by elmads

Introduction

Have you met or know anyone who is a part of the FIRE movement? I haven’t, but by reading about it, I personally perceive that the individuals who follow the FIRE principles have one common trait, and that is frugality.

FIRE is an acronym for Financial Independence and Retire Early. This movement started with a book by Vicki Robin and Joe Dominguez titled “Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money” back in 1992, but this movement only took off and became widely practised from 2010 onwards.

The FIRE programme teaches people how to live well while using fewer resources and committing to a programme of extreme money saving and investing in order to achieve financial independence as soon as possible.

Disclaimer: I do not follow, practice, or advocate the FIRE movement, as my personality, actions, and philosophies don’t completely jive and agree with it. This is only for educational and sharing purposes.

Its Focus & Goal

The FIRE movement seeks to retire earlier than the traditional and current state retirement age of 65–67 years old (depending on the country) where a state pension is available. That has been the standard connotation of retirement. But for the FIRE movement, retiring at a very old age is not a part of their plan, they want to leave the work force earlier than everyone else by living solely off of their saved and invested money.

The advocates and individuals who practise FIRE have a lifestyle of extreme frugality. Saving and investing most of their salary, which is approximately 70% of it. This is indeed an extreme savings rate, even for the average frugal person.

I probably need to add the FIRE individuals here who save >70% of their income and categorise them as the Divine Accumulators!😂 See below:

Types of FIRE

1. Fat FIRE – This type of FIRE is for those who have above average salaries while they are employed. These individuals can easily save and invest a significant portion of their salary (>70% savings rate—the divine accumulators of wealth), which can increase their retirement pot further and help them retire early. Their retirement pot allows them to live a luxurious retirement life.
   
   Large income, save money while giving up less.
   
   
2. Lean FIRE – Saving a significant amount of their salary is also important in this type of FIRE. The only difference between Fat FIRE and Lean FIRE is their salary during their employment lives. The latter tend to have a lower salary than the former. This is the reason why Lean FIRE individuals tend to adhere to a minimalist lifestyle while undertaking extreme frugality.
   
   Small income, save money with a minimalist lifestyle
   
   
3. Barista Fire – Is the middle ground of the Fat and Lean FIRE types. Once Barista FIRE individuals reach their goal FIRE monetary savings amount, they’ll then leave their main 9-5 work and transition in a low-stressful or part time job. The part time job will generate a residual income that could still supplement their early retirement savings amount, so that they would not need to purely rely on their savings pot.
   
   The Balance, save money and transition into a less stressful job to have a residual income.

These FIRE types are not absolute, individuals who practice FIRE can transition from one FIRE type to another. Let me explain.

An initial Lean FIRE individual can go to Fat FIRE if this person increases his/her earnings power. Or, a Fat FIRE retires early than his target retirement age, then just transition into a Barista FIRE.

These types are only to specify the common approaches to FIRE but this shouldn’t be the only basis of a person who wants to undergo this lifestyle. You can mix and match, add or subtract FIRE methods.

Always remember this, whether we follow the FIRE approach or not, financial planning MUST always be based on our own individual needs. What works for you will not work for others, the reverse is also true. “PERSONAL” financial planning.

How Much Do You Need To Reach FIRE?

Detailed Planning & Thinking

This is absolutely dependent on an individual’s lifestyle today, and his/her planned lifestyle on retirement. This is where the planning and thinking processes are paramount.

We need to know ourselves, what we need, what we want, and what makes us happy and fulfilled, in a realistic and pragmatic way.

Remember, the more we want and need, but the less fulfilled we are every time we achieve it, the more it will be hard for us to live. We’ll just always be continuously playing the rat race of life, where we’ll be forever bound in a hedonic treadmill.

Financial Independence Retiring Early is not different from retirement planning. The only difference is that FIRE participants don’t want to retire based on the conventional retirement age, which is 65 years old and above.

