Dreaming about leaving your job, spending your days doing what you want to do, living on a remote island, or traveling the world? What if you could have all of these things – and soon? Americans in their 30s, 40s, and 50s are embracing the “FIRE” movement so they can do just that. Here, we explain the FIRE movement so you can decide whether this is a financial path worth pursuing.
What is FIRE?
FIRE stands for “financial independence, retire early.” Essentially, it boils down to combining the following elements to reach financial independence so you never have to work for money again (unless you want to): extreme savings, frugal living, and low-cost index fund investing. When you reach the point where you no longer have to work to support yourself and the money from your investments pays for your daily expenses, you have reached FIRE.
The Rules of FIRE
By spending less than you earn and investing the rest, you will be on your way to achieving FIRE. Let’s delve further into the rules of FIRE to show you just how to do that.
1. Get Out of Debt
If you currently have debt, that does not mean FIRE is not for you, but you do have to get out of debt as the first step on your journey to FIRE. If you need help paying off your debt, consider reaching out to a debt relief company for help. They can point you in the right direction and help you get pay it off, whether that involves enrolling in a debt settlement program, credit card consolidation, or any number of other debt relief options that are out there.
2. Cut Your Expenses and Increase Your Income
After getting rid of your debt, you need to understand where you stand so you can begin to cut back and save. Begin by tracking your monthly expenses so you know exactly what you are spending money on. From there, you can analyze what expenses are necessary and what you can cut.
To achieve FIRE, most people are ruthless when it comes to saving and cutting expenses. Those who are devoted to achieving FIRE usually go all-in, which means cutting back on as much as possible today to achieve their independence in the (short-term) future.
Here are just some of the ways you can cut back on your expenses on your way to achieving FIRE:
- Lower your housing costs.
- Use public transportation and sell your car.
- Get rid of cable and streaming TV.
- Switch to a low-cost cell phone provider.
- Cut back on eating out and overall food costs.
Lastly, cutting back on your expenses and saving can only get you so far. If you want to achieve FIRE as soon as possible, consider getting another job, picking up extra shifts at work, or starting a side-hustle business to boost your income. The more you earn, the more you can save.
3. Low-Cost Index Fund Investing
While you can do whatever you want with your savings, the fastest way to reach FIRE is usually to invest your money in low-cost index funds. As opposed to leaving your money in a checking account, which will earn little to no interest, a high-yield savings account, which might earn you 2% interest, investing in broad market index funds (where you invest in a slice of the whole market) will traditionally earn you a much higher rate of return
Over the long-term, investing in index funds could earn you an average of an 8% return, although this varies by year, as sometimes it is much less (and you might even lose money) and sometimes it is much more. That is why those in the FIRE movement rely on living off of their investments, but do not assume a high rate of return every year. Below, we explain how this works.
What is the 4% Rule?
So you have been saving and investing in index funds. When will you know you have reached FIRE? Those in the FIRE movement invest in index funds and achieve FIRE when they have twenty-five times their annual expenses put away in investments.
Twenty-five times your annual expenses in investments is the number those in the FIRE community cite when they talk about how much you need to access the “4% Rule.” Studies have shown that you can withdraw 4% of your assets during every year of retirement, no matter when you retire, and you will very likely not run out of money. Essentially, you will be able to live off of what you withdraw and never have to earn another dime.
While this number is never guaranteed, and your money could run out even if you do follow the 4% rule, it is the benchmark used for those in the FIRE movement. If you are more risk-averse, you could save more than twenty-five times your annual expenses, and if you are less risk-averse, you could save less.
Know What You are Working Toward
Probably the most important thing to know before beginning FIRE is what you are working toward. What is your retirement goal? When do you want to retire and, most importantly, how much do you predict your annual expenses during retirement will be? All of these things are essential to know when you begin your journey so you know what you are working toward. While these goals and figures can evolve, you cannot reach FIRE if you are guessing what your annual expenses will be during retirement. If you do that, you will never be sure you have saved enough and are ready to retire.
Why Choose FIRE?
The FIRE movement brings so much more than the ability to leave a job early. Most people do not pursue FIRE just so they never have to work again but rather so they pursue FIRE so that they can choose to work on what they truly enjoy, regardless of how much money it makes.
FIRE is all about choice. It allows you to choose where to work (if at all), where to live, and how much time you get to spend with your loved ones, without having to worry about how to afford it all. And the best part about joining the FIRE movement is that if you decide not to retire early, building these good financial habits that go hand-in-hand with FIRE means you will be setting yourself up for a successful retirement, no matter when that is.