How To Be Financially Independent: FIRE For Beginners

FIRE ….. Financial Independence Retire Early

How to be financially independent. It’s one of the ultimate goals, isn’t it. You may have heard of this new trendy thing called FIRE. It’s a huge movement of people who are 100% committed to doing all that it takes to get to the stage in their lives where working is optional. Forget waiting until you’re 65, 70 or even older to quit your job. There must be another way right? Well, FIRE just may be it.

FIRE Simplified

The average person works all of their lives, saves along the way and hopes that when they reach their retirement age, commonly around 65, they have enough in their retirement fund to be able to live a reasonably comfortable life for the next 20-plus years.

Well, what if I said that you could instead retire in your 30’s or 40’s? I’m thinking that I wish someone had told me about this magic decades ago.

This is what many people claim to have done by making some tough changes to their lives, cutting their spending dramatically and investing wisely to then be able to quit work or work on their own terms.

This guy has done it. He is known by his blog name, ‘Mr Money Mustache. Pete Adeney retired at age 30 and has been working hard ever since to inspire his FIRE followers. Check out his blog. https://www.mrmoneymustache.com/

How To Be Financially Independent?

The key is to get to your ‘FI number’ (Financial Independence number). This is the amount that you need to have saved and invested in order to live off of the investment returns for the rest of your life.

You’ve probably heard of the idea of ‘living off the interest’. This is much the same. If you have enough money invested then you can in theory live off of the investment returns (such as dividends and appreciation of the investment) for the rest of your life, without your investment ever diminishing.

Now, if your costs of living are extremely low then this is an easier number to get to. So how do you know when you have reached ‘the number’ and can tell your boss where to shove your job?

The Magic Number Calculation

Based on some assumptions about how the stock market has performed throughout its history as well as taking into account inflation, FIRE advocates have calculated that you need to save 25 times your current annual living expenses. This will allow you to withdraw around 4% each year to live off.

So if you are living off of $50000 a year now, then you need to reach $50000 x 25 ie. 1.25 million dollars. If this is invested in an index fund (basically a fund representing the average of all major stocks on the stock market) then withdrawing 4% each year allows you to have that $50000 without your investment diminishing at all. 4% of 1.25 million is $50000.

What’s The Catch?

Catch Number 1

Most people won’t have enough in their ‘retire early’ fund unless they can save over 50% of their monthly income. This is tough. So frugality really is key and some people just couldn’t do this. Obviously, high-income earners who can suddenly become super frugal have a better chance.

An example.

Let’s say that you earn $100000 per year and save $50000 that you invest. If your investment was to return 8% per annum (which is about the average for the stock market throughout history) then you could reach your magic number in less than 14 years. So if you started at 20, you’re retired at 34. But who makes $100000 at the age of 20? And who can save 50% of their income?

Catch Number 2

There is a reliance on the stock market and the consistent earnings of index funds. The market hasn’t exactly been averaging 8% lately. Compound interest can add considerably to invested earnings if given time, but if the stock market falls then the amount of time needed to reach FIRE may increase.

Other Criticisms

The whole concept is based on delayed gratification. For most people striving for early retirement, it will mean living a frugal lifestyle for up to 20 years just to stop working early. You then need to continue to live this frugal lifestyle or risk your savings slowly evaporating in your later years.

Numerous books promote the benefits and opportunities presented by FIRE. These include “Your Money or Your Life”, “ The Simple Path To Wealth” and “Financial Freedom”. But others criticise the delayed gratification and the “slow path to wealth’ strategies. These include “Millionaire Fast Lane” and “Die With Zero”. The argument is generally around the benefits of enjoying life more in the younger years and that the ‘slow lane’ is less effective compared to seeking riches earlier in life.

I will also add that there lies an assumption that everyone hates their job. Many people are actually quite happy in their working lives. In fact, many delay retirement in order to keep working despite having a large enough nest egg for retirement.

Why I’m Still A Fan

Fan Point Number 1

This FIRE idea is at least getting people to think about what it is that really makes us happy. Clearly, working in a job that lacks satisfaction isn’t making anyone happy. Are consumer goods making us happy? Do expensive cars make us happy? What about big houses? What if the things that we work for aren’t actually worth the pain and suffering that our jobs can bring? The parable of the investment banker and the Mexican fisherman is a great way of thinking about this. It’s a little long to add so read it here if you are interested.

Fan Point Number 2

I actually think that we could all find ways to cut back on our spending if we just changed our priorities a little. The minimalism movement shares some values of the FIRE movement here. If we could just find satisfaction without expensive consumer goods like huge flat-screen tvs and new smartphones every year then we could up our savings ratio a little. And if we weren’t worried about having the nicest car on the block, then we wouldn’t have such high monthly bills to pay. Unfortunately, as our incomes increase we fall victim to lifestyle creep and simply find ways to spend more.

Fan Point Number 3

Another point that needs to be made is that even though FIRE stands for Financial Independence Retire Early most people who are on this path are adamant that they actually don’t really want to retire early. They just want to be able to quit the job that they hate in order to pursue the things that they love.

Most prominent FIRE advocates are continuing to work in some form and in some cases are making more money now than before they technically ‘retired’. So a more accurate description is to just refer to the FI part.

Fan Point Number 4

FIRE has made people more aware of the benefits of saving and investing wisely

What Exactly is FI Though?

Financial Independence

 I’ve also heard this referred to as FU money. This means that you are able to live without reliance on a traditional job. Hence you could say to your boss ‘FU’. If you wanted to that is. Most likely you’re living off of your investments, savings and maybe some ‘side-hustles’. Maybe you can work when you chose and maybe you can take a holiday for as long as you like. Sounds pretty good to me.

Though some have suffered and sacrificed and managed to get to their number in their 30’s or 40’s, I think a more moderate goal of being able to plan to retire in your 50’s is a great idea. This is a goal that we can all strive for. Financial independence should not be something reserved for the super-wealthy. It should be achievable for us all. We just need a plan. FIRE at least provides such a plan. It could be modified to suit each individual situation.

Key Takeaways On FIRE

For those that have achieved it? Good for you.

For those working towards it? Good luck. May your journey be as enjoyable as possible.

Like everything in this world, it is important to learn as much as we possibly can about all of the opportunities that exist. We should all be working towards how to become financially independent. 

When people put forward new ideas, we should consider these, research, ask questions and chose what’s right for ourselves. Personal finance is after all ‘personal’. We all have our own paths to tread and I wish you all the same success.