sign me up. This movement is also rapidly gaining momentum . We spoke to four FIRE enthusiasts and asked them to share what the movement is and what it takes to achieve this elusive goal of financial independence / early retirement .
What is FIRE?
When you think about retirement age, you’re probably thinking of someone in their 50s or 60s, and there’s a reason for that: it’s the norm. Social Security allows you to start receiving benefits, for example, at age 62 , and you can start withdrawing money from your IRA without penalty at age 59.5.
While this is the standard age at which most people start thinking about retirement, people who aspire to FIRE retire much earlier, usually at the age of 40, 30, and sometimes 20.
(Most likely, you are now skeptical. You are probably thinking something like this: “Sounds great, but what if I only make 35 thousand a year and drown in student loan debt?” Many FIRE enthusiasts heartily acknowledge the privilege of the FIRE movement.)
Early retirement is the literal definition of the FIRE movement, but there is a much more reliable meaning when you start digging into the principles behind FIRE. Namely about flexibility.
“Financial independence ultimately means you can shape your life without taking money into account,” said Tanya Hester , author of Job by Choice: Retire Without a Penny . “Most of us have to consider our finances in almost every decision we make, or perhaps even make decisions based solely on money. But as soon as we achieve financial independence, we get the freedom not to depend on what we earn or what we have accumulated. “
Contrary to our traditional view of retirement, FIRE doesn’t necessarily mean you have to quit your job. The movement is working on a vague, unconventional definition of what it means to be “retired.”
“It’s not so much about early retirement, but about having the freedom to pursue your dreams and ambitions,” said Deacon Hayes , author of You Can Retire Early! “. Hayes adds that FIRE is really about “the freedom to choose whether to work or not.”
In fact, the FIRE community seems to be focusing less on the “early retirement” aspect of the movement and more on the financial independence component, “which is a powerful ambitious goal that is easily achievable if people are willing to do something small but important. optimizing their lives, ”said Jonathan Mendonsa, co-host of the ChooseFI podcast.
Mendonsa is committed to financial independence and explains that there is a specific definition for this: when your net worth is 25 times your annual spending, you are considered financially independent. “So, if your annual expenses are $ 40,000, you are financially independent when your total net worth is $ 1,000,000,” he said.
Who is FIRE for?
If you have a high paying job that sucks, FIRE probably sounds good right now. However, Hester warns against this:
“Early retirement because you don’t like your job is a bad reason for this, and it’s a recipe for boredom or aimlessness when you get there,” she said. “Achieving FIRE is a big undertaking that requires a lot of focus and determination. This is not for those who want to get rich quick or those who just hate their jobs. “
Esther loved her career in politics and the media, but she didn’t like the pace and pressure of constant travel. She said that the best solution for people who feel stuck in their jobs is to find a new position or a new path.
Hayes would agree. He said that if you are willing to develop and stick to a plan for achieving financial independence, it really doesn’t matter if you quit your job or not.
“Many people who have achieved financial independence do so as a W2 employee,” he said. “Plus, being financially independent doesn’t mean you have to quit your job. It simply means that your job needs you more than you need it . This gives you the opportunity to negotiate things like opening hours, vacation times, etc. “
This is not a career break, but a comprehensive lifestyle update. “A good reason for early retirement is that you have an alternative vision for your life that you aspire to, but that you cannot achieve by working full-time,” said Hester. “Achieving financial independence has allowed us to leave this career chapter of our lives out of gratitude and appreciation and move on to the next chapter that we control.”
Yes, some people who have achieved FIRE strongly believe that anyone can do it – if you can’t, they argue, it’s because you’re not saving enough or cutting back. This is not entirely logical when wage stagnation is still a problem for many.
While financial independence requires spending cuts, it also requires a decent income. However, many in the FIRE community recognize this.
“This is a huge privilege,” said Liz Thames , author of Meet the Frugalwoods: Achieving Financial Independence Through Simple Lifestyles . “For many people, these questions go beyond their daily lives. We have a real problem with income gaps and people who do not have a living wage. So I want to make sure we understand that being able to keep the distance between our income and expenses is often a privilege. ”
Hester adds that it’s unrealistic to think that “everyone can save enough to retire early in a country that doesn’t value many professions and doesn’t have a living wage.”
