For this new wave of employees, retirement isn’t about reaching a certain age — it’s now all about achieving a level of financial independence, also known as FIRE.
The FIRE movement began when Vicki Robin’s best-selling book, “Your Money or Your Life,” shaped the idea that anyone can achieve retirement in their 40s or younger. Specifically, the book described the relationship between savings rate and time of retirement in which, given a set of income and expenses, you can easily calculate your retirement date.
Most individuals have other dreams that they want to pursue or travel the world, but their 9-to-5 job is holding them back.
Because of this, millennials have started to embrace the idea of retiring before the standard retirement age of 65. This brought about the FIRE movement.
The FIRE movement simplifies the process of doing so, which is just maximizing your savings rate by either spending less or earning more so you have the financial independence to retire as early as possible.
? What Is FIRE, Exactly?
FIRE is short for Financial Independence, Retire Early. It is a lifestyle movement that aims to gain financial independence as soon as possible. Early retirement is relatively common among FIRE advocates, but the focus is on financial freedom rather than retirement.
Deacon Hayes, author of You Can Retire Early says, “it’s not about retiring early, but about getting the opportunity to follow your goals and your ambitions.” This movement has spread like wildfire among millennials in the early 2010s through various mediums such as blogs and podcasts.
To have financial independence, you must first be free of the need to rely on a paycheck for money.
You receive big enough dividends from various passive income sources such as investments or real estate to cover all of your primary and reasonable expenses so that you can live comfortably for the rest of your life.
You have enough money in your portfolio to do what you want—whatever retirement looks for you. Retirement can still be working full-time or part-time or finally pursuing that income-generating hobby that you’ve always wanted to do.
? Who Is It For?
You might think that FIRE is for those who want to escape their job, but you’re mistaken. It takes a lot of hard work to achieve FIRE; concentration and dedication are needed to get there.
It’s not for those who want to get rich quickly or escape a boss—it is easy to stumble and lose sight of the purpose. It’s also not about trying to leave your job or making a career change. The point is that it’s about an improvement in your personal life.
Retiring before age 40 can be positive if you have a different vision for your life than your current job. Financial freedom can help you realize that you can leave your job behind you when you know it’s time to move on to another part of your life that you have complete control of.
However, to achieve financial freedom, it is necessary to reduce spending and increase your income.
Retirement at age 30 might be more difficult in a country that doesn’t value many careers or doesn’t expect retirement at an early age. So while plenty of people have succeeded financially without an income of six figures, having a higher income helps you reach your FIRE goal than anything else.
? The Rules Behind It
FIRE only involves simple math: the number of expenses you spend should be less than your income.
The difference will then be diversified among different investment vehicles such as index funds and rental properties. In addition, you will also need to live below your means to avoid spending on unnecessary expenditures.
While these rules are relatively simple, there are different factors that you need to consider. Privilege and spending behavior is one of them since having these will give you an upper hand in reaching your retirement age target faster. Nonetheless, just like any financial goal, doing FIRE requires consistency and firm commitment.
? Variations on FIRE
In the FIRE movement, there are different variations you can take depending on your goals and ideal retirement:
1. Fat FIRE
Fat FIRE is about having the choice to continue living up to your current lifestyle without having to sacrifice a lot of your spending. Being fat FIRE means that you can survive even without having any active source of income. This is because your portfolio can cover more than your ideal living expenses.
2. Lean FIRE
Lean FIRE is being able to retire with a very lean lifestyle. This often means that your portfolio can only cover your necessities such as rent, transportation, and food.
Because of this, individuals who undergo Lean FIRE need to supplement their income by doing some extra active work. This is the opposite spectrum of fat FIRE.
3. Barista FIRE
Barista FIRE is the most accessible way of doing FIRE among the four different spectrums. It harnesses the leisure opportunities of both part-time employment and retirement.
It has become an increasingly popular option with retirees wherein they keep working part-time while getting all the benefits of regular 9-to-to-5 employment. It’s called Barista FIRE because it offers you health insurance and helps you achieve FIRE in less time.
4. Coast FIRE
Coast FIRE takes advantage of the savings rate when you’re still at an early stage of your career. It is a process of increasing your savings rate over time into a tax-advantaged savings account.
Once that the money has compounded its interest to grow, you would no longer have to add more contributions to keep it going. It has now become more than sufficient for your retirement. Compound interests require time and investment to achieve their full potential.
The goal of Coast FIRE is to optimize both investments and time. If you can accomplish these two, then you will have more control.
? The 10 Step Process to Reach FIRE
According to experts, the first step to financial freedom is determining your “why,” so let’s first take a step back and assess why we want to do FIRE in the first place.
The road to FIRE can become challenging. It will be easy to fall into various temptations, especially that next holiday sale waving at you and having a strong why will keep you grounded and easier to say no to things that don’t help you reach your goals.
