You’ve probably heard of the FIRE movement by now and are wondering what the hype is all about. Many people, especially millennials, are joining the FIRE movement in flocks in hopes of retiring early. Find out what the FIRE movement is, how it started and some tips to get you moving in the right direction.
What Is The FIRE Movement?
FIRE stands for “Financial Independence, Retire Early” and the FIRE movement is made up of people who have the goal of retiring long before the age of 65. In fact, most members have a goal of retiring in their 30s or 40s. You might be wondering, “how is that possible?” This lifestyle is based on having an extremely high savings rate (50-75% of income) prior to retirement combined with a frugal lifestyle and low cost investing.
The FIRE movement is definitely not for everyone, but learning about it to see if it’s right for you and making some changes based on it to improve your finances can be beneficial.
How Did The FIRE Movement Start?
The origins of the FIRE movement can be traced back to the 1992 best-selling book, “Your Money or Your Life” by Vicki Robin and Joe Dominguez. It promoted the idea of financial independence as an end to working a 9-5 job through your 60s.
Later, a 1998 study by professors at Trinity University resulted in the 4% rule. Simply put, it states that an individual withdrawing 4% of the original balance of a retirement portfolio each year can do so for 30 years before running out of money. To find your target portfolio to live off of for 30 years, multiply your yearly living expenses by 25. This must be adjusted for an earlier retirement and is obviously not set in stone because of various factors, but it provides an estimate for FIRE movement members.
Many other books, podcasters, and bloggers have popularized the movement since then. We recently read one such book, “Quit Like A Millionaire” by Kristy Shen and Bryce Leung and decided it was time to share more about this personal finance phenomenon.
5 FIRE Movement Tips To Get You Started
1. Increase Your Savings Rate
The foundation of the FIRE movement is having an aggressive personal savings rate. An individual’s savings rate is the percentage of money leftover after taxes and other expenses.
Savings Rate Percentage = (Take Home Pay – Expenses)/Take Home Pay x 100
For example, if someone’s annual take home pay is $50,000 and they save $10,000, then their savings rate is 20%. To give some perspective, the average personal savings rate in the US in 2019 was 7.6% according to Statista.
Here’s some important info about savings rates, based on consistent income and expenses:
- With a 10% savings rate, it takes 9 years of work to save for 1 year of living expenses.
- With a 25% savings rate, it takes 3 years of work to save for 1 year of living expenses.
- With a 50% savings rate, it takes 1 year of work to save for 1 year of living expenses.
- With a 75% savings rate, it takes 0.33 years of work to save for 1 year of living expenses.
Although the high savings rate of 50-75% is out of reach for many people right now, you can take steps to increase your savings rate. First calculate your individual or household savings rate with the easy calculator below:
We recommend that you take note of your savings rate and check it on a quarterly basis. Of course, this only makes sense if you make an effort to increase your savings rate.
Learn about different types of bank accounts to find the right one for your lifestyle to help you reach your financial goals.
Now that you know what your savings rate is, find ways to increase it below.
2. Set Your Priorities
An important factor in increasing your savings rate is understanding your priorities. Once you determine what you want to spend money on, utilize frugal living habits to spend less on things that matter less. To learn more about frugal living and the habits that help us get more out of our money, read our article These 8 Frugal Living Habits Allow Us To Spend More On What Matters.
Not everyone can be happy and truly enjoy their life in the present moment by cutting a significant amount of spending. The FIRE movement is not for everyone, but we can certainly learn from it. Many FIRE members spend money on the things they value and cut out the rest (one of the things they value is early retirement). Consider making a zero-based budget after you set your spending priorities and cut expenses.
3. Set Your Retirement Goal
Depending on your age and income, you may not be able to retire as early as your 30s or 40s. But if you set a retirement goal now, you can take steps toward achieving it. You also might not even want to retire that early and that’s just fine! Some people are fulfilled by their jobs and actually enjoy what they do making a living. For them, they might not mind a later retirement. There are also variations of the FIRE movement where people plan to work part-time or on their own business after “retirement.”
Think about your motivation for early retirement. Do you want to spend more time with your family? Travel the world? Consider how early retirement fits in with your lifestyle and motives and try to set a realistic goal of retiring at a certain age. If you’re serious about retiring early, you should consult a financial planner (or use a retirement calculator).
4. Make More Money
Cutting costs will increase your savings, but combining that with additional income is a better method. Take up a side job, get a raise or get a higher paying job. Avoid increasing your spending as you increase your income. Many FIRE movement members and supporters caution against joining the FIRE movement just because you hate your job. Keep in mind that you will have to work to save enough to retire early.
5. Invest Your Money
According to a well-known FIRE resource, Playing With FIRE, many FIRE members invest in low-cost index funds as part of their early retirement strategy. Author and self-made millionaire, Kristy Shen, who retired at age 31, also advocates for investing in index funds. More specifically, Warren Buffet recommends a low-cost S&P 500 index fund as a simple investing strategy, which he stated in a Berkshire Hathaway annual shareholder letter. Index funds are a low cost way of investing in many stocks without actually buying each stock, which is much more expensive.
Many FIRE members use a combination of retirement accounts and brokerage accounts. If your employer offers an employer match on a 401(k) or other retirement account, you should be depositing at least the amount that gets you the maximum employer match. Learn more about saving for retirement in our article, Start Saving For Retirement In Your 20s: Here’s Why & How.
It’s important to note that there are many different ways to achieve financial independence and retire early. The tips we discussed are the most popular methods we found in our research of the FIRE movement. Of course that does not mean that you cannot achieve FIRE in other ways, as many people have done so.
Moreover, this is not meant to be an all encompassing guide to the FIRE movement, just a helpful introduction. It might not be right for you, but we can all learn from it.
FIRE Movement Resources
If you are interested in pursuing financial independence and retiring early, then by all means learn more about achieving it. Aside from the previously mentioned books, there are endless resources if you want to learn more about the FIRE movement. Here are a couple to get you started:
- Physician On FIRE Blog: Leif Dahleen retired from his career as an anesthesiologist in 2019 at the age of 43. At Physician on FIRE, he writes about all things FIRE in an attempt to educate, enlighten, and entertain his following of high-income professionals.
- Mr. Money Mustache Blog: Pete Adeney retired in 2005 before turning 30 and started his blog to teach others about FIRE. Some call him the father of the FIRE movement.
- Financial Samurai Blog: Sam Dogen has been FIRE since 2012 and gives a unique perspective of the FIRE movement as his cost of living is very high living in San Francisco.
- Our Next Life Blog: Tanja Hester, often referred to as the matriarch of the FIRE movement, retired in 2017 at 38 years old. Her and her husband share how they achieved FIRE and how you can too.
- Playing With FIRE Documentary: Scott Rieckens and his family devoted everything they had to FIRE and started Playing With FIRE to share their experiences. The documentary features their journey as well as many other FIRE influencers.
Financial freedom begins with good habits.
Rebecca & Tiago, theloadedpig.com