FIRE Explained: Your Path to Early Financial Independence – Simplified

The Financial Independence, Retire Early (FIRE) movement might not be a new concept. But if the movement had a leader it would be Mr. Money Mustache .

He retired in his early 30s (via index funds) and now with his annual expenses paid, he enjoys the freedom to live life on his own terms. 

Sounds epic, no? To be young, rich, and free.

Now, once upon a time you’ve might’ve been sold the standard plan: Go to (good) school, get a (preferably prestige) job, work your way up, get married, plant roots by buying a house (affordable or not), invest in your 401k, have some kids, retire at 65 or older, pay off that house…

I thought this was my only option too. But I thought even picking one career would close all the other doors on me. I can’t change my mind and switch careers so easily, it would mean starting all over again.

But now I find it’s possible to live any way that I want to? Mr. Money Mustache proved it!

It inspired me to get my own house in order. I didn’t have to resign to a pay-check just for the sake of one.

If someone can feed you, they have the power to starve you too.

It even inspired me to document my own journey and start a blog of my very own. If you’re curious how that’s done – you can read how to start your own blog here.

So if you’re curious about FIRE, taking more control in your life, and how’s it’s actually possible to live any life you want – read on! Here’s a brief read on what’s FIRE!

What the heck is the FIRE Movement? 

Financial Independence, Retire Early (FIRE). At its core, FIRE is about achieving enough financial security that you no longer need to work for money.

You’d have enough wealth and passive income to cover all your yearly expenses – without relying on just one source of income. 

And the general formula: Spend less than you earn, invest the difference in income producing assets, and once the income from those assets covers your living expenses, working for money is now just an option.

It’s about having the freedom to choose whether or not you want to work and how you want to spend your time.

If you would like to go back to school, change careers, pursue your passions, or simply drink long islands on the beach all day – the power of choice is yours. 

No longer are people waiting until their 60s to retire.

If they had a choice, why wait? Why would you not want to “retire” early? With the right strategies and financial discipline, many are retiring in their 40s or even 30s. Imagine a life where you’re not bound by a 9-5 job, where you can pursue your passions, travel the world, or simply enjoy quality time with loved ones. 

You’d have your Financial Independence where you no longer need to work for money.

You’d have your Retire Early that’s entirely relative – be it retiring at 35 or 55 and never working again. Or working part-time or volunteering at 45.

Together, your personal finance is so optimized you get FIRE and the ability to do what makes you happy.

Major Key Points of FIRE

• FIRE is a financial movement defined by extreme savings, investments, and frugality
• Spend less than you earn, invest the difference, have your investments pays your expenses
• By aggressively saving more than 50% of one’s income, FIRE prospects aim to live off small withdrawals of their accumulated funds
• Majority of FIRE participants follow the 3%-4% rule, whereby one withdraws no more than 4% of their accumulated portfolio per year to cover annual expenses
• Many FIRE participants also build several sources of passive income, like rental properties or stocks, that cover their expenses in retirement.  

Is FIRE possible for everyone?

A big misconception is that FIRE is for people with high-income or high net worth.

If you’re aiming to retire within your 30s, a high-income is usually the way to go. For lower income-earners, the journey could be a bit longer BUT NOT impossible. Everyone can learn from the principles of FIRE. 

• Frugality and Mindful Spending (Living below one’s means and being more conscience of money)
• Importance of Financial Literacy (Understanding personal finance to empower better decision making)
• Value of Passive Income (Time is valuable, generate income without active work)
• Flexibility and Adaptability (Recognizing that not one size fits all)

Ultimately, the biggest takeaway with FIRE is to learn how to consume less while living better. You don’t need that big purchase for your dopamine hit, but make a lifestyle change that’s more meaningful and long-term. 

How Does FIRE Work?

People who dedicate themselves to FIRE retire early (before the age of 65) achieve this by: reducing a lot of their expenses, increasing their income/savings as much as they can, and investing the difference in income producing assets. Once those assets generate enough income to cover your living expenses, you’ve reached FIRE, and working for money is now just an option.

But it first starts with a clear understanding of one’s financial situation and setting specific goals.

1. Detailed Planning

It’s important for everyone to plan for their retirement and get their estate in order.

It doesn’t start when you’re nearing 65 or when your account is big – it starts now. Even if you have a negative net worth or nothing to your name. 

First and foremost, assess your current income, expenses, debts, and savings. Creating a detailed budget and tracking every penny spent can provide insights into areas where expenses can be reduced.

If you need help with that, and pen and paper no longer suffice, you can check out my monthly budget planner that I use. Have a look!

What we want in step 1 is clear and concrete numbers of your income, expenses, and debt. No second guessing!

2. Figure out your FIRE number in two ways – Rule of 25 or Rule of 4%

Budgeting and knowing your numbers tells you where you’re starting off.

Your retirement amount is your end goal.

Retiring early usually utilizes one of following two rules to mark of a general “goal post” or your FIRE number. 

The Rule of 25 says you need 25 times your annual expenses to retire. To figure this number out, calculate your monthly expenses. Multiply your monthly expenses by 12. This will result in your number being your annual expenses. Then, multiply your annual expenses by 25. This is the FIRE number – the goal amount – one needs to retire. 

For example: If your money expenses are $5,000. It means your annual expenses equate to $60,000. And that makes your FIRE number $1,500,000.

