If you’re interested and learning about financial education, you’ve probably heard about the idea of retiring early or obtaining financial independence. The goal to retire as early as possible gave birth to a whole movement named FIRE. According to a New York Times article, the movement has a great comeback due to the pandemic.
Why is it called the FIRE movement?
FIRE stands for Financial Independence, Retire Early, and it came to life in 1992 after the launch of “Your Money or Your Life,” a book written by the two financial gurus, Vicki Robin and Joe Dominguez.
The movement is based on a savings rate as much as 70% of your yearly income into an investment portfolio to be able to afford to retire early. When your savings reach 30 times your yearly expenses, you can retire entirely or quit your day job. Once you have achieved that, you can withdraw 3 to 4% out of your savings yearly to cover your living expenses.
One thing to note, many in the FIRE movement live a frugal lifestyle even with their considerable nest egg.
Some people choose not to invest entirely in stocks but instead allocate some portion of their portfolio into bonds. Others opt to use real estate as part of their portfolio strategy. Still, others prefer to focus exclusively on dividend-paying companies.
There’s no right way to achieve FIRE, so that it can take different forms depending on individual preferences.
But how can you achieve FIRE, and what do you need to do to retire before the traditional retirement age?
We’ll cover some of the most important things you need to do and what you need to avoid to make FIRE a reality in your life.
How to Achieve FIRE
To reach your financial independence not only takes time, but you also have to take constant steps to build it, sometimes making great compromises. So here are the most important things that will help you retire early.
1. Analyze your budget in detail
You can use this as your first step towards FIRE. To reach any financial goal, you need to be conscious of all the money you bring in and everything you spend, all in great detail. From that point on, you can make adjustments and work more actively towards your goal, which is early retirement. Once you dedicate yourself to FIRE, every financial decision you make should follow your retirement goal.
2. Cut down on your expenses
Remember that “70% of your yearly income” should go towards your early retirement fund, and that means now is the time to make a few compromises or sacrifices. The focus is cutting back on your annual living expenses, which reduces the amount you need to save and the amount you’ll need during early retirement.
Cutting down on your lifestyle expenses may not be an easy task, but you can start small and grow from there. Are you using and really benefiting from all your paid subscriptions? Do you really need to go to a restaurant every week/day? Does your wardrobe really need clothes purchases each month?
These are only a few questions to show you that sometimes we can get carried away by impulsive or comforting expenses that we might not actually need. Of course, you might need your gym subscription and new clothes, but whatever is not a necessity or priority, you should cut it. That money should now go towards the FIRE retirement goal.
3. Pay off debt and your mortgage early
Keep in mind that you can’t achieve financial independence if you are beholden to massive debt. You can choose to pursue an aggressive saving plan, but don’t forget about your consumer debt and student debt. Get rid of these as soon as possible, whether you choose to pursue retiring early. The net benefit is financial security.
So work your way towards paying your mortgage early and end all the debt you have accumulated so far. That may include personal loans, credit card debt, money borrowed from friends or family members, car leasing, etc.
It might seem hard at first, but you need to constantly remind yourself that you’re taking these measures to ensure you won’t have to work until you’re old. And a sure-fire way to be obligated to working is owing money to other people.
4. Make sure you have an emergency fund
A significant step towards achieving financial independence is having enough money put aside in your emergency fund to cover 6 months of living expenses. I would argue for closer to 12 months. This way, you can take care of any unexpected expenses without interfering with your FIRE plan. We can plan for many things, but many things like the pandemic we can’t. You don’t want to tap into your retirement accounts before you actually retire.
Maybe your car needs fixing that is not covered by your insurance, or there’s something that needs to be fixed in your home. Your emergency fund will cover for all that, and you can stay on track towards meeting your financial goal. Learn more about our emergency fund savings strategy.
Keep in mind with FIRE; the focus is maxing out your retirement plans and using taxable investment accounts to reach financial independence goals.
5. Look for side hustles to increase your income
Remember we talked about sacrifices? Sometimes a sacrifice you may need to make to achieve FIRE is sacrificing your time for an income boost. Taking on side hustles along with your day job can help you pay off your debt faster and put more money aside. Try to find side hustles that you can do easily, or you are interested in making it a smoother process for you.
Side hustles can be one-time gigs that give you money to pay off debt. Or it can be a recurring side job that brings in steady active or passive income.
