What is FIRE?
Updated: Apr 24
FIRE stands for Financially Independent Retire Early.
To be “Financially Independent”, you need to have enough money built up through savings and investments that you can live off the income those investments generate, indefinitely. And this, ladies and gentlemen, gives you the freedom to “Retire Early”.
As far as I can tell, the FIRE movement was popularized from the 1992 book by Vicki Robin and Joe Dominguez titled “Your Money or Your Life”. In recent years, Millennials in particular have jumped on board the FIRE train with the aim of retiring much earlier than the standard age of 65.
A very simplified view of how to reach Financial Independence (FI):
1. Spend less than you earn
2. Invest the rest
The less you spend each year, the less you need to retire on.
How much do you need to retire?
A general rule of thumb to reach FIRE status is to save enough to cover 25 times your annual expenses. This is also known as the 4% rule. The rule states that if you can live off 4% or less of your total invested portfolio each year it is very unlikely that you’ll ever run out of money.
Sounds pretty good, huh? Statistics show that over the long term (+10yrs), the market tends to average a return of least 6-8%. Yes, there are years where the market will be more up than down, but we’re in for the long haul here people. Time is on our side.
Image 1: S&P 500 Index trend, 1950-2019
For simplicity, if you spend $40k a year you would need around $1,000,000 invested to retire on (4% of $1M = $40k). The higher your expenses, the more you’ll need invested to live off. I put an example in section ‘The more you save, the more you can invest’ for how it to can work.
For more information, why not read the blog by the God of personal finance blogs himself, Mr. Money Mustache? It’s a great read!
Saving that much money seems so far out of reach, but it’s really not
You see, FIRE is basically a lifestyle choice that blends frugality, minimalism, and personal finance disciplines all together. Being frugal doesn’t mean you cut out all the things you love and enjoy in life. In fact, it’s the complete opposite!
You cut out all the crap that doesn’t matter and only spend your hard earned on things that truly bring you joy (obviously you still have to pay your bills, even though they suck). By doing this you are naturally acting in a minimalist way.
With frugal behavior and a desire to learn about basic investing, achieving FIRE is completely realistic for the average person.
So I can save a bit, now what?
Remember this basic principle; your money needs to make you more money. This could mean investing in real estate, paying down your mortgage (this is a guaranteed rate of return), low cost index funds or ETFs, or even a combination of all of these. Hell, you could even invest in Bitcoin if you wanted to!
It’s completely up to you how you invest and will depend on your tolerance to risk. You will need to do your research and learn about the options out there. Your investment portfolio needs to be specific to you.
The more you save, the more you can invest
The most important part of achieving Financially Independent (FI) status is your savings rate, meaning how much you save each pay.
Let’s take the $1M saved example and break it down for how a fictional guy named Joe could get there, assuming an investment return of 6% each year.
Joe is an area manager who earns a take home pay of $100,000 a year
Joe can save $24k a year, which is a savings rate of 24%. Great work Joe!
With $2k a month of savings, Joe can start investing to build his nest egg
This nest egg can start to snowball through the magic of compound interest
HOLD UP! If you’ve made it this far, and you’re confused, that’s okay! Some people are visual learners. Instead of me trying to re-invent what other folks have already successfully done, here’s a link which shows the power of what Einstein labelled the 8th wonder of the world, compound Interest!
If you prefer the numbers, continue on.
$24k at a 6% return compounded annually over 22 years will generate over $1,000,000
In this example Joe only had to invest $528k of his own money. The rests is interest earned from interest!
But Joe’s FI number is actually much higher if he spends $76k a year ($100k-$24k).
He will need over $1.9M invested. Remember our 25 x annual expenses rule? ($76k x 25 = $1.9M invested)
Doubling Joe’s savings rate to $4k a month will also reduce his annual expenses to $52k/yr. By doing this he would cut down his FI number to $1.3M and only need 17 years invested.
Cut his expenses in half to $38K/yr? Joe could retire after only 12 years!
See now why your savings rate is the most important part of reaching Financial Independence?
Now you have a bit of background for why FIRE is so freakin’ cool! Follow us, a family of four who previously knew nothing about personal finance, as we go on our journey to financial freedom. We will share with you our successes, our bumps in the road and everything in between.
FIRE with a Family