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Have you ever thought about retiring early? Maybe you want to spend less time working and more time with family. Perhaps you want the freedom to travel. Or maybe you are just tired of working for someone else. Whatever your reason for wanting freedom from work, there is a path to financial freedom and early retirement. In this article, I will share with you everything you need to know about the FIRE movement (financial independence retire early). These FIRE movement tips can set you well on the path to financial freedom, so let’s get started!
What is the FIRE Movement?
Before I dive into my top five fire movement tips, let’s start with some basics on the FIRE movement.
The FIRE movement is an approach to personal finance all about low spending, high saving, and prioritizing financial goals to retire early and be free from working for money (financial independence).
A high savings rate is typically invested in assets and build passive income to cover living expenses later in life.
If you’re wondering who started the FIRE movement, most of the key ideas came from the best-selling book Your Money or Your Life. If you want to learn about the principles of FIRE, this is book is the best place to start.
However, if you’re looking for the “FIRE movement for beginners guide,” the FIRE movement tips I will share with you can help you get started on your journey with FIRE.
So, let’s get started with these tips on how to FIRE!
1) Take Control of Your Money: Track Your Spending
If you want to pursue FIRE, the very first thing you must do is track your spending. And while I recommend this practice for everyone, it becomes all the more vital if you wish to pursue financial independence and early retirement.
The best way to track your spending is by using a budget. Knowing what you spend and where you spend it is the first step in figuring out how to set up your life for FIRE.
The budgeting tool I recommend is You Need a Budget. It sets you up to take a proactive approach rather than a reactive approach to your spending. And if you want to FIRE, this is the approach that works, as you’ll need to choose your spending in advance (rather than merely recording what you spent).
2) Figure Out Your Numbers: Set Your Savings Rate
Once you start tracking your spending, the next thing you’ll want to do is figure out how much you need to retire and when you want to retire.
The very first thing is to determine how much income you need to have in retirement. Maybe you feel you want to have your current income in retirement, or perhaps you want to have some higher amount to have the flexibility to spend more in retirement.
Now, the next thing you’ll want to do is convert your expenses into a target investment number. If you’ve ever heard someone ask how many times your salary you need to retire, this is the principle to which they are referring.
In particular, you may have heard of the 25x rule or the 4% rule – these refer to the same basic financial principle.
This rule states that you should have 25x your annual expenses in investments to retire. Said differently, you can withdraw 4% of your investments per year and not have to fear running out of money in retirement.
So, if your monthly expenses are $3,000, your annual expenses are $36,000. Take this number times 25, and you’ll determine that to retire comfortably at your current expense level, you will need $900,000.
While this may feel like a daunting number, stick with me for a minute because it is possible to achieve.
However, before I go into more detail, I want to share the 4% rule’s origins.
Safe Withdrawal Rates
In 1994, an individual named William Bengen researched a “safe withdrawal rate” in retirement. In other words, how much of your retirement portfolio can you withdraw per year without running out of money in retirement.
Without boring you with the details, the answer turns out to be around 4%.
Now, here’s the truth. Depending on when you retire, this number can move around a bit (based on the market’s performance), but 4% is a reasonably safe bet. Over the last several decades, others have researched and challenged the 4% rule. And the results? The 4% rule works. So, if you want to set a bar for retirement, this is it.
If you want to learn more, check about William Bengen’s masterpiece on Determining Withdrawal Rates Using Historical Data.
FIRE Movement Calculator
Once you have a target number in mind, next, you’ll want to set a savings rate based on when you desire to retire. If you want to retire in 10 years, then you’ll need to save a lot more than if you want to retire in 20 years.
As a general rule, if you’re wondering how much you should save for FIRE, the answer is more than most of your peers. At a minimum, most folks actively pursuing FIRE aim to save 20-30% of their income. At the top end of the spectrum, some try to save as much as 70%. I realize that a 70% savings rate is likely not realistic for most people, so the key is deciding how much you’re willing to sacrifice in near-term creature comforts in exchange for early retirement.
The best way to figure out how much of your income you should be saving is to use a FIRE movement calculator. Check out this calculator to try different savings rates until you determine one that will work for you and your lifestyle.
