It’s both interesting and terrifying to write an article about a topic that has an almost cult-like following. In fact, this is my only post to date that has taken me multiple days to write. Why? I really want to do the topic justice because I feel like it has the power to actually change lives. The acronym FIRE stands for Financial Independence Retire Early. I wanted to write a resource explaining everything you need to know about FIRE to understand what it is, decide whether it’s right for your life, and how to get started. So yeah, no pressure at all!
Everything you need to know about FIRE (Financial Independence Retire Early)
How would you feel if I told you you could retire within 10 years with enough money that you could live however you wanted for the rest of your life? Do I have your attention yet?
I’m no stranger to the concept of FIRE. As I explained in my post on Why you should start a blog, my roommate and I discovered a blog called Mr Money Mustache (arguably the most popular FIRE writer around) about 2 years ago. We were both casual dietitians at the time (also known as “broke”) and the blog blew our minds. Retire at 30? Never need to stress about money? We sat around for way too many hours drinking coffee and discussing articles we had read. I learned so much from a stranger on the internet, and it planted a seed I’ve never managed to shake.
There was only one major problem: I’m not naturally frugal like he is. For me, it has taken conscious effort to cut down my expenses. Do I regret it? Not at all.
Fast forward two years to today. I have been reading a fascinating book this week by Scott Rieckens called Playing with FIRE. In it, one family dramatically changes their lifestyle in the pursuit of FIRE. They started out spending ~$10,000 monthly on their California lifestyle (which shockingly didn’t even seem lavish to them!). They found FIRE as the solution to their problems after deciding they wanted more time for creative pursuits, outdoor activities, and moments with their daughter but were unsure of how to afford such things.
I found their story refreshing, because it wasn’t easy for them at first. There’s something impressive about people overcoming their natural tendencies to pursue a life more in line with their actual values. Once again my brain went into overdrive wondering whether FIRE could be for everyone?!?
So what is FIRE?
FIRE means having enough passive income to cover all your bills so you never need to work to pay for your living expenses. Like all the best financial advice, it is simple but not necessarily easy. I will explain later in this article how it is actually achievable for almost everyone, but I need to make one thing clear: You will need to make changes from how you’re currently living.
Mr Money Mustache explained the average way of living so incredibly well that I’m going to quote him verbatim:
“We trade most of our free time for money by working the highest-paying job we can find, but then we trade most of this money for the most expensive stuff we can possibly afford, in most cases even borrowing or leasing this stuff so we can claw our way even higher up the luxury scale when we get the chance. In the likely event of a money shortage, we assume we just need to go out and earn even more of it. And when this causes an even worse shortage of time, we just strap in tighter and reward ourselves with a few of the finer things in life- because if we’re going to work this hard, we should at least get to see some of the rewards. Stop it. It’s a trap- all of it!” Mr. Money Mustache in the foreword to Playing with FIRE.
The math behind FIRE
So, how do you know when you are financially independent (FI)?!
You’re FI when: you have enough assets to support your expenses.
What’s the secret number?
Most experts consider you financially independent (aka you no longer need to work!!) when you have saved 25x your yearly spending.
FI when assets= expenses/0.04= 25x expenses
I explained the math behind this “secret number” in my post on how much you need to retire. If you’re new to the 25x rule, check out that post before continuing with this one. It will also help you determine how to calculate your yearly expenses.
In short, it’s based on the Trinity Study where they showed 4% is a safe withdrawal rate of your investments to never run out of money.
As an example, if you spend $25,000 a year like MMM, you’d need $625,000 to be financially independent.
How the heck do you want me to save up 25x my yearly expenses? Do you know how much I spend in a year?!?
Remember when I said that FIRE was simple, but not necessarily easy? That’s why.
The math behind financial independence is very, very simple, but the lifestyle changes can be hard.
As MMM explains in his post, the amount of time required to reach FI depends on only one thing: What your savings rate is as a percentage of your take-home pay.
So essentially the only two factors that matter are 1) what you earn versus 2) what you spend. [Isn’t that essentially true for all financial advice? Maybe instead of rolling your eyes that means you should actually start paying attention to it?]
As Liz Thames of Frugalwoods explains: “There are three basic elements to FIRE: time, expenses, and income. The goal is to put space between expenses and income. How much space you put determines how much time it takes you”.
In the simplest of examples, if you spend 100% of what you earn you will never be able to retire (you’re saving nothing).
What about the areas in between 0 and 100?
[If you’re curious about the math behind the chart above, read how many years does it take to become financially independent by Doug Nordman. I double checked his calculations because I’m a nerd, but left the formula out of this post for simplicity. I promised my blog would be fun, and I’m not sure everyone finds exponential formulas enjoyable…..]
So if you save the typical 10-15% of your income that most financial guides recommend, you’ll be able to retire in 40+ years.
Want to retire sooner?
Following FIRE principles can be the way to do it. However, I think there are some VERY important points about FIRE to note first. I would like to dispute 5 common misconceptions, because I just know a few of these excuses/thoughts have popped into your head.
1) No, you don’t need to be a two income household to start FIRE
Let’s use me as an example. In some ways it’s hilarious to consider myself part of the FIRE “cult ” because I have so much debt. Maybe I’m more FIRE starter versus full on FIRE? Let’s call me kindling for now. (Get it??)
However, after reading Mr Money Mustache, I dramatically changed my expenses. In my post on creating a budget I show exactly what my income and expense breakdown is. Currently, I take home ~3800 monthly and put $1150 on my student loans (and another $25 in savings). This amounts to about 31% of my take home pay, and I do not live an overly frugal lifestyle. I own a dog, live in a good neighborhood of a large city (without a roommate), buy expensive skincare (because it finally keeps my skin clear), rock climb, and go for dinner with friends. Needless to say I could still cut way back, should I want to.
