How can someone achieve financial independence at a young age? While early retirement may be the ultimate goal for some who follow the FIRE method, there are other objectives as well. By embracing the principles of the FIRE method, such as spending less, saving more, and creating innovative possibilities for oneself, individuals can attain greater financial independence.
What Is the FIRE Movement?
The FIRE movement is a method of financial planning and lifestyle that promotes reducing expenses, saving a lot, eliminating debts, and investing wisely to achieve financial independence. By following this philosophy, it’s possible to retire much earlier than your late 60s to early 70s.
The FIRE movement, or FIRE method, is based on the book “Your Money or Your Life” from 1992 by Vicki Robin and Joe Dominguez. It encourages you to accumulate wealth by being content with less. While not everyone may want or be able to fully embrace FIRE, it can help you set ambitious financial goals and adopt a mindset to achieve them.
How Does FIRE (Financial Independence, Retire Early) Work?
FIRE is a financial strategy that promotes saving money by making significant lifestyle changes to achieve financial independence sooner. To begin, you need to determine your FIRE number, which is the amount of money required to retire or reach your desired level of financial independence. There are two formulas available to calculate this number: the rule of 25 and the 4-percent rule.
What Is the Rule of 25?
According to the rule of 25, you should save 25 times the amount of money you spend annually. This way, you have enough money in your savings to cover your expenses without worrying about running out of money. For instance, if your yearly expenses amount to $40,000, you will require a sum of $1 million to retire comfortably without financial stress.
What Is the 4% Rule?
According to the FIRE method’s 4 percent, you can use 4 percent of your retirement savings during a 30-year retirement period. While this is pretty simple math, it’s not perfect. While it’s a good general rule of thumb, it’s not a hard and fast rule. Many financial experts recommend dropping it down to about 3 percent per year instead.
For example, if you had $1 million in your retirement account, 3 percent per year would equate to about $30,000 per year. Keep in mind that while this sounds low, this is not necessary to replace your income but to replace your expenditure (which hopefully is not equal to your income).
The 5 Pillars of the FIRE Method
Saving over a million dollars is no easy feat, and it doesn’t happen overnight. Well, unless you win the lottery overnight. But the FIRE method isn’t a long-shot like plans of becoming a MegaBucks winner. It might sound difficult, but it is feasible and making it happen comes down to four pillars that help people save a lot of extra money pretty quickly.
Here are the five pillars of the FIRE method:
1. Live Below Your Means
Some people choose to save a large portion of their income, ranging from 30% to 70%, by giving up expensive possessions like houses and cars. Achieving this requires extreme measures such as living with family to save rent expenses, experimenting with van life or small housing options, or working remotely from a location with a lower cost of living.
2. Work More
In short, if you want to save more, you’ll need to earn more money. FIRE followers often choose to work multiple jobs or do freelance work in their free time in order to increase their income. In return, giving them more money to set aside for early retirement.
3. Don’t Pay Interest
A surefire way to waste money is by paying interest. So FIRE followers do not throw money down the drain on interest. They avoid carrying a credit card balance and focus on paying down any installment loans they may have.
4. Save, Save, Save
In addition to putting aside a high percentage of their incomes, this group maximizes their tax advantages and returns by using a combination of savings accounts, traditional and Roth retirement accounts, and investments.
5. Do Earn Interest
Interest can be your friend–if you’re the one getting paid interest. By earning more money, saving money by not paying interest and saving as much as you can, you have more money to invest in interest-earning accounts like your 401K and Roth IRA.
Does FIRE Work?
The FIRE Method is pretty simplistic and if it is followed, it will work. Granted, there are a number of factors involved. For example, if you don’t begin practicing the FIRE Method until you are 50 and you hope to retire at 60 with $1 million, then it’s not likely. But by being financially conservative as possible is going to provide a good, low-risk path to building a solid retirement account.
Granted, while it’s wise to be strategic and plan for the future, it’s not always realistic to practice the method to a T. For example, you might not always be willing to forgo that vacation or keep driving that old car. There are times when you need to spend money and it’s generally wise to enjoy life in the moment in addition to planning for the future.
That said, the FIRE movement is not surprisingly not for everyone. However, it is a highly beneficial strategy for those that it resonates with. It helps to empower people to take control of their finances and work towards their goals.
3 Types of FIRE Strategies
When it comes to financial independence and early retirement, the definition varies from person to person. The concept of FIRE suggests exploring different variations of financial independence and early retirement as you plan your financial goals. These variations could serve as your ultimate objectives or help you track your progress.
Here are the three primary ways to approach the FIRE method:
FIRE Method #1. Barista FIRE
The first type of FIRE strategy is the Barista FIRE strategy. This is where you save enough money to leave your current job and work in a less demanding role. This approach requires a smaller amount of savings than traditional FIRE as you’ll need to withdraw less money from your savings.
Your Barista FIRE number is calculated based on the assumption that you need $4,000 per month for expenses and can earn $1,500 per month working part-time. Using this information, your Barista FIRE number would be 25 times $30,000, which equals $750,000. This figure is lower than the $1.2 million required for traditional FIRE if you planned to withdraw $4,000 every month.
