In recent years, the Financial Independence, Retire Early (FIRE) movement has become a popular tenant for many looking to take back financial control of their lives. More and more people are looking to save enough money to retire as early as possible. But what does it involve? And is it accessible for everyone?
FIRE often preaches the portrayal of people taking extreme measures to pinch every penny for their early retirement. As a result, others have dismissed the movement as a fringe idea. But there’s more to FIRE than frugality and self-deprivation, and it works a little differently for everyone. In fact, there are even different types of paths for FIRE devotees. Not all of them involve living a life of coupon clipping. Like many parts of the financial world, there is no one-size-fits-all.
Do you want to learn how to become financially independent? Here’s our complete guide (the first part in a series!) about the FIRE movement, and how to become financially independent.
What is FIRE?
FIRE has become a trendy word in recent years, but what does it really mean? The FIRE movement is all about helping individuals achieve financial freedom over their lives, rather than depend on a 9-to-5 income.
But this looks a little different for everyone. For many people, the ultimate goal behind FIRE is taking an early retirement and using savings and passive income from investments to fund your life.
Oftentimes, you hear of FIRE advocates living in extreme frugality, trying to save as much as possible and invest the money to retire in their 30s. The goal? Save 50% of your income, or more, to retire as early as possible.
But this isn’t the only way to interpret the FIRE movement. In fact, the definition of FIRE has expanded in recent years to become a much more expansive concept. Most proponents nowadays will focus on the “financial freedom” part instead of focusing on retiring early. The reality is that there are multiple ways to consider how to become financially independent.
FIRE involves a core shift in your financial mentality regarding both money and work. You need to think about what’s truly important to you, and how you can eliminate what may not be as important in the effort to strive towards financial freedom. It’s all about how you choose to enact these principles in your own life.
Different approaches to FIRE
There are several different types of FIRE that evolved over recent years. Let’s take a look at some of the most popular approaches to FIRE:
LeanFIRE
LeanFIRE is all about living a minimalist lifestyle, or a “lean” lifestyle, to save as much money as possible to retire early. That means owning exactly what you need, and nothing more. But it doesn’t just stop there: in retirement, you would also live a minimalist lifestyle. Because of this minimalist lifestyle, though, you will retire much sooner. However, it might not be a good fit for you if you plan to live a little more exorbitantly in retirement.
BaristaFIRE
BaristaFIRE focuses on retiring as early as possible from your primary 9-to-5 job. However, instead of not working at all, people use their financial freedom to do part-time work, gig work, or freelance work. For many, that means pursuing their dream careers that might not pay as well. You can work for pleasure instead of work for money.
FatFIRE
Much like LeanFIRE, FatFIRE focuses on retiring as soon as possible. However, unlike LeanFIRE, you wouldn’t necessarily be living a less frugal lifestyle. FatFIRE is about indulgence. People that abide by this method do not make as many sacrifices, and in turn, will need to save more money to fund their early retirement. FatFIRE devotees will take much longer to achieve their early retirement goals. In addition, you need a much higher income to make this work.
How does FIRE work?
How can you make FIRE work for you? Let’s break it down.
Make a plan with your finances in mind
Before you take any steps, it’s important to start with a plan. What are your goals? When do you want to retire? Once you understand your final goals, you can start making a plan and pathway to get there.
Remember to keep in mind your own financial situation, as well. Consider the following factors:
- How much do you earn right now?
- What are your current expenses?
- What standard of living do you want in retirement? How much will it cost to maintain?
- Will you have income during retirement?
As you start your journey, it’s so crucial to remain realistic about your goals and monitor your progress. In making a plan, you may realize that this isn’t for you, either.
Reduce spending
A big part of FIRE means reducing your spending. That starts with understanding your expenditures. How much do you earn each month? How many bills do you pay? What are your monthly food expenditures? Reducing your expenses as much as possible is a primary tenant of FIRE. That means looking at every facet of your financial life. For example, when looking at your finances, you might be spending too much on takeout each week.
Stay out of debt
Staying out of debt is crucial. If you don’t have one, set up an emergency fund to help you through financial struggles so you can avoid credit.
Increase your income
Boosting your income is another essential tenant to retiring early. Some people do this by switching jobs and selecting a higher income, while others will pick up a second job or a side hustle. Finding new income sources can help you reach FIRE much sooner, but be careful to avoid the “lifestyle inflation” trap. That means spending more as you make more. Instead, FIRE dictates that your extra income goes towards savings!
Look at your savings
How much are you able to save each month? Some elements of FIRE can seem intimidating and out of reach, especially if you are new to saving. But saving a significant sum of money each month is key. If this seems tricky to you, start with small savings goals and increase them as you feel comfortable.
Invest, invest, invest
Investments are the best way to generate passive income and make your money work for you. Passive income should be your focus in FIRE, especially because it doesn’t use up your precious time. To get advice on investing, consider consulting a financial advisor who can help discuss options, risk, and returns.
The FIRE Movement: Takeaways
Many people believe that FIRE is an exclusive club for high earners or people willing to live in extreme frugality, but the truth is that anyone can participate in FIRE. When considering if this is for you, think about your own lifestyle and what goals you have for your life.
Do you want to penny pinch for years and years? Is retiring early the most important financial goal you have? Take a holistic approach to your finances before deciding whether the FIRE principles work for you and your family.