Just remember there is a direct tradeoff between your savings rate and when you’ll be able to retire.
Cut Your Spending
Once you have a savings rate in mind, you will likely need to cut your spending to achieve this savings rate. The best place to start is with your most significant expenses. For most people, these two expenses are housing and transportation.
If you can, seek out a cheaper place to live or find a way to cut transportation costs (such as driving an older car). While this may not necessarily be the lifestyle you’d like, having the option not to work much sooner than your peers is pretty attractive.
Additionally, you have to get out of debt for FIRE to work.
If you’re looking for some meaningful ways to cut your spending as you work towards your target savings rate, check out these After School Finance Resources:
- How to Stop Spending Money: 9 Tips to Curb Your Spending
- How to Live Below Your Means in 7 Easy Steps
- 17 Simple Ways to Save Money on a Tight Budget
3) Build Your FIRE Movement Portfolio
Next, as you boost your savings rate, it is simply not good enough to keep your money in a bank or under your mattress.
If you want to retire early, you must get your money to grow. The only way to make that happen is to invest.
For most, the simplest way to do so is through paper assets such as stocks and bonds. For FIRE, most people tend to lean more aggressively towards stocks, particularly in the early years, as the returns simply increase the speed at which you’ll reach your goals (though with more risk).
To get started building your portfolio, here are a few guides to get you started:
- How to Start Investing: A Beginner’s Guide
- How to Invest in Mutual Funds
- How to Invest with Little Money
4) Boost Your Income
To achieve FIRE, you must save and invest a substantial portion of your income. But what if you feel like you’re already squeezing as much juice as you can out of your current income? Are there other ways to accelerate your path to FI?
The answer is yes. Many in the FIRE community are strong advocates of starting a side hustle to boost your income. Side hustles allow you to earn money on top of your regular income to put towards your retirement goals.
If you’re looking for a side hustle to get started, here is a list of the 99 best side hustles, so you can find one that is right for your skillset and time availability.
5) Automate Your System
Finally, while achieving financial independence and early retirement is possible, it doesn’t happen overnight, no matter how hard you work.
And here’s the truth, it won’t be easy. Distractions are vying for your dollars everywhere you look. That’s why the best thing you can do to stay on track is to automate your system.
When you get your paycheck, automatically invest. Put your bills on autopilot. Get your budget working for you. All of these things will ensure your path to FI doesn’t get derailed.
Check out this ASF guide on automating your finances to make sure you’re on the right track.
These five FIRE movement tips are all you need to know to achieve financial independence and early retirement.
Types of FIRE
It’s important to know that FIRE is not a one size fits all plan. There are different types of FIRE, and the right answer depends on your priorities. Below are three of the most common types of FIRE:
1) Lean FIRE
Lean FIRE is for the minimalists. Lean FIRE means reducing your expenses as low as humanly possible and choosing an ultra-frugal lifestyle.
I am talking about people living in camper vans and moving to parts of the country with the lowest cost of living.
While there is nothing wrong with Lean FIRE, it is perhaps the most difficult because of the lifestyle sacrifices it requires.
2) Fat FIRE
Fat FIRE is the opposite of Lean FIRE. If you want to live in retirement with the same lifestyle you had during your working years, including potentially living in a potential coastal city in a nice house, you’ll need to save a lot more for retirement.
Fat FIRE is challenging like Lean FIRE but for different reasons. Fat FIRE means you’ll need a much larger nest egg to be able to retire and maintain your current expense level. So, depending on your savings rate, it can potentially take much longer to reach FIRE.
3) Barista FIRE
Barista FIRE is a bit of a hybrid approach between Lean FIRE and Fat FIRE. It means that you can cover most of your expenses through passive income, but you may need to work some small side job (such as being a barista at a coffee shop) to cover your remaining expenses.
While this approach doesn’t necessarily match the 100% retired option, it is worth considering if you want to pursue FI without going to an extreme.
What are the Pros & Cons of FIRE?
Seeking to achieve FIRE undoubtedly requires a different lifestyle – one that mandates a lot of dedication and focus. Before you embark on FIRE, you’ll want to consider the pros and cons.
