Financial independence isn’t necessarily something that everyone thinks about or strives towards.
Many people are content being employed by someone else,
knowing that their monthly salary will appear in their banks simultaneously every month.
Others want to work towards getting the promotion of their dreams and are in no
hurry to retire early. There are, however, others who want to break free from the
norm so that they have the time, resources, and freedom to pursue their dreams without
waiting until or after retirement to do so. The FIRE movement is made up mostly of individuals
who have rallied behind the principles of financial independence. Some are incredibly
aggressive savers. Others are remarkable investors, while some are insanely high earners.
Either way, they all want the same thing, and that’s to reduce the dependence they have on
their respective employers and at the very least, have the option to live life on their own terms.
The Financial Independence, Retire Early movement AKA FIRE, can be traced back to a
1992 book written by Vicki Robin and Joe Dominguez called, ‘Your Money or Your Life.’ In its pages,
Robin and Dominguez advocate for spending your retirement years enjoying your time on hobbies,
family and friends, instead of working well into your sixties to continue earning money.
Over the years, the FIRE movement has gained increased exposure as more and more people become
drawn to the idea of having enough money to grant them the freedom, to do what they want without
being at the mercy of a paycheck. And this is how it works.
Pursuing FIRE means working hard when you’re young, saving and investing an average of fifty
percent or more of your income, and adopting a strict budget. The movement centres on taking
control of your finances, and followers focus less on increasing their earnings and more on
spending less. Saving and investing more of what they earn and spending less of what they earn
is what they concern themselves with. By saving and investing their money,
participants can generate enough income to sustain their lifestyles.
To meet their goals, participants must go the extra mile by investing in stocks,
which means understanding how the stock market works and having a brokerage account. They won’t
be able to rely on the low returns and absolute safety of a bank account to amass their fortune.
By spending less, they reduce the level of savings they need to retire early.
While some critics may say they live too frugally to reach their goals,
many say they don’t have to make extraordinary sacrifices.
By spending on what they really love, they do in fact, receive more enjoyment from those things.
Those who partake in this movement see it as a way to spend their time doing
what they really want rather than what society tells them they should want.
So, on the screen are some of the common practices among followers.
• Automating saving and investing through payroll deductions.
• Eliminating credit card debt and other loans. • Maximising retirement account contributions.
• Buying food in bulk, cooking at home and eating out less.
• Purchase used items such as clothing and furniture.
• And, reducing housing costs by moving to a cheaper area.
Over the years, the FIRE movement has been divided into several subgroups. Each requires
varying levels of discipline and sacrifice. The savers are all striving for the ultimate goal,
but participants have different objectives and approaches based on what they see as
valuable and the sacrifices they’re able to make. These people are grouped into six main groups.
1. The Extreme savers While many view all FIRE participants
as extreme savers, there’s a subset that goes even further. These guys cut down every frivolity to
minimise expenses. They don’t go out much and may even cut down on social interaction unless
it’s on their own terms. Simply put, everything is subservient to the goal of financial independence.
2. The Moderate savers They may still seem extreme for some,
and they still save a massive chunk of their income, but they are moderate savers compared
to the other followers. They’re, however, not willing to give up some things that they value.
They may take a family vacation to go camping, for example, instead of going to an expensive city.
They may even be willing to work an extra year or two in exchange for doing something they love.
3.Lean FIRE This is the most frugal
FIRE follower. They often adopt a minimalist lifestyle and aim to survive on approximately
$25,000 a year or less to maximise savings before and after retirement.
4. Fat FIRE This refers to
those who have a more traditional lifestyle while saving more than the average retirement investor.
5. Barista
This is basically a combination of the first two. A person quits their nine to
five job but still works part-time or as a side hustle to cover current expenses.
They maintain more than a minimalist lifestyle while withdrawing from savings and investments.
6. Coast FIRE This is similar to barista,
where one maintains a part-time job to supplement income.
However, coast followers typically don’t tap into their retirement accounts or investments.
So, everyone has their own unique way of going about their journey to financial independence,
and while there is no right or wrong way, here are a few pointers for those just starting.
1. Ensure you’ve covered all your financial bases first
One of the first and most important steps to take, even if you aren’t pursuing the movement,
is making sure you have some of the financial basics down. Have an emergency fund in place to
cover any unexpected expenses without taking on additional debt. Any high-interest debt
you may have should also be paid off, plus any other loans such as a mortgage or student debt.