FIRE Method #2. Lean FIRE
The concept of Lean FIRE pertains to the minimum amount of savings required for a work-free retirement. It involves living modestly on an annual budget of $40,000 or less. To achieve this, you’ll need to lower your monthly expenses to $3,000 or less. For instance, if you can live on $3,000 per month, the amount required for Lean FIRE would be $900,000.
Living frugally and avoiding debt for many years can prepare you for a low-cost retirement, but it can also lead to burnout. However, achieving Lean FIRE is a significant accomplishment as it means that retirement is now within reach.
FIRE Method #3. Fat FIRE
For those who aim to live on an annual retirement income of $100,000 or more to enjoy their retirement, Fat FIRE is the way to go.
Fat FIRE followers don’t want to struggle with expenses related to their health or elder care in the future and want to travel and experience life. It helps you to have a more relaxed retirement by allowing you some extra flexibility in your finances. To achieve an annual retirement income of $100,000 through Fat FIRE, you would need to have $2.5 million in retirement savings.
7 Tips For Reaching Financial Independence
The FIRE method is brimming with tips and strategies to help you gain financial independence and retire early. Using these tips, you can not only get on track, but get motivated and stay on track to becoming financially secure, debt-free, and work-free at an earlier age than average.
Here are seven FIRE-inspired tips to help you reach financial independence:
1. Focus on your vision
Focusing solely on paying monthly bills can make it difficult to strive for long-term financial goals like retiring early and achieving financial independence. It’s crucial to have a clear vision for your future and devote attention to it. While managing day-to-day expenses, it’s essential to take a break from the grindstone and make space for lifelong objectives.
6. Limit your expenditure
To achieve your financial goals, it is important to reduce debt and increase savings. Despite the encouragement to spend money on various consumer goods and services, it is essential to prioritize financial well-being over a spending lifestyle. This requires a shift in both mindset and habits to align your lifestyle with your financial goals.
2. Eliminate debt
Eliminating any debt you may have is vital to financial independence. After all, you’ll be hard-pressed to save a lot of money when you’re wasting a ton of money by paying interest. But that doesn’t mean that if you have debt you’re doomed. It simply means that you need to focus your efforts on paying down and eliminating your existing debt.
On top of that, it also means that you need to avoid taking on any new debt. For example, avoid buying that new car and while you’re free to use credit cards and take advantage of the myriad of benefits, don’t carry a credit card balance.
3. Earn as much as you can
If your income doesn’t give you much opportunity to save money, try finding ways to lower your expenses and increase your income on the side. For the time being, you can look for a part-time job or a way to earn money passively to supplement your regular income. Alternatively, you can work towards getting a promotion or pay raise at your current job. In the long run, think about pursuing a career that offers higher earnings or consider starting your own business if your current job does not have the potential for growth that you need.
4. Maximize savings
If saving 30% to 70% of your income for FIRE goals seems unachievable currently, you can start with a steady 10% to 15%. FIRE adherents prioritize savings by utilizing high-yield savings accounts and CD ladders to earn maximum interest and augment their earnings.
5. Invest strategically
Investments are crucial for achieving your FIRE number and sustaining your savings in retirement. It’s essential to educate yourself about investing, in addition to seeking the guidance of a financial advisor. By grasping the basics of investing, you can effectively manage your finances, whether you work with a professional or not.
7. Get started ASAP
Starting to follow the FIRE method early on in your working career will give you an advantage in saving for the long term. Beginning early means that you will have more time on your side. Whether you are aiming for early retirement, financial freedom, or just stabilizing your financial situation, now is the ideal time to start.
The Bottom Line
The FIRE movement helps people focus on achieving financial independence and retirement, which can often feel far away. By breaking down big financial goals into specific numbers, it becomes easier to measure progress and start saving for the long term. While saving 25 times your annual expenses can still be challenging, and retiring without any obligations for decades comes with risk, FIRE provides practical steps to help achieve these objectives.
Frequently Asked Questions (FAQs)
How Does Social Security Factor Into FIRE?
If you retire early, your Social Security benefit amount may decrease because you won’t be able to earn as much during your prime earning years. This is because Social Security benefits are based on the average of your highest 35 earning years, so if your earnings are lower during those important years, it can have a big impact on your retirement benefits.
While your Social Security benefits can lower your total retirement expenses, if your goal is to retire early then it may not be worth getting too hung up on how FIRE can impact your Social Security benefits. Most people will need money in addition to their Social Security benefits to supplement their expenses, so it’s not as though saving so much for retirement that you can retire early will hurt you just because it might drop your monthly Social Security benefits (which for most, are fairly small anyway).
How does my credit score impact my ability to save?
While a good credit score alone won’t increase your savings, having a good credit score can help you save more money. This is because, with a higher credit score, you can get a lower interest rate. When it comes to using the FIRE method, you could refinance any high-interest debt to get a lower APR. This, in turn, will help you pay less in interest and therefore you can pay off your debt more quickly. Learn more about how to increase your credit score in under a month.