If I put the debt payments into savings once my loans are gone, I can retire in ~30 years (5 years to get out of debt then 25 more years until retirement [look at chart above]).
If I increase my savings by $345 monthly, I could knock 5 year off that!! (My overall savings percentage would be bumped to 40% of my take home). I could literally shave 1/6 of my remaining mandatory work years with just over $300. When you realize the power behind the math of small tweaks, it all sinks in.
Best part? That’s if my income never changes, and I stay single forever (hopefully not). If a girl that graduated with 100k in debt and now lives on a solo casual income can retire by age 55, what’s your excuse? Which leads me to my next point….
2) Nope, it doesn’t require a high income
As with all things financial, having a high income makes things easier; I won’t deny that. One of the beautiful things about FIRE though is that what you spend is more important than what you earn. If you continue to spend all of what you make, you’ll need to stay working forever regardless of your income.
However, decreasing what you spend has dramatic effects on how much money you’ll need (and therefore when you’ll be able to retire).
In my article about making my debt feel manageable, I described how I broke my debt into $50 chunks so that I felt like smaller sums of money matter. How does $50 affect my FIRE requirements? Assuming I can decrease my spending by $50 a month, I will need $15,000 less to achieve FI. How is that possible?? Well $50 x 12 months= $600 less expenses yearly x 25= $15,000. So yes, even small amounts of money can make a massive difference in your overall financial plan. Every spending decrease benefits you twice because it frees up more money available to save, and decreases the overall amount you need to save. Double win!
3) You don’t HAVE to retire
I think this is the most common misconception out there. There’s even a new acronym called FIOR (Financial Independence Optional Retirement) created so that people are less confused. If you love your job, keep it! “Retirement” is not the end of work, it’s the end of MANDATORY work. As Jonathon Medosa explains: “it just means that your job needs you more than you need them”.
Following FIRE does not mean you hate your job! It simply gives you options in life. Want to travel for 6 months? Work part time instead? Spend more time with your kids? Start your own company? Try a new career? Once you’re financially independent you can do those things risk-free because you no longer require a paycheck. It provides you with the ultimate freedom of choice.
Still don’t believe me? Here are some quotes explaining the concept in different words:
“Financial independence ultimately means that you can shape your life without taking money into consideration”- Tanja Hester author of Work Optional: Retire Early the Non-Penny-Pinching Way
“It’s less about retiring early and more about having the freedom to pursue your dreams and ambitions”- Deacon Hayes author of You Can Retire Early!
“For me, the pursuit of financial independence has never been about retirement. I like working and I’ve enjoyed my career. It’s about having options. It’s about being able to say “no”. It’s been about having F-you money and the freedom it provides” JL Collins author of The Simple Path to Wealth (one of my personal favs)
Ok. Enough quotes. I think I’ve proven my point?
4) No, It’s not restrictive
It’s about having MORE, not less. More time, experiences, fun, sleep, freedom. The important things.
There’s a large difference between being frugal versus being restrictive. Frugality means you’re making intentional decisions about what items/experiences really add benefit to your life. It’s not about cutting EVERYTHING out.
Obviously you are going to have to make changes and learn to say no to yourself sometimes. It’s about choosing a new blueprint for your life rather than following the “societal norm”. You’ll be using your money to buy time rather than more stuff. In my experience, that has lead to less stress and more happiness.
You get to determine your own budget and priorities. For any lifestyle you might be considering (single, travel, blogging, multiple animals, starting a business, living in NYC, staying home with kids) there is someone out there following FIRE and doing the same thing. Google is an amazing resource; use it! You can definitely be frugal without feeling deprived.
5) It’s really not that “risky”
There are multiple financial writers that complain about FIRE being financially risky because people have “left their jobs”.
In a particularly painful podcast episode of “Afford Anything” featuring well-known financial writer Suze Orman, Suze describes why she positively hates FIRE. To be 100% honest, I couldn’t actually listen to the full thing. I found myself getting overly annoyed at many of Suze’s misconceptions (my ginger side strikes again!). Paula Pant, the host and an avid FIRE member, handled it really well however. Her rebuttals at the end are worth listening to!
“But what if the markets crash??” is a common theme when calling FIRE risky.
I find this hilarious for multiple reasons:
- Why are they worried about people that have previously established good financial skills, a long history of not overspending, and large savings accounts?! That seems like the definition of the least financially risky group, especially when compared to the average North American. In the case of a complete market crash (in which case everyone is basically stuffed…..) I know who I want to be like!
- Markets go up and down, sure. However, most FIRE people are only withdrawing 4% yearly as already established earlier. That’s well below average market returns.
- The 4% does not include any sort of social security or pension! That’s just bonus money.
- In most cases (refer to rant #3) financially independent folks are still doing some kind of work/making some money! If you look at Mr Money Mustache as an example he still has multiple revenue streams, and likely earns more yearly than you do.
If you’re still reading, thanks for following through until the end!!! I recognize that this was a beast of an article, but I wanted to explain FIRE fully to do it justice. I will write more posts coming up on intentional living and reducing costs, but my three takeaways about FIRE for now are:
-Disassociate your spending from your earning. There’s no rule saying you need to spend it all.
-Determine how you really want to live your life. Then pursue that.
-Make intentional choices with your money. Always consider the opportunity cost. You can only spend each dollar once.
If you enjoyed this article, I would love a comment or share!
For a list of all posts I’ve written, look here