So now that is settled, let’s dive into the 10 step process to reach FIRE:
Step 1: Lower your housing costs.
Surprisingly, most households forget the housing costs whenever they’re making a budget. It is always best to consider the choices you have: will it be your dream house, or are you willing to settle in a decent home? Will you use the difference in your portfolio so you can achieve FIRE sooner?
If you are serious about going FIRE, you might want to consider House Hacking. This is purchasing a duplex or triplex, then renting out other units.
Through this, you will be able to cut off the housing cost by over 50% and might help you reach financial independence 5 to 10 years earlier.
Step 2: Drive used cars.
It’s crazy how much our society puts high importance and value on owning a brand new car. We tend to forget that it has excessive premium payments. Cars aren’t investments since their value depreciates over time.
The best alternative to these expensive cars is a well-used car with high gas mileage. The key is to ensure that the vehicle has been driven as long as possible. Doing this, you will only have to spend almost half of what a brand new car would.
Additionally, it will take a while for a well-constructed second-hand car before you would have to spend on any major repairs.
Step 3: Cut the cable cord.
When you avail cellphone and cable packages, it is inevitable to spend almost $200 dollars just for these services.
Rather than spending these together in one package, you might want to consider downgrading by availing other services. An example is buying Netflix instead.
Step 4: Lower your tax liability.
Effectively optimizing the tax liabilities is where the FIRE community truly shines. Over time, we have gathered substantial knowledge on how to do tax hacks that are not commonly talked about.
There are numerous ways on how to withdraw and grow your retirement fund tax-free by maxing out your tax-deferred vehicles such as your 401(k), 457, 403(b), IRA, HSA, etc.
Step 5: Switch to a cheaper cell phone service.
For your phone bill, you might want to consider haggling with the company, switching to another service, or piggyback off any available wifi that you find.
Step 6: Use credit card rewards and smart financial habits to help fund your travel.
In the personal finance community, several famous figures mark credit cards as bad. We challenge that notion in the FIRE community. Credit cards are simply tools.
If you strive to save 30-50% off your retirement fund, you will surely benefit from the travel rewards that might come with using credit cards.
Through this, you can now travel almost freely around the world, allowing you to do something for less, instead of spending the possible expenses you might have had to pay without the travel rewards.
Step 7: Reduce your grocery bills.
Most of us spend so much on food and eventually waste half of it. On the other hand, there is a lot of pay for those who go out for each meal. It’s okay to go out of the house once in a while, but you can experience the same quality or the best experience at home eating quality home-cooked food.
The bonus is that it allows you to be creative with the meals you are going to eat. It provides you the opportunity to spend quality time with your family and friends.
Step 8: Increase your income and add multiple income streams.
A key element in financial independence is increasing your income by getting a side hustle or starting your own business. The best way to think of this is by considering it an investment to yourself when you spend the time to set the proper foundation in your business.
This will surely set you on the path of financial independence and will allow you to afford the freedom you’ve always wanted.
Step 9: Invest in low-cost index funds
Investing in low-cost index funds is the first foundation. Over a long time, the vast majority of professional investors cannot even keep up with the uncertainty of the market.
Since the ups and downs of the market cannot be determined, you should go for the one thing you can manage: fees. In comparison with other investment sites, index funds have very low fees.
Step 10: Use the 4% rule
The math here is relatively simple.
The rule of thumb is that if you can withdraw only 4% from your retirement fund each year so you can cover your living costs and still have wiggle room for emergencies, you have finally reached financial independence.
❓ You Might Ask
- Who Invented FIRE?
The FIRE came from a central principle taught in the best-selling book entitled “Your Money or Your Life,” authored by Vicki Robin and Joe Dominguez, which juxtaposes the number of expenses and amount of time we spend at work throughout our life. We compare the cost of an item depending on how many hours it will take us to work for it.
- How Does FIRE Work?
Those who follow the FIRE movement all plan to retire before the standard age of 65. They do this by placing almost 70 percent of their income into their portfolio while still keeping their active day job. Once they reach their target amount, which is typically 30 times the calculated yearly expenses, that is a sign for them that they may now choose to do retirement or do part-time. In order for them to cover their daily expenses, the followers of FIRE usually withdraw around 3-4% of their savings yearly.
- What Are Some FIRE Variations?
Several variations exist throughout the FIRE movement. Fat FIRE is a person who saves more than a regular retirement investor with a more conventional lifestyle. Lean FIRE refers to a strict commitment to minimum living conditions and severe savings that require a much lean lifestyle. Barista FIRE applies to followers who have left their conventional 9 to 5 jobs and still work part-time to meet current expenses; otherwise, their retirement fund will be depleted. Coast FIRE extends to part-time workers, but these followers have sufficient savings to finance retirement and current living charges.