Even with our current economic difficulties brought on by a global pandemic, past generations of Americans would clamor for the financial opportunities many of us take for granted each day. For example, while “retirement” is very much a financial goal to be obtained in today’s society, it wasn’t even in the realm of possibility for Americans before the late 1800s.
Today, not only is retirement an attainable financial goal, but many Americans have successfully devised a way to do so even earlier than the traditional retirement age. That’s right, this movement, dubbed the FIRE movement, which stands for “financial independence to retire early,” has motivated many Americans to not only work towards retirement but to get there even earlier in life than they ever thought possible.
It is this movement we are going to look into today. What it is, and how to implement it into your current financial plans, along with how to use its principles to make positive financial changes in your life. Now, on to the topic at hand:
What is The FIRE Movement (Financial Independence Retire Early)?
We will look at the movement in small bits, broken into the letters that make up the acronym FIRE. First up, let’s consider the meaning of FI:
FI: To properly quantify this movement, we first have to consider financial independence. What exactly does financial independence mean? Although there are many definitions, the best way to sum up true financial independence is to be free from worrying about money.
For some, financial independence is only achieved after paying off debts. For others, it could be defined as the moment in time they no longer have to work to earn money.
RE: This part of the FIRE acronym stands for retire early. While you might consider this element of the movement easy to define, there are actually differing opinions on what it means to retire early.
For example, for some individuals retiring early means stopping a job as in they never again go to work and clock in anywhere. Others consider retiring early to mean that they continue to work without the need for income. In other words, they enjoy their jobs and continue to work but no longer need their income to pay bills or purchase life’s necessities.
FIRE: When you put these two parts together, you get FIRE as in the FIRE movement. However, while the focus involves financial optimization, it could more accurately be considered a life optimization movement. Central to the movement is the question “what makes you happy?”. After answering that question, you will ideally align your saving and spending habits to cultivate that happiness. It is in this mindset that the FIRE movement found root. In fact, it integrates philosophical and psychology concepts from other notable movements like Buddhism and Stoicism. In this way, the FIRE movement is a personal journey that you go through on your own and is very individual to your own personal goals and preferences. With that being said, there are some facets of the movements that have remained somewhat constant for everyone. They are outlined below:
- Lean FIRE: If you ascribe to the lean facet of the movement, this means you are extremely frugal and usually live on less than $25,000 yearly.
- Fat FIRE: This category includes individuals who like to spend money and plan to make 6 figures in retirement.
- Side FIRE: If you fall into this facet of the movement, it means your side hustle is successfully generating enough money that you now enjoy a good income from it.
- Barista FIRE: This includes individuals who retire early per the FIRE movement but still supplement their income through a part-time job or continue to work only to garner needed health insurance benefits.
While those are the most common facets of the broader movements, more categories pop up daily. Therefore, if you don’t fit any of the above categories, no worries, you can simply create your own path. That is what’s great about the movement, it is very unique to each individual. It fits everyone!
How Did The FIRE Movement Begin?
The origin of the FIRE movement is contested and debated among participants, critics, and experts. There are two accepted origin stories. One theory is that the term first appeared in a Motley Fool forum back in the early 90s. However, most experts agree that the true origin of the movement we now know found its beginning in 1992 with the publication of Your Money or Your Life authored by Vicki Robin and Joe Dominguez.
The book introduces a simple yet innovative and game-changing idea that being that when you work for something you are in essence trading your life energy for that money. Therefore, instead of considering items in terms of their monetary value, such as this item costs $5 or $200, you would quantify it in terms of how many hours of your life you would give up to earn that much money. So, you would say that item costs five hours of my life or 30 minutes, etc.
It places a greater emphasis on how you live life and how you think about possessions or items than it does with making financial changes. Of course, it does include that as well, which we will get into next.
How to FIRE: Steps to Follow to Embrace the FIRE Movement
Step 1: Consider what kind of life you want. This movement differs from other financial strategies in that it isn’t about money at all, but it’s about time. Therefore, the first step of embracing the movement is to define within yourself what it means to live a good life. What does that look like for you? Ask yourself this question and write down your thoughts. Come up with the 10 things you love most about life or you enjoy the most.
If you are like many people, you will quickly determine that the aspects of life that make you the happiest are often those that cost the least. You might enjoy spending time with your children, playing fetch with your dog, hanging out with your friends, etc. All these “things” are free or inexpensive. When you see that life is really about much more than possessions or income, you can start making different financial choices that reflect that understanding. No longer will you find yourself fighting for that next raise with long hours or even trying to save everything you make. You will realize life is about more than money.