This is the reason why the steps I’ll be sharing to you below are completely the same with what I’ve written already in my previous articles regarding retirement planning titled, “Retirement Planning for Millennials & Gen Zs” & “Retirement Planning – The Rule of 300”

Below are the basic steps that we can use to form our initial retirement plan.

1. Understand your debts and other financial responsibilities.
2. Determine the type of retirement lifestyle you desire.
   -Our current lifestyle
   -Our planned and projected lifestyle
3. Know where you want to settle
4. Estimate up until what age you will be living your life (your life expectancy)
5. Project your possible income from today up until your retirement age

“Don’t tell me how much you need; tell me what your objectives and priorities are; by then, we will know how much money you will need to achieve your financial goals.” In this case, retirement.

–Evan Louise Madriñan

In my article, “Retirement Planning for Millennials and Gen Zs”, I explained in a step-by-step guide with examples and photographs how you could frame your mind to answer these questions.

The hardest part of attaining FIRE is the major lifestyle change. Literally, you need to save almost every penny of your earnings, while spending less on unnecessary things (mostly our wants). Not unless you’ll be able to ramp up your earnings power to the above average salaries of $70,000 yearly or reach the near top 10% earners of the world, which is >$173,000 yearly (top 10% earners income amount was taken from the study done by the Economic Policy Institute (EPI) in 2020). It is by then that you could give more monetary allocation on spending for your luxuries and wants and still able to save a substantial amount of money for your FIRE retirement pot – the Fat FIRE individuals.

For most of the time, in order to save more money, we also need to do everything ourselves and not outsource it. Below are some of the approaches you could take to save money to reach your FIRE monetary amount:

• No debts as much as possible. It’s staying away from interest payments on debts.
• Save a lot of money, as usual.
• Maximizing discount coupons when spending.
• Cook homemade food than take aways.
• Knowing how to fix our broken belongings, e.g. our home, our car, and our gadgets, and/or maintain them is important. In short, DIY.
• Making a spending plan that you’ll be able to follow no matter what.
• Learn new things that will help you make more money and save more money.
• Financial endeavours that mix both comfort and growth than doing the unpractical and excessive comfort that tilts more on hedonism.

DIY is like exchanging your time for more money. However, if you analyse some of these things, there are times where paying money for someone’s services is better than doing it yourself because our time can be spent on other endeavours that can yield a better financial outcome.

The Rule of 300

“Evan what’s this?”

You said that the steps I’ve shared previously are too complex, and you want an easier way to know your FIRE nest egg amount. Then I’ll just show you the easy way via “The Rule of 300”

• Your planned and projected retirement monthly expenses amount X 12 months X 25 years.

“Where did the 300 come from?” It is calculated by multiplying 12 months by 25 years. The number that will show up after you do the computation is the nest egg for which you’ll live your life for 25 years.

So, let’s say, for example, your projected monthly lifestyle expenses upon your early retirement would be worth $5,000.

• FIRE pot = $5,000 monthly X 12 months X 25 years
• FIRE pot = $1,500,000 – This is the amount you’ll need to reach your early retirement and the amount you’ll also be utilizing to live the 25 years of your retirement life. Take note that’s only 25 years. 

The number of years can be changed, as 25 is not a mandatory number that everyone needs to follow. Let’s say you want to reach financial independence at age 35. Then you surmise that you’ll be living your retirement life until you’re 85 years old. Then you’ll need to use 50 years (80 years old minus 35 years old) as one of your multipliers in the equation.

Therefore, using the same scenario above.

• Supposed to be FIRE pot at age 35 = $5,000 monthly X 12 months X 50 years
• Supposed to be FIRE pot at age 35 = $3,000,000

To see the full explanation of “The Rule of 300”, see my article for this.

This is indeed a good shortcut to quickly compute your approximate firepot amount. However, there is one problem with it: inflation is not yet taken into account. This is why I made an article with my own spreadsheet included, which I have been sharing freely for everyone to download. See the links below.

