Discover the revolutionary FIRE movement (Financial Independence, Retire Early) and its principles of frugality, smart saving, and strategic investing to achieve early retirement or pursue your passions. Learn how to set financial goals, save a high percentage of your income, invest wisely, and embrace minimalism for a more purposeful life. Explore the different types of FIRE, such as LeanFIRE and FatFIRE, and find the approach that suits your unique circumstances. Start your journey to financial freedom now!
What is the FIRE movement?
The FIRE movement, which stands for Financial Independence, Retire Early, is a lifestyle and financial philosophy that gained popularity in recent years. The movement emphasizes frugality, smart saving, and investing to achieve financial independence at an early age, allowing individuals to retire or pursue their passions without relying on traditional employment.
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Key principles of the FIRE movement:
- Financial Independence: FIRE followers aim to accumulate enough savings and investments to cover their living expenses without needing to work for a paycheck. This is achieved by saving a significant portion of their income and investing it wisely.
- Retire Early: While traditional retirement age is typically in the 60s, FIRE enthusiasts aim to retire much earlier, often in their 30s, 40s, or 50s. “Retirement” in this context doesn’t necessarily mean ceasing all work; it can involve pursuing work that they are passionate about, even if it pays less or isn’t a traditional 9-to-5 job.
- High Savings Rate: FIRE followers typically save a large portion of their income, sometimes as much as 50% or more, in order to expedite their journey to financial independence. This requires living frugally and being mindful of expenses.
- Investing: To make their savings grow and outpace inflation, FIRE adherents invest their money in various assets, such as stocks, bonds, real estate, and other income-generating investments.
- Minimalism and Simple Living: Many FIRE enthusiasts adopt a minimalist lifestyle, focusing on what truly brings them joy and purpose, while cutting back on unnecessary expenses.
- Geographic Arbitrage: Some FIRE followers take advantage of geographic arbitrage by living in areas with lower costs of living, especially during the accumulation phase of their journey.
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How does FIRE work?
FIRE movement works by following a set of principles and strategies aimed at achieving financial independence and early retirement. Here’s a step-by-step overview of how the FIRE movement typically works:
- Setting Financial Goals: The first step is to define your financial goals. Determine the age at which you want to achieve financial independence and the lifestyle you desire during retirement. Calculate the amount of money you would need to cover your living expenses annually.
- High Savings Rate: FIRE followers prioritize saving a significant portion of their income. Many aim to save at least 50% of their earnings or even more. This requires living below their means and being frugal with their expenses.
- Budgeting and Expense Tracking: Creating and maintaining a detailed budget is crucial. It helps identify areas where spending can be reduced and enables more efficient allocation of funds towards savings and investments. Many FIRE enthusiasts use expense tracking apps or spreadsheets to monitor their financial progress.
- Debt Reduction: Minimizing and eliminating high-interest debts, such as credit card debt and personal loans, is a priority. Being debt-free means more money can be directed toward savings and investments.
- Investing for Growth: FIRE followers invest their savings in a diversified portfolio of assets, such as stocks, bonds, real estate, and other income-generating investments. The goal is to let their money grow over time and outpace inflation.
- Emergency Fund: Building an emergency fund is essential. It provides a safety net for unexpected expenses, preventing the need to dip into long-term investments prematurely.
- Maximizing Income: Increasing income through salary raises, side hustles, or entrepreneurship can accelerate the journey to financial independence.
- Tax Optimization: Understanding and utilizing tax-advantaged accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s in the United States, can provide significant tax benefits and boost investment returns.
- Geographic Arbitrage: Some FIRE adherents take advantage of geographic arbitrage by living in areas with lower costs of living, allowing them to save more money.
- Continual Monitoring and Adjustments: Achieving financial independence and early retirement is a long-term process. Regularly reviewing and adjusting financial strategies based on changing circumstances is essential.
- Withdrawal Strategies: Upon reaching financial independence, careful withdrawal strategies are employed to ensure that the investment portfolio can support the chosen retirement lifestyle sustainably.