“So while many people have become financially independent without earning six figures, more earnings will certainly help speed up the process,” she said.
FIRE rules
The basic math behind FIRE is ridiculously simple: Spend less than you earn and “save the difference on low-commission investments like index funds,” Hester said.
Other investments, such as property rentals and passive income sources, are also an important part of achieving financial independence. And frugality too. The less money you need to live, the less money you have to save to fund the rest of your life.
“To highlight the value of cost savings, for every $ 100 a month you can trim, that means you need $ 30,000 less to achieve FI ($ 1,200 a year x $ 25 = $ 30,000),” Mendonça said. …
Thames explains that FIRE has three elements: time, cost and income. The goal is to separate expenses and income . “How much space do you mean, and how much it takes time,” – she said.
So, although the rules are simple, getting there is, of course, a different story. Achieving FIRE involves the same concepts of achieving any other financial goal, and ultimately comes down to behavior.
For example, although the Thames leads a modest life that many would consider sacrificial, its frugality has nothing to do with self-restraint. “I’m not missing out on anything in my life because of frugality,” she said. “I spend money on what is important to me. I just don’t have to buy so much to live a fulfilling life. “
According to Hayes, “It’s more about spending money on purpose than being frugal.”
First steps to FIRE
If any of this sounds appealing and realistic to you, all the experts pretty much agree that the first step is to figure out your why.
“If you want to retire early, you have to have a clear why,” Hayes said. “Do you want to quit your job to start your own business that you’ve always talked about with your friends? Do you want to have more than two weeks of vacation a year? Want to spend more time with your loved ones? Whatever your “why” may be, keep it motivating to create a plan and execute it in difficult times. Once you understand why, you will want to define your path. “
Thames proposes to find out as concretely as possible why.
“The first step is to figure out what you want to do in 5, 10, 20 years,” she said. “Where do you want to be geographically, what do you want to do, what you want your family to look like. Once you know this, you can shape your money the way you want. Why do you need FI? I would write it down. And if you have a family or a partner with whom you live, involve them in the conversation. “
Second step? Track your expenses. Check your bank statements, credit card statements, online budgets and note what exactly you are spending your money on and whether those purchases are meaningful or necessary.
“Most of us are shocked to find out how much we are actually spending,” Hester said. “Once you’ve started tracking, figure out how much your lifestyle costs per year, look for what you can cut back to reduce that number, and then start working to increase your savings rate. These are the hardest parts of the journey, and the rest is just waiting for the money to come and go. “
The key is to spend more mindfully, and Mendonça says spending more mindfully means taking stock of the expenses that really matter to you.
“We are not promoting extreme frugality,” he said. “Instead, our message is based on the fact that ‘value’ is the guiding thread in purchasing decisions. We want to get rid of the clutter in our lives, because it allows us to reduce our monthly expenses and, thus, accelerates the path to FI. ” Hayes recommended looking at every line item in your budget and asking, “Does this add value to my life?”
After you’ve conquered your spending, it’s time to look at your bottom line and compare. Thames said that you should deduct your fixed compulsory expenses from your income and then adjust your discretionary expenses as necessary.
Hence FIRE comes down to mathematics and mechanics. In an episode of his podcast, Mendonsa offers ten pillars of financial independence. These pillars:
- Reduce housing costs
- Drive used cars
- Cut the cable cord
- Reduce your tax liability by maximizing the number of tax deferred vehicles such as 401 (k), 457, 403 (b), IRA, HSA, etc.
- Switch to a cheaper cellular service
- Use credit card rewards and smart financial habits to help fund your trip
- Reduce your grocery bills
- Increase your income and consider adding multiple sources of income
- Invest with low cost index funds
- Use the 4% rule, the ultimate equation for achieving financial independence. When you can safely take 4% off your bird’s egg each year to cover your expenses, and still have enough money left over in the future, you’ve reached FI.
Like any other financial goal, the math is simple, and everything else requires ingenuity , diligence, and patience . As Thames says, you can start your goal at any moment and then move forward. How quickly you reach your goal will depend on these three main variables: income, expenses, and time.
This story was first published in 2017 and updated with more recent information in October 2019.