Financial Independence, Retire Early (FIRE)
What Is Financial Independence, Retire Early (F.I.R.E)?
Financial Independence, Retire Early (FIRE) is a movement dedicated to a program of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow. By dedicating up to 70% of income to savings, followers of the FIRE movement may eventually be able to quit their jobs and live solely off small withdrawals from their portfolios decades before the conventional retirement age of 65.
Of course, FIRE isn't a surefire plan, and extremely high rates of saving at the expense of current quality of life and lifestyle should be considered.
- Financial Independence, Retire Early (FIRE) is a financial movement defined by frugality and extreme savings and investment.
- By saving up to 70% of annual income, FIRE proponents aim to retire early and live off small withdrawals from accumulated funds.
- The FIRE movement was born from a 1992 book "Your Money or Your Life," written by two financial gurus.
How Financial Independence, Retire Early Works
Borne out of the 1992 best-selling book “Your Money or Your Life” by Vicki Robin and Joe Dominguez, FIRE came to embody a core premise of the book: juxtaposing expenses and time spent at work against hours of your life. Every expense is compared to the time spent at work in order to earn the purchase.
If you are already sold to the idea, then let me start.
Know the basic of personal finance. Before you follow F.I.R.E., you should atleast be aware of the big ideas of personal finance / financial independence. Make sure you know your expenses, have eliminated most of your debts if there is any, and is willing to reduce your expenses to increase your savings.
Income doesn't matter, savings rate does. Instead of monthly net/gross comparison, ask how much is the savings rate? Don't be discourage because someone posted saving 20k/mo. If that particular person is earning 100k/mo, then he/she will be ready to retire after 37yrs at 20% savings rate. On the other hand say someone is saving 15K/mo on 25K/mo earning, saving rate is 60% and retirement is only after 12.5 years. For more info about the assumptions used, see shockingly simple math behind early retirement by MMM.
Set milestone according to your annual net. The popular trend is saving 1M, I'm not saying this is wrong - just not for everyone. For the following example I am only considering savings here without investment to simplify the comparison. (A) If your earning 20k/mo with 50% saving rate, this will be an 8yrs+ journey. (B) While for someone earning 50k/mo with also a 50% saving rate, it will only take 3yrs+. Don't you agree 1M will be overwhelming for (A)? Sometimes maybe even discouraging. Why not choose your own milestone? I suggest for (A) 250k and for (B) 650K, these are their annual income respectively (roughly estimated with 13th mo. bonus, excluding other allowances and incentives). Gauge your milestone with your own income capacity.
Savings will not bring you FI, investment will do. This one is a no brainer but I wanted to include since I am seeing a lot of savings only post. After inflation, your money will decrease its value over time if you just leave it on your savings account. Investment will save your funds buying power and even offer higher rate if you just choose the right option for your need. Play with this fire calculator to crunch your own numbers.
KEY TAKEAWAYS
- Savings rate will only help if all those are invested on your retirement fund.
- One can FIRE faster by increasing income through side hustles.
- Avoid lifestyle creep - while your income may increase in the future, maintain your current level of expenses.
- The trinity study (also known as the 4% rule) conducted decades ago suggest that if you only withdraw that percentage per annum from your nest egg, you will never run out of money no matter how long you'll live for retirement. Some argue for 3% as the new safe withdrawal or equivalent to having 33X your annual expenses instead. But minimalist/frugalist still believes with 4%.
Don’t Do F.I.R.E. Just to Escape a Job You Hate
You might be drawn to the F.I.R.E. movement if you hate your job. After all, only 31% of Filipino workers say they’re engaged at work. So it’s no wonder that a growing number of young workers are dreaming about leaving the workplace altogether.
But there’s a deeper problem that lies beneath the surface, and F.I.R.E. isn’t going to solve it. If you hate your job, you don’t need F.I.R.E. What you really need is a new career path. My friend Ken Coleman calls it “finding your sweet spot.” That’s the place where your greatest talents and passions intersect. Even folks who follow F.I.R.E. will tell you that!
If your sole desire is to retire early so you can escape going into work on Monday, you’re going to be disappointed. Life is too short to waste decades or even one year working a job you hate.
What We Can Learn From the F.I.R.E. Movement:
- Start Dreaming and Planning for Retirement
- Find Ways to Keep Your Expenses Low
- Look for Ways to Boost Your Income
- Make Saving and Investing a Priority
These contents are from Dave Ramsey and r/phinvest. I do not own any of these contents, I just simplified them in my blog for my audience.