Have you ever heard the phrase ‘the FIRE movement’ and wondered what it is? Lately its a phrase that has made its rounds among frugal communities and among folks looking to escape the rat race. Folks much like yourselves, visiting resources like Hustle Domain and other sites. Well if you haven’t heard the term or don’t know what it means, in this post we will take a deeper dive to try and explain this phenomenon. We will explain how, if applied properly, the FIRE method can help you achieve financial freedom.
Defining FIRE
The term FIRE is an acronym for Financial Independence Retire Early. The term is quite self explanatory. It is preaching a new paradigm shift whereby it encourages its adopters to break the mold of conventional thinking. It wants you to know that you shouldn’t be planning to retire at 65 like most people do. But rather plan to amass wealth in your early years so you can retire early and live off your savings.
How Does It Work?
Well, the above introduction makes it sound simple doesn’t it? I mean, save now, play later, how hard can it be right? Well you’d be surprised at the amount of dedication and focus it takes to strap down and make something like this happen. If it were easy, everyone would be doing it wouldn’t they? But take one look around and you will see that most folks are stuck in the rut of getting a job, buying a house, working the 9-5, taking 2 weeks vacation each year and contributing to a retirement fund as their only safety net.
The FIRE movement preaches the opposite. Instead of buying a house and getting stuck with massive loans as early as you can qualify, it teaches you to live frugally. Live on the utmost minimum now, invest the rest in fast growing assets and live off the dividends later.
How Much Do You Need?
You can roughly calculate how much you will need to become financially independent by using the following equation:
Amount Needed = Annual Spending / Safe Withdrawal Rate
Where the Annual Spending is your total yearly expenses which include things like rent, food costs, bills etc. Safe Withdrawal Rate is the annual % of funds that you can withdraw from your portfolio without running out of money.
The equation below can help you figure out how long it will take for you to save the Amount Needed.
Years Needed = (Amount Needed – Amount already saved) / Annual Savings
Where Amount already saved is the money you already have in your investment and savings portfolio and the Annual Savings are the amount you are able to save each year.
Using the equations above, you can figure out how much you need to save in order to be able to achieve financial freedom and how far you are from making that happen. Those numbers ought to give you the motivation needed to become more cautious with your spending habits.
Need Motivation?
Though this may seem like an impossible task, you’ll be pleased to know that the FIRE community has been growing steadily. What does that mean for you? It means that there are others like you out there who are ready to sacrifice today in order to break free from the 9-5 tomorrow and live life on their own terms. You can find numerous articles on the FIRE movement online as well as motivational blogs like Mr. Money Mustache. Similarly the sub-reddit at r/FinancialIndependence has also seen steady increase in numbers.
At resources like the ones listed above, and money others scattered across the internet, not only can you find motivational posts but also practical examples of frugal living and tips to save your money aggressively.
Boiling It Down
It really comes down to minimizing expenses and maximizing income. If you can find a high paying job and figure out a way to eek out a bare minimum living for about a decade or so, you will be able to retire on your savings. But we are talking aggressive levels of saving here. Think, 70-80% or more of your annual take home pay. The rest of that is tucked away in high yield investment instruments such as IRA, 401(k) etc that return 8-10% returns on average. At that rate, you should be able to set aside enough money early enough where your growing investment should be able to outpace your withdrawals (to cover your expenses) and inflation.
Is This Realistic?
Depends on who you are, what is your lifestyle like, how disciplined you are with your finances and how late are you getting into the game. If you got a family to think about and you are late in your career, this maybe not be too realistic. After all, when you have to put food on the table for loved ones, all of a sudden, eating Ramen 5 days a week isn’t an option. The earlier you get into this, the sooner you can get to your goals. It also helps if your partner is also on the same page as you. So think this one through before going all in.
Conclusion
So now that you know what the FIRE movement is all about, you have a powerful option that you can exercise. Not only will help become financially independent, it will also force you to become fiercely disciplined and goal oriented. It really will be a trial by FIRE but you will love the results when you come out on the other side.