Those pursuing FIRE need to save as much as seventy percent of their income every
year to reach their goals. By taking a good look at your financial picture,
you can help get a clearer picture of where you are right now and where you need to be.
The moment you have an exact idea of how much money you bring in,
how much is spent, and how much is saved, you may begin to think about
areas where you can cut costs or increase your income to start making FIRE a reality.
2. Figure out the why The reason behind joining the
movement should be one of the biggest things to focus on during the early stages of your journey.
Why do you want to retire early? Is it to travel? Spend more time with your family
or do something completely different from what you’re doing at the moment?
When you think about why you want to achieve FIRE,
you discover that the goals you want to achieve can become a reality sooner than you thought.
You might want to become more flexible while your children are still young. You’re able to make some
adjustments to your budget to be able to work part-time now. Or you can probably shift into a
job that is less demanding and doesn’t require you to put in long hours. Determine whether there are
any other steps you can take in the short term that can help you achieve the same objective.
3. Separate your needs from your wants Traditionally, the FIRE movement has been
associated with an extremely low spending rate and an aggressive saving and investing rate.
For the majority, this is much easier said than done since there are so many grey areas in life
where you can’t just say you won’t spend in the name of
saving. This realisation can be very exhausting. Over the years, however,
the movement has made room for more balance which still helps you reach your goals.
The concept of conscious spending asserts that it’s possible to spend as much as you’d like
on things that make you happy as long as you’re aggressively cutting back on the things you hardly
care about. Saying no to everything, including the things that bring you joy and happiness,
can leave you feeling miserable and, in some extreme cases,
lose touch with those you care about. But by creating space to allow for spending on the
thing that makes you happy, you remain joyful and motivated to retire early.
Though retiring early is a nice benefit on its own,
the benefits of FIRE come mainly from the financial independence component.
Financial security When you’re financially independent,
you no longer rely on a paycheck to survive, and this is because you have amassed enough wealth
that your investments can cover all your expenses. Financial security is said to be the most
significant benefit of financial independence. While there are other benefits of FIRE,
they’re enabled by the financial security that comes along with it.
Choosing a job that aligns with your values FIRE is defined in different ways by different
people. Some believe they have to stop working completely, while others still
opt to work a job they care about instead of simply exchanging their time for a paycheck.
Here you can look for a job that interests you more and not just because of the paycheck.
Reclaiming your time For FIRE participants,
there is nothing more valuable than time. Not even money itself.
And once you reach FIRE, you are no longer obligated to exchange your time for money.
You can spend time doing things you really enjoy instead. This could be spending more time with
family, travelling, volunteering, or whatever you’re passionate about. If you look at it,
these activities usually don’t pay, yet most of us would consider them priceless.
So, while FIRE is excellent from a financial perspective, some criticise the movement. Many
followers approve of the lifestyle, but others, not so much. One of the frequently cited drawbacks
is that achieving it is difficult for the average American. Some followers even fail
to mention sizeable inheritances, property or other family hand me downs that boost
their journey to financial independence. Most working-class Americans don’t enjoy this luxury.
But even top earners must make sacrifices to achieve FIRE. And many young people don’t
want to put in what it takes. You have to make a lot of sacrifices on how you spend.
FIRE can also be difficult if you’re single because you don’t have anyone to split the
bills with. Having kids is also another financial hurdle to early retirement.
The movement, however, has also garnered a reputation of being too overwhelming
and intimidating since many followers take extreme measures to save fifty to
seventy percent of their income annually to reach their goal. While, financial experts
usually recommend that you save fifteen percent of your income each year so you’re able to retire
by the traditional age of sixty-five. Because of their desire to retire early,
many participants won’t be able to take full advantage of employer-sponsored retirement plans
such as a 401(k). They may or may not be able to take advantage of plans such as an IRA, depending
on whether they earn income in retirement. Instead, they’ll need to save in taxable
accounts or in accounts such as Roth IRA, both of which offer access to cash without any penalties.
And there you have it guys; let me know what you think.
Is FIRE something that you would consider? Drop a comment down below.
With that said, have a great day, and see you in the next one.