“The Inflation Adjusted Retirement Calculator – Part 1” & “Part 2”

Is FIRE Suitable for You?

Discipline

Are you serious enough to undergo this endeavour? A divine accumulator of wealth, saving more than 70% of your income, being efficient with spend and allocating money, and significantly increasing your earnings power are critical. You’ll be firing on all financial cylinders in this approach.

It is a way of life that is indeed extreme, even for frugal individuals. This is not for everyone, and it is not supposed to be a cool thing to do just because you see its popularity rising.

What differentiates your own financial path of success is whether or not the approach and method you use works for you.

Discipline goes hand-in-hand with your will to do things regardless of the failures, setbacks, and what society says.

Drawbacks: Discipline will always require a corresponding sacrifice. It is the opportunity cost of both our time and resources. When we focus on something, we also choose not to concentrate on other things that we could also do.

When we focus solely on accumulating wealth, the financial well-being aspect of life, then we would certainly devote less, if not no time and effort to other aspects of our well-being, such as physical, social, and spiritual well-being, to name a few.

We must always be aware of what we may lose when we focus on one thing, and if what we may have less of or lose entirely is fine with us, then we must give our all to our chosen endeavour.

There is always a price to pay for the life we choose. 

Live a life with accountability and with fewer regrets.

Investing

Securing a retirement nest egg that could support a FIRE life is vital, because saving money alone will not be sufficient enough to reach your FIRE nest egg. This is where Investing becomes paramount as it will supplement your savings. It is by making our money make more money, for 24 hours a day without any physical labour required.

That being said, the act of investing our money will not automatically spell success for us, because losing money is one of the outcomes of this endeavour.

Investing wisely with our hard-earned money entails learning how to invest and determining which investment philosophy and strategy work best for us, including behavioural, psychology aspects and everything in between. Such things can make or break our ability to achieve our required retirement pot.

To maximise the power of compound interest, a person must invest early, consistently, and for long periods of time. Let the 8^th wonder of the world (Compound Interest) take you to FIRE.

Downside: Not everyone will want to put in the effort and time to learn how to actively invest, which is completely understandable as each of us has our own unique abilities, gifts, and interests. If investing is not one of them, then we must take an investing path that does not require us to spend our precious time while still making our money work for us. Index funds are what most professional fundamentalist investors always recommend to everyone. Like John Bogle said, “Don’t buy the needle in the haystack.” “Just buy the haystack.”.

Investing in index funds removes the friction of doing the research, analysis, and investment decision. It gives anyone in the world a chance to own pieces of businesses in a specified country and around the world.

NOTE: Most individuals who live and practise a FIRE lifestyle are not active investors; most of them purely focus on strategies for saving and investing more and increasing their income. A substantial percentage of their salary is mostly invested through index funds.

“What are Mutual Funds?”, “Passive & Active Funds” & “The Power of Cost Averaging Investment Strategy”.

To Sum It Up

The FIRE movement is for individuals whose goals align with the mindset and philosophy of what the movement advocates.

It is an endeavour that most people will deem unnatural and impractical, but for these individuals, it’s more than what society thinks. It is more about them, their family, and what they aim to achieve personally.

Disclaimer: I do not follow, practice, or advocate the FIRE movement, as my personality, actions, and philosophies don’t completely jive and agree with it.

That being said, I do salute the individuals who are keen to reach such a feat, because it is a process and journey that only a tiny fraction of the world’s population will ever be able to undertake.

Do what you love, do what you want to do, and most especially do you. Provided that you do not hurt anyone in the process.

I’ll end this blog with a very encouraging comment from Vicki Robin regarding the book she wrote with Joe Dominguez titled “Your Money Your Life.” 

“The aim of the book, according to comments by Robin, is not to convey a master plan for early retirement; it is to show people how to live well while consuming less to have a more rewarding life while wasting less of the world’s resources. Or, as Robin put it, ‘If you live for having it all, what you have is never enough.’”

-Vicki Robin

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.