We live in a world full of financial uncertainty and economic challenges and it is likely that many of us will have to work far longer than previous generations.
However, a group of people are bucking this trend by becoming part of the FIRE movement. No, we aren’t talking about people who extinguish burning buildings, rather those who are part of the Financial Independence, Retire Early (FIRE) movement and devoted to a program of extreme saving and investment with the aims of allowing them to retire far earlier than traditional retirement planning and budgeting will allow.
In this article, we look at the principles of FIRE, how it works, and what steps you could take to embark on this transformational journey.
What is FIRE?
Financial Independence, Retire Early (FIRE) is based on the concept of accumulating enough wealth during your working life to sustain a comfortable lifestyle without the need of regular employment. The goal of FIRE is to achieve financial independence by having a passive income which covers your living expenses and allows you to stop working, or just work part time, and pursue your passions perhaps when you are even still in your 30s.
FIRE’s Key Principles
1. Frugality
At the core of the FIRE movement is the practice of being frugal. By creating a budget which distinguishes between “needs” and “wants”, and finding cost-effective alternatives without compromising quality of life, you waste less money on unnecessary spending and free up more of your income to save.
2. Aggressive Savings
FIRE emphasises the importance of being an aggressive saver. By putting a significant portion of your income into savings each time you get paid, the magic of compound interest help those savings grow quickly. Those dedicated to FIRE aim to save at least 50%, and often up to 70%, of their income with the remaining amount allocated towards living expenses and the repayment of debt.
3. Invest
Whilst saving is a great way to build your wealth for future financial independence, FIRE devotees also look to leverage the power of investing which can provide better long term returns than putting money in a savings account. They may invest in stocks and shares, bonds, property and other investment products, which also sometimes provide tax advantages. The compounding effect and growth potential of investments can often dwarf what can be achieved in a normal savings accounts and, for FIRE followers, plays a crucial role in them building their future wealth.
4. Create Passive Income
Passive income is income you receive without having to work for it and is a key part of FIRE. By building a range of passive income streams from investment dividends, interest on savings and rent from property, you can gradually reduce your reliance on active work and start to gain financial independence.
How To Achieve FIRE
1. Work Out Your FIRE Number
The first step to FIRE is to work out how much money you will need to have the lifestyle you would like in retirement. Carefully estimate your annual expenses and multiply them by the number of years you expect to be retired for. This is your FIRE number; the amount of money you will need to amass and generate to fulfil your FIRE dream. So, write down what you want your retirement to look like and start planning how you can get there.
2. Make A Budget
Develop a detailed budget that aligns with the principles of frugality. Identify areas where you can cut unnecessary expense and then stick to it. Redirect the extra money your budget frees up in to savings and investments, and keep in mind your FIRE goal.
3. Manage Debt
If you have debt, prioritise paying off high-interest debt first to reduce its financial burden and increase the amount available for saving and investing. Getting rid of debt is an essential step in achieving financial independence.
4. Boost Your Income
Whilst setting a budget and reducing your expenses is crucial, boosting your income significantly speeds up your progress towards FIRE. Taking on a second job, asking for a pay rise, moving job for more pay, and developing skills that will increase your earning potential are all options. When you have extra income be sure to stick to your budget and use the income to boost the amount you save and invest each month.
5. Build An Emergency Fund
Saving and investing a significant part of your income each month means you will soon have money put aside for the future. However, avoid derailing your FIRE plan by also having an emergency fund which you can dip into when unexpected expenses arise. FIRE savings and investments benefit from being undisturbed, and sudden withdrawals can impact the interest you receive on savings and possibly incur costs on your investments. By having an emergency fund in place, you can avoid this and have a financial safety net in place to help you when unexpected expenses do arise.
6. Build An Investment Portfolio
As we have mentioned, whilst savings accounts are good to help you achieve your FIRE aims, investing can provide much better long term results. So, work with a financial advisor to build an investment portfolio that aligns with your tolerance for risk and FIRE goals and review it regularly to make sure it continues working well for you.
7. Assess Progress
Regularly assess how you are progressing towards your FIRE goals. Remember, this is a long term process so don’t be disheartened at the beginning if you feel your savings and investments are not growing very quickly. Stick with it as the amount you have for your FIRE future will grow. Make sure you also adapt your FIRE approach as needed by regularly reviewing your income, expenses, savings and investments.
Whilst the FIRE movement does offer a compelling path to financial freedom, achieving that freedom won’t be without challenges. Being able to retire early will require a lot of sacrifices in the short term, and the wider economy can also impact your ability to do so.
Ultimately, for a successful FIRE journey it is essential to plan thoroughly, be realistic, have discipline and determination and have the flexibility, adaptability and resilience to overcome the challenges that come your way. Achieving financial freedom is something many people dream of. Perhaps the FIRE movement is the way to achieve it.
Remember, your investments can go up and down and you could end up with less than you started with. Past performance does not guarantee future results. The information provided is financial guidance and should not be considered financial advice.
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