Step 2: Do the math, how much do you really need to live on? How much money will it take for you to live the life you want, the life you just defined in step one? Do you really want that luxury sports car, or would it be better to start saving money so you can spend more time doing the things you love?
Here’s some math to consider: if you save $5,000 a year, and invest this money correctly with a compound interest rate of at least 6%, you would have earned $433,000 in 30 years. This amount won’t be nearly as much as it is today, though, 30 years down the road, not to mention the fact that you will have to pay taxes on the income. If you adjust that number, allowing for an annual inflation amount of 2% and a tax rate of 30%, your new number is down to $170,000. This isn’t nearly enough money to retire.
Most traditional wisdom states that you should aim to bank 25x your current annual expenses. When you do this, your number to aim for would be much closer to $1,250,000, much more than the $433,000 mentioned above. This is based off living on a $50,000 annual retirement income.
Step 3: Save towards your passions. Doing the math on what you need to be saving to retire early can lead to a bit of shell shock. However, saving doesn’t have to be a sacrifice if you change your mindset. Remember, this movement is about life optimization. The only way to embrace the FIRE movement is to save as much money as you can and invest it along the way so that you can live your best life. In fact, some participants of the movement adhere to a 50% saving/investing rate. (Your saving rate is the amount in percentage form of your income you are saving.) Aim to get your savings rate to 20%, 30%, or even 50% to fast track your retirement.
To save this amount of your income, you have to make some spending changes. There are several ways to do this by altering your life priorities. For example, most Americans spend around 70% of their income on food, transportation, and housing. If you can take this number down to say 25%, you can increase your savings rate by 25% or more, and that is just one change. Therefore, to save more, you cut back on spending by reducing your cost of living and invest the difference.
Step 4: Use good debt, pay down bad debt. Some people feel that debt is always bad and that simply isn’t true. There is both good and bad debt. Some debt reduces your income, costing your money, some you use to create income, or make money with.
Good debt includes your mortgage, or any loans used for investing in real estate. Bad debt includes consumer debt like credit card bills. Ideally, as part of the FIRE movement, you want to pay your bad debt off. Work on the one with the highest interest rate first, then move to the next one, paying what you were on the first debt against the second. This “snowball” effect will irradicate your debt as quickly as possible.
Step 5: Build new skills, get a raise, improve your full-time income. There are only two notable ways to create margin in your current financial plan. One, increase your income. Two is to reduce debt. We just went over debt reduction, now we will consider increasing income.
You can increase your income by asking for a raise. Even a small increase can help you over time. In general, most people are underpaid and deserve a raise, so you likely are due for one anyway. Might as well ask. If you need to learn some new skills to qualify for a promotion, you can always do that as a way to “earn” your increase. There are many strategies you can use when asking for a raise.
Step 6: Start a side hustle. If asking for a raise or getting a deserved one isn’t possible for whatever reason, you can instead create extra income through a side hustle. You can then choose how much you want to work and when in order to generate a bit of extra income doing something you love.
Step 7: Invest. No matter how disciplined you are, there is likely no way to build wealth through saving alone, without investing. You can invest in stock bonds but can also invest in real estate. It’s a good idea to combine short term and long term investing as well.
Step 8: Track your investment performance and net worth. To stay on track with the FIRE movement, you need to determine your net worth. Do this by subtracting your liabilities or debts, like credit card debt or student loans, from your assets, which is anything of value. This will allow you to track your progress within the movement and make any necessary adjustments to your strategies.
Step 9: Build good habits, one day at a time. As with many good things in life, financial freedom and retiring early takes a great deal of focus and continued execution. Consistency is far more important than any other aspect. After all, you can’t expect to follow these steps for just a few months and enjoy lasting change. No, the FIRE movement takes consistent focus for years. If you waver from the plan, don’t just throw your hands up in defeat, instead just regroup, refocus and begin again to follow the FIRE principles to get back on track.
Living the FIRE Life
When you embrace the FIRE movement, you will be living differently than most Americans. Most of your peers, family members, and friends will spend more than you, with little thought of their future. You are embracing a different kind of life, one that places life experiences and quality of life over simply earning a dollar. While it does take an income to retire early, when you live with less, you begin to see that all those “things” weren’t really as valuable as you once thought anyway, and you won’t even miss them. Then, eventually, you will be able to retire early, much earlier than your peers, and reap the bounty of your harvest.
Dave Ramsey, a well-known financial expert once said, “to achieve financial freedom and live like no one else then (meaning retiring early), you have to live like no one else now (meaning saying no to the bigger house and eating out in order to save and invest more of your income). It’s important to keep this in mind when those days come where it’s tempting to give up, throw in the towel and just “live like everyone else.” Keep the faith and the FIRE and you will enjoy a life like no other.