6. Get help from a financial advisor for your investments
When you’ve taken on such a demanding goal, it’s clear to say you need to be very careful with all the money you make and everything you invest. The stock market is a volatile financial pool, and wrong steps can lead to money loss, while good ones can make you more money and boost your retirement fund. Working with a financial advisor may be a good investment you can make to help you with your investments. It will give you more stability and control over your portfolio and some peace of mind.
There are many in the FIRE movement who argue for DIY investing and financial planning. That may work for some people, but if you’re looking for better guidance, financial planners can help you think of areas in your personal finances you may have overlooked.
Things You Need to Avoid
FIRE might sound like a great thing to engage in, and in a lot of ways, it actually is, but before you start this journey, there are a few things you need to take into consideration and avoid.
- Don’t do FIRE if you’re tired of or hate your current job. While the idea of retiring early can help you get your freedom and leave your job, this should not be your primary intention. Chances are you might just need to make a career change, a new job where you feel appreciated and you get to do things you like. You can still pursue FIRE in the end but first, try to address the issue with your current job situation.
- Don’t take on additional work or side hustles if you’re chronically tired. Getting an income boost will surely help you do FIRE but you should only do this if your body and mind can actually do this without going into burnout. Unfortunately, burnout is on the rise among Millenials with over 50% of respondents in a survey made by Indeed admitting they are in burnout. Don’t risk your current health for financial independence in the future.
- Make sure this is good for you. Keep in mind that all the efforts you need to make for FIRE will have a toll on your lifestyle, your comfort, and your stress levels. If you can’t afford to put 70% of your income into your savings account without a big negative impact on your well-being, then decide if it’s actually worth it for you or not.
Variations to FIRE
In more recent years, Millennials, particularly, have embraced the FIRE movement intending to retire well before the traditional retirement age of 65. While the original concept behind FIER (Financial Independence, Early Retirement) stands as an idealized goal, many variations exist within the FIRE community.
The growing number of FIRE members helped evolve the community. It’s more inclusive and pursued by professionals from all walks of life, not just the developer with a high-paying job.
I believe that you shouldn’t sacrifice a good lifestyle in retirement–early or not– to speed up quitting work. Consider your current standard of living, current expenses, and overall quality of life. You have options.
Based on your lifestyle, these are some FIRE variations:
Coast FIRE: followers who want to continue working and have enough to quit their jobs.
Learn FIRE: focus on minimal lifestyle with extreme savings today and well into the future. It’s the most restrictive.
Fat FIRE: a goal to have more spending capability in early retirement. Often, attracting those who often have expensive lifestyle choices.
The Ideal Life in Retirement: FIRE Tips
I’ve followed the movement since 2015. And there are many things I’ve agreed and disagreed with it. Overall, I believe people should achieve financial independence. However, the goal is to do more meaningful work and positively impact the world—basically, less time having to work and more time doing purposeful work.
If you decide that doing FIRE is the right choice for you, always keep in mind your main goal and why you want to achieve it. To help you get started, here is how you calculate your financial independence number to know exactly how much you will need to set aside to retire early.
What are some other ways to achieve FIRE without restricting yourself?
Think about yearly expenses and ask yourself if those add value to your life and things you want to continue into early retirement. Chances are these annual expenses are to make ourselves feel better because we’re not living life. Imagine if you enjoyed your life, then you might not need to spend on such things.
Many FIRE members have created passive income, hold rental property, and income from investments. They are diversifying their income streams. That’s something you want to consider as well. Although much of FIRE is focused on investment strategies, you want to think about your sources of income. Don’t have your financial life depends solely on stock market returns.
Now, this is the most important thing.
Really do the work to understand what you’ll do with all your free time. We tend to romanticize not having to work, but I’ve learned the vast majority of FIRE’d people still work. And yes, the work is something they choose to do. That’s because the goal isn’t to sit around and binge streaming shows. It’s to use the time on something else.
A good thing to start practicing as you pursue FIRE is to do some of those joyful things now. Don’t restrict yourself and believe happiness will happen after FIRE. It does not. Happiness is experienced at the moment.
Oh, and one last thing…
The SSA determines the traditional retirement age when you’re eligible for government benefits. So, if you happen to retire at any time before that age, consider yourself retired early!
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