The downside of this rule is that it doesn’t allow your lifestyle to upgrade or adjust with inflation. 

The Rule of 4% says that FIRE retirees can take out no more than 4% out of their retirement portfolio in their first year. The second and sequential years would be adjusted on inflation or special circumstances that might come. 

For example: If your yearly expenses are $40,000, your retirement portfolio and FIRE goal amount should be a total of $1,000,000. (4% of $1,000,000 is $40,000) Ergo, no more than $40k should be taken out the first year of retirement.

3. Economic Discipline with the Right Savings Rate

Now that you know where you are, and where you are going, it’s just a matter of planning how to get there. If FIRE is your goal, chart and plan how much money you need to save. Break it down to annual and monthly goals. 

While it’s great to be aggressive, your savings rate is subjective – it needs to feel right to you. Save enough every month to go at the speed you want without compromising too much in the present.

“Aggressive Savings” means something different to everyone. 

Assuming you want to reach FIRE as fast as possible, the general Savings Rate (according to Mr. Money Mustache and FIRE principles) is to save 70% of your income.

If you’re willing to retire in 12 years from now or further along, the general Savings Rate is 45% of your income or less.

4. Magic of Compounding and Wise Investments

The Savings Rate to FIRE doesn’t mean putting the money you saved in the bank.

Remember, money in the bank is money at rest. What we want is investing your savings in income-producing assets.

Money in the bank means money at rest – and not working for you. The rate of inflation usually is higher than the highest interest in the best savings account in the bank. Which means leaving your money in the bank will eat away at your money and purchasing power. A bank’s compounding interest in a savings account will not be enough to sustain your retirement. 

Finding income-producing assets, however, will. Mr. Money Mustache and majority of FIRE favours index fund investing, but it’s a matter of finding the type of investments that suits you and your goals. Be it real estate or stocks or something else.

Related Reads: 5 Best Ways to Invest in Your 20s

Too Long Didn’t read Summary

1. Get all your numbers in order. Income and Expenses and Debt. Calculate how much expenses you need on a yearly basis.
2. By Rule of 4%, the yearly expenses should 4% of your total portfolio.
3. By Rule of 25, your total portfolio is 25x that of your yearly expenses.
4. Your total portfolio is your FIRE number.
5. Break down your FIRE number into a monthly saving rate
6. Those monthly savings goes into an investment vehicle (eg. stocks, real estate, etc.)
7. Commit!

Types of FIRE

Because retirement is based on YOUR rules, there are several FIRE variations that might suit you best! Here are the top 6 kinds of FIRE:

1. Traditional FIRE: This is the standard approach where individuals aim to save and invest aggressively, typically around 50-75% of their income, to retire early. The general rule is to accumulate 25 times one’s annual expenses to safely retire. Or a portfolio that generates 4% annum.
2. Lean FIRE: Followers of Lean FIRE prioritize frugality and aim to retire with a more modest lifestyle. They focus on cutting expenses to the bone and living with the essentials in retirement.
3. Fat FIRE: The fatter version of Lean FIRE. Fat FIRE enthusiasts aim to retire with a more than the bare minimum. They don’t want to reduce their standard of living and want a bit more “padding”. Luxury even. They save and invest more money to maintain or even elevate their current standard of living in retirement.
4. Barista FIRE: This approach involves retiring from one’s primary career but continuing with a part-time job or side gig to cover some expenses. The idea is to have the bulk of expenses covered by investments, with the part-time job providing additional security and social engagement.
5. Geoarbitrage FIRE: This strategy involves moving to a location with a lower cost of living to stretch retirement savings further. For example, someone might save and invest in a high-cost country and then retire in a country where their money goes much further (Eg. Earning in USD, and spending retirement in Thailand with Thai Baht)
6. Hybrid FIRE: As the name suggests, this approach combines elements from different FIRE strategies to create a personalized retirement plan. Remember, it’s never a one size fits all! For instance, someone might combine Barista FIRE with Geoarbitrage FIRE, working part-time in a country with a lower cost of living.

The best part isn’t so much which to chose from – it’s just that you can take bits from each.

Each of these strategies has its own set of advantages and challenges. The best approach – of course- depends on your own individual preferences, financial goals, and risk tolerance. You’re essentially designing your own life.

Where to Go From Here

Start by assessing your current financial situation and getting your house in order (Step1). Gradually implement the practices that align with your chosen FIRE strategy.

Remember, the FIRE journey is not just about the end goal but also about the financial habits, discipline, and freedom you cultivate along the way.

Best FIRE Blogs and People to Follow

It’s no fun going at it alone.

It’s awesome to find others who are just as passionate about their retirement goals. In no particular order, here are my favourite FIRE blogs that I follow, continue to reference and learn from. They are awesome. Period.

• Mr. Money Mustache – If there’s a cult leader “founder” of the FIRE movement, it would be Pete Adeney, the Mr. Money Mustache
• Millennial Revolution – Canadian couple, Kristy Shen and Bryce Leung, retired at age 31 and now travels the world. Their book “Quit like a Millionaire” is a must-read.
• Mad Fientist
• JL Collins – Mr. Collins is a witty writer. His stock series is free, and his book “The Simple Plan to Wealth” is also a must read.
• Root of Good – Justin McCurry retired at the age of 31
• Go Curry Cracker
• Get Rich Slowly
• Physician on FIRE
• Early Retirement Now

What’s your reason for FIRE?