Benefits of FIRE
Retirement is a key part of why people pursue FIRE. But what’s often missed is what retirement is all about.
Retirement doesn’t mean that you have to quit working. Retirement just means that you have the CHOICE to stop working. And there is a big difference.
Maybe you’re an accountant but are passionate about baking. Perhaps once you reach FI, you can decide to quit your job as an accountant and open a bakery.
Or maybe you’re passionate about helping animals. Once you achieve FI, instead of working for somebody else, you can spend your time volunteering at an animal shelter.
Flexibility to spend your time how you wish is the whole point of FI. You can gain time freedom, which simply isn’t possible when you’re working for somebody else.
FIRE provides choice.
Another benefit of FIRE is the freedom to travel once you achieve financial independence. While travel isn’t what everybody seeks once they decide to stop working, it is an option.
The most challenging thing about travel is that there are always too many places to see and too little time. However, once you achieve financial freedom, financial independence gives you the flexibility to see new places without worrying about how many vacation days you have to use.
For many individuals, career opportunities lie in working in big cities. But maybe you’ve always wanted to live somewhere else. It could be a cabin in Vermont or an apartment in a small town in France.
These options simply aren’t possible when you’re tied to a job in a fixed location. FI can afford you location independence.
As you may have noticed by now, the pros of FIRE are all about freedom. It is all the things you can’t do when working for money. But all of those freedoms do come at a cost. FIRE does require dedication and effort in the short-term to achieve these long-term freedoms.
Cons of FIRE
1) Near-Term Sacrifices
FIRE, while quite powerful, does come with some level of sacrifice. For FIRE to work, you do have to increase your savings rate and cut spending dramatically.
It is all about financial priorities. If it is important for you to gain financial freedom from work earlier in your life, the FIRE movement has the power to do that. But that does mean you have to make spending sacrifices in the interest of boosting your savings rate.
While much research has been done into the safe withdrawal rate to retire, it is simply not possible to account for all of life’s curveballs.
A significant fall in the market could derail your investments (and reduce your available withdrawal rate).
Or an unexpected expense (such as a health problem) can wreak havoc on your retirement plans.
While FIRE has been tried and tested, individual circumstances can derail the best-laid plans.
3) Lack of Purpose
While early retirement sounds like a fantasy for many, make no mistake about it, retirement is an adjustment.
For folks who have spent much of their working lives working, suddenly having nothing to do can lead to feeling a lack of purpose.
While in time, it is possible to fill your time in meaningful ways, this adjustment is one you should plan for and expect.
Is FIRE Realistic?
Achieving FIRE is difficult. That’s the truth. But the reality is the math works – if you’re willing to put in the work.
In 2012, a blogger named Mr. Money Moustache rocked the world when he revealed the Shockingly Simple Math Behind Early Retirement.
That shockingly simple math is this: if you boost your saving rate, you can retire much sooner. FIRE is realistic, but it does require sacrifice.
There is a balance between making yourself miserable in the short-term and spending your life working. I am not saving 70% of my income, and I do not want to. I am also not saving 10% of my income. Currently, I probably save 25-30% of my income, and I aspire to increase that number. Is that the aggressive path to FIRE that some advocate? No. But is the path that works for me and what I am willing to give up in the short-term.
FIRE is an individual choice, and that’s why you need to find an approach that works for you.
Is the FIRE Movement Right for You?
The FIRE movement isn’t right for everybody. But I think FIRE is something everyone should know about and how implementing the FIRE movement tips I have shared with you can accelerate your path to retirement.
FIRE isn’t about escaping a job you hate – you should do that no matter what. It’s also not about being miserable in the short-run. FIRE is about gaining time freedom, and independence from work.
If that’s appealing to you, run the numbers and figure out what approach might make sense for your life and financial priorities.
As a final tip, one of the best things you can do to accelerate your path to financial freedom is getting all of your numbers organized in one place – your investments, your financial goals, and more. Sign up for Personal Capital, the best FREE financial management tool I have found. You can set your retirement goals, track your investment performance, and much, much more. I have been using Personal Capital for years, and it has helped me put thousands more towards my financial goals – and ultimately accelerate my path to financial independence.