What You Need To Know About FIRE: Financial Independence, Retire Early

Years back, retiring at age 50 was considered early retirement; however, a new movement is changing the narrative. The idea of retirement is taking a new shape. People are tilting towards the idea of retiring early. This new movement is called FIRE (Financial Independent, Retire Early). The primary drive behind this movement is the desire to retire in your early 30s and 40s [1].

What is FIRE about

The idea behind the FIRE movement stemmed from the book Your Money or Your Life authored by Vicki Robin and Joe Dominguez. The view was reiterated in the book Early Retirement Extreme by Jacob Lund Fisker. These books explain the fundamentals of the FIRE movement. The movement started in 2011 when Mr. Money Mustache’s blog showed interest in the idea of achieving early retirement by being very frugal with one’s expenses [2]. His interest promoted the movement, and over time, several blogs and podcasts also showed interests and supported the movement.

Most people interpret that financial independence is being able to afford the most expensive things anytime you feel like. This notion is false because most of these things require more than the kind of money most people will have in their lifetime. A more realistic view of financial independence is to have enough money to finance major life decisions based on your wants, not your needs; for example, having enough money to quit your job to start a business.

According to Investopedia, “The FIRE movement is a program of extreme savings and investments that allows proponents to retire far earlier than traditional budgets and retirement plans would allow.” [1] If you want to retire early, a certain level of financial independence is needed. Saving from your annual income is one of the ways to attain this but sometimes it might not be enough. Most people who are into FIRE do more than save money; they involve themselves in several things that can bring them more money and that can sustain them for the rest of their life.

Furthermore, there are different principles involved in the FIRE movement. One of them is saving as much as you can by reducing your expenses and increasing your income. The FIRE unwritten rule is that you should save 25 times your expenses in a year [2].

Types of FIRE

There is no one way to go FIRE, which is why there are different plans to fit your goals. Everyone has a different view of how their retirement should be. Some will like to travel the world, while some will want to be involved in serving the world around them. Whatever retirement desire you have in mind, there is a plan for you thanks to the FIRE mindset.

2.1 LeanFIRE

This type of FIRE is for those who want to retire as early as 35 to 40. As the name implies “Lean,” it is an extremely minimalist lifestyle [2]. You will have to give up a lot of luxury to get lean. People who are into LeanFIRE are incredibly frugal with their expenses. They can go as far as living in a Van to cut out the costs of living in an apartment. They can deny themselves a lot of pleasures like going out to dinner, going on vacation, or buying expensive clothes. They will instead grow their food, make their clothes, and do a lot of DIYs to cover up. Raising a child can cost a lot of money, so, some leaners free themselves from it by not having children. LeanFIRE sounds exciting; however, could seem unrealistic because most people won’t be able to keep up with this lifestyle.

2.2 FatFIRE

The FatFIRE sounds exciting, but only a few people can achieve it. It’s hardly possible to achieve because it’s like eating your cake and having it too. FatFIRE advocates being able to retire early and living large throughout your working years [2]. People who are into FatFIRE live in expensive houses in expensive cities, wear the best designs, eat at five-star restaurants and go on expensive vacations. To achieve FatFire, you need a career that will pay a tremendous amount of money throughout your working years. You will also need a significant investment portfolio and multiple streams of passive income to maintain your lifestyle. It might be worth considering to have investments like real estate and dividend stocks.

2.3 LMMFIRE also known as ListenMoneyMattersFIRE

This type of FIRE is recommended because it is easily achievable. LMMFIRE advocates separating your time from your income to achieve financial independence. This means having multiple ways of making money that requires little to no effort from you [2]. You might put in some work at some point to get it going, but when the work is finalized, it will require very minimal effort to keep it going. You can’t just sit by and watch the income roll in, that is why you need a side hustle to be fully involved in LMMFIRE.

2.4 BarristaFIRE

This type of FIRE is a partial retirement because you have to work part-time to cover expenses that might exceed your retirement budget. For example, we all know the cost of healthcare can be draining if you are without insurance. Financing some expenses might be out of your retirement budget; this is why being into BarristaFIRE sounds like the right solution [2]. An exciting thing about it is that you will have a job, colleagues to interact with but you are not laboring for up to 40 hours per week or more. Some jobs that you can have with BarristaFIRE are working at a golf course, being a bartender, doing bike deliveries, even being a dog walker, or any other part-time job [3].

2.5 TBDFIRE

Little from here, little from there is what this type of FIRE entails. TBDFIRE means you create your kind of FIRE based on what works for you. You put your values and goals into consideration while creating it, and you ensure it aligns with them [2]. For example, you might not be able to keep up with LeanFIRE for ten years, but you can do it for a few years and save as much as you can. A few years after retirement, you can switch to BarristaFIRE because you will be bored from not working for a long time.

Most people perceive FIRE as more than a retirement plan but an escape route. For people with no kids and double income, FIRE can be easier to attain than someone with a single income and kids. The FIRE principle can work for everyone. Even if you don’t achieve it, you can improve your financial life by adopting it.

How to start FIRE

YYou will need to practice the three significant components of FIRE if you’d like to achieve early retirement and financial independence.

3.1 Extreme Frugality

Being frugal has a different meaning to everyone. It can mean living in a van for LeanFIREs, cutting down on some designer wears for FatFIREs, or spending less than your income for most people. Whichever type of FIRE you are, you will need to spend a lot less than you make so you can save more money. For example, if you are 25 and would like to retire at 40. You will need to save at least 65% of your annual income. Usually, housing cost is the most significant expense for a lot of people, so maintaining your housing cost at the lowest is an excellent way to get your FIRE started [2].

3.2 Invest

You have to invest and put your money in the right places to FIRE. You need to use the tax-advantage on a retirement account to your benefit. However, retiring doesn’t mean you can access all the money in your retirement account. You can only access it when you get to a certain age, taking it before then attracts a penalty [2]. Money kept in a retirement account has to be left in there until you attain the age you can withdraw it without penalty; this is why you will most definitely need cash in an investment account to sponsor your expenses till you reach that age.

3.3 Don’t stop stashing

You have to develop the habit of always saving money. For FIREs, an emergency fund is necessary. Once you start FIRE, you have no choice but to keep saving and investing [2]. You will need all the money you can get since you won’t have a steady stream of income after you retire.

Weaknesses of the FIRE movement

The FIRE movement is built on strong financial discipline. It is only achievable if you are disciplined enough to put aside a large percentage of your savings for future purposes. FIRE might sound like a perfect plan, but it isn’t devoid of few glitches.

4.1 Income and expense differences

FIRE can only work well for someone with a vast income and little expense [4]. For someone who earns little and spends more, it will be tough to attain the financial independence the movement promotes.

4.2 Full-time work criticism

The philosophy behind FIRE makes it look like full-time work should be avoided as much as possible, so you should leave it as early as you can [4]. However, this is not true because a full-time job can be great for your finances.

4.3 Not exploring the potential of long-term income

FIRE focuses more on saving your income than increasing your income [4]. For instance, if you have $50, you will focus more on keeping it than exploring options that can increase it to $100.

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Cheat Sheet and Key Takeaways

  1. The FIRE movement started in 2011, it is the acronym for Financial Independence, Retire Early.
  2. Being in a state of financial independence means that you can finance major life decisions based or your wants and not your needs.
  3. There are many kinds of FIRE philosophy from the easiest to implement to the hardest one.
  4. Starting your FIRE journey implies learning to be frugal, to save money and to invest your money wisely.