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It’s important to emphasize that the FIRE movement requires discipline, dedication, and adaptability. Everyone’s financial situation is unique, and the approach may need to be adjusted to suit individual circumstances. Additionally, early retirement is not the only goal for everyone in the FIRE movement; some may choose to achieve financial independence to have more flexibility in their career choices or pursue work they are passionate about without financial constraints.
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Rule of 25 & 4%
The rule of 25 says you need to save 25 times your annual expenses to retire. To get this number, first multiply your monthly expenses by 12, and then you’ll have your annual expenses. You then multiply that annual expense by 25 to get your FIRE number, or the amount you’ll need to retire.
So, for example, if your monthly expenses are $6,000, you multiply that by 12 to get an annual expense of $72,000. Multiply that by 25 and you’ll have your FIRE number of $1.8 million.
The 4% rule
The 4% rule says that retirees can withdraw 4% of their savings the first year, and then adjust for inflation in future years if necessary, and not run out of money in retirement.
The 4% rule assumes a 30-year retirement goal, so if you plan to retire earlier than that, this may not work for you.
Both the 25 & 4% are case by case and it might not the right number for you.
If your goal is to achieve financial independence in 10 years or less, Woods suggests saving about 70% of your income. However, saving and investing money in tax-advantaged retirement accounts can help you prepare for retirement, thanks to compound interest.
Roth IRAs require you pay taxes up front, but your investments grow tax-free and you can withdraw your money tax-free in retirement. Accounts such as traditional IRAs and 401(k)s are subject to taxes when you withdraw money in retirement, but you still enjoy the benefits of tax-free growth and compounding returns.
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Types of FIRE
Within the FIRE movement, there are different approaches and variations that individuals may adopt based on their goals, risk tolerance, and lifestyle preferences. Some common types of FIRE include:
- LeanFIRE: LeanFIRE followers aim to achieve financial independence and early retirement by living an extremely frugal lifestyle. They prioritize cutting expenses to the bare minimum, often with the goal of covering basic needs and essential expenses only. LeanFIRE may involve significant lifestyle adjustments, such as living in small, affordable housing, cooking at home, and minimizing discretionary spending.
- FatFIRE: FatFIRE is the opposite of LeanFIRE. Followers of FatFIRE aim to accumulate a more substantial amount of savings and investments, providing a more comfortable and luxurious retirement lifestyle. This approach may appeal to individuals who desire a higher level of spending and are willing to work longer or earn more during their careers to achieve a larger nest egg.
- BaristaFIRE: BaristaFIRE involves achieving financial independence to the extent that you can pursue part-time or low-stress work (such as working at a coffee shop or any other low-pressure job) to cover your basic living expenses. This approach allows individuals to step back from their full-time careers while still having some income to support their lifestyle.
- CoastFIRE: CoastFIRE is when individuals have already saved enough for traditional retirement (at a later age, like 65) but continue to work without adding more to their retirement savings. They “coast” until retirement age while letting their existing investments grow until they can fully retire without relying on additional contributions.
- GeoFIRE: Geographic Financial Independence, or GeoFIRE, involves relocating to a region or country with a lower cost of living to stretch savings and investments further. This can help accelerate the journey to financial independence and early retirement.
- Olean FIRE and OFat FIRE: Olean FIRE and OFat FIRE are variations that emphasize optimizing different aspects of life, such as health and well-being (Olean) or focusing on maximizing life experiences and luxury (OFat).
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It’s important to note that these types of FIRE are not rigid categories, and many individuals may incorporate elements from multiple approaches based on their unique preferences and circumstances. Each person’s journey to financial independence and early retirement is individualized, and there is no one-size-fits-all approach within the FIRE movement.
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Sources
Elizabeth Ayoola. 2023. FIRE Movement: Financial Independence, Retire Early.
https://www.nerdwallet.com/article/investing/financial-independence-retire-early#:~:text=Financial%20Independence%20Retire%20Early%20(FIRE,how%20to%20spend%20their%20time.
Dorian Finance YouTube Channel. 2023 https://www.youtube.com/channel/UC-csiHY8qJhAW6Cg9mO7LRA
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