The FIRE movement says you’ll retire in your 30s, but you have to work super hard to make that happen.
FIRE stands for Financial Independence, Retire Early and the goal is to budget, save and invest aggressively so you can retire as quickly as possible. “Aggressively” means exactly that: you’ll need to save at least 50 per cent of your income, preferably closer to 70 per cent. Living off only 30 per cent of what you earn is a massive commitment, but it’s one that plenty of people are taking on.
Early FIRE starters
Much like it’s namesake, the FIRE movement is rapidly growing. It started in 1992 from Vicki Robin and Joe Dominguez’s bestselling book Your Money Or Your Life. The authors placed emphasis on knowing your values and focusing your money on supporting how you ultimately want to live. Ultimately, they considered expenses in terms of how many hours of your time would be needed to work to pay for something. So everything you purchase is basically adding hours to your working life.
The authors demonstrate that accurately tracking income and expenses and gradually increasing your fixed assets leads to a ‘crossover point’. This is the point at which your investment income exceeds your expenses. You can stop working because your salary is no longer needed to fund your lifestyle.
FIRE movement fuelled
In the past 30 years since the book’s publication, an entire FIRE movement has grown faster than the author’s investment income (presumably significantly funded by royalties from their book!). This was fuelled by US bloggers like Pete Adeny at Mister Money Mustache and Sam Dogen’s Financial Samurai.
Local FIRE blogger ‘Mrs Flamingo’ from Money Flamingo, came to the movement seeking life balance. “Initially I got interested in FIRE when I was unhappy in my first job and was shocked how little free time was left after working all week,” she says. “My motivation to pursue FI has changed over the years. These days, financial security is a big factor because I now have a young family. Now my main motivation for FIRE is to spend time with my kids and to create a good balance of work, family time and time for myself so I can look after my health and pursue my passions.”
So, while early retirement is enticing, many FIRE followers are initially drawn to the movement simply to improve their financial means right now.
“I came to FIRE due to a lot of rough life experiences, living in poverty and struggling after my first daughter was born to keep things going,” says Katy Winter, founder of the Financial Independence & Early Retirement Australia Facebook group. “I learnt about FIRE and it aligns with my values around minimalism. Since then it’s been something I’ve worked towards slowly, despite many life hiccups along the way!”
Not everyone using FIRE wants to retire early, but they like knowing they could. The ultimate goal of FIRE is financial independence, and whatever that personally looks like for each follower.
FIRE isn’t for everyone
That said, one of the biggest criticisms of FIRE is that it’s not feasible for everyone.
For a start, you need to be earning at a certain level to have any chance of a reasonable standard of living on 50 per cent or less of your income. On top of that, you’ll need to have invested enough by your mid-30s to earn a decent income from your investments until your superannuation kicks in. And hopefully that’s a super account you continued contributing to after retiring your salary in your 30s…
There’s also the fact that most FIRE investment strategies rely on a bull sharemarket. While historically the market has come out on top, there have been plenty of bears along the way. If you’re living on a retirement budget for a significant period of your life, you’re really going to feel it should your nest egg decline 10, 20, 30 per cent or more. You’ll also need to ensure you’ve invested enough to smooth out life’s bigger hurdles along the way.
US personal finance guru Suze Orman broke the internet a couple of years ago when she suggested FIRE advocates needed at least $5-10 million in order to retire early. To Orman, the risk of financial failure if you have anything less is just too great. “You will get burned if you play with fire,” said Orman.
Basic FIRE principals
The downsides may paint a bleak picture, but there’s nothing wrong with trying to save and invest as much money as you can, as early as you can. At the very least, FIRE makes frugal sense for most people.
“Getting started I think is hard because you see all the DINKs out there who can cut back expenses hard, work a lot or have side hustles, and hit FIRE in a few years,” says Winter. “I have two daughters of primary age and my partner has three – so we’re never gonna smash that goal overnight. But it informs the choices we make for the long-term, what we prioritise and value, and helps us move there, albeit slower than others.”
There are three basic elements to FIRE: time, expenses and income. The goal is to put as much space between your income and expenses as possible, as quickly as possible. In order to get there, you’ll need to be prepared to make some serious sacrifices on the expenditure front, as well as some canny investment decisions. Above all, you’ll need to work hard on your finances, effectively making them a second job.
Getting started with the FIRE movement
Winter’s advice is to start with simple things like a budget and expense cutting, rather than getting straight into investing. “An ETF or LIC should be sufficient to put your money in with a little research,” she advises. “From there your focus should be getting the most enjoyment from your life with as little expense as possible. Enjoy the sunshine, friendships, family, food, and things that really matter that can all be enjoyed at low cost!”
Here’s how to get started on your own early retirement plan.
1. Have a plan
All budgeting starts with knowing what you’re working towards and FIRE is definitely a numbers game. There’s a lot of spreadsheet work involved.
“Getting started and figuring out a personalised plan was the hardest part for me,” says Mrs Flamingo. “When I first learned about FIRE, I was overwhelmed with the amount of time and savings involved. Once I created a plan that was tailored to our specific goals – which was to semi-retire rather than fully retire – things got a lot easier and more enjoyable.”
Some key questions to start your planning with are:
- What does a ‘good life’ look like for me and how much does that cost right now?
- What’s the projected cost of my good life over time?
- How much will I need to invest to give me the income I need?
- What’s my ideal age to retire at?
- Do I want to fully or semi retire?
The anonymous Australian blog Aussie Firebug has created an Australian Financial Independence Calculator. It’s a good place to start.
2. Cut back expenses – hard
“Mindful spending” underpins the FIRE lifestyle. It means spending money only on the things that truly matter to you. The more you can cut back on monthly outgoings, the more you’ll have leftover to invest.
This is where being sharp about what you need, what you want and what you simply think you should have is critical. Cutting out the haves, reducing the wants and being frugal about the needs is what will get you there.
Many FIRE followers go to extreme measures to reduce their outgoings, living in tiny, dark houses furnished exclusively from road side finds. But you don’t have to go that far. Finding the balance between what you can and can’t live without is key to making FIRE sustainable.
Great ways to cut back: 101 frugal tips to help you live a richer life
3. Prioritise paying off debt
High-interest debt like credit cards, personal loans, car loans and store cards have to go asap. Pay them off and then don’t accrue them again. Save up for the things you really need, or better still, go without (see above).
Whether you pay off lower-interest loans like your mortgage or HECS or HELP debt comes down to whether it’s worth it in the long term. Is the money you would use to pay down these debts better invested elsewhere? See the next point for clarification on this.
Banish debt: 5 tips to get on top of your debt – and stay there
4. Hone your investment skills
Saving is great, but it won’t be enough to retire early. For that, you’ll need to invest your money and there are always risks involved with that. Most FIRE followers stick with low-risk share investments like ETFs and LICs, but there are plenty of strategies that suit the system, including property investing.
Unless you’re a financial gun, at this point it makes sense to have a good financial adviser by your side. They can help you plan an investment strategy that will bring in the income you need to fund the post-retirement lifestyle you crave.
5. Increase your income
The more money you bring in now, the earlier you can retire. As well as a salaried job, many FIRE followers have a side hustle that produces extra income. This can be as simple as earning extra cash doing a shift at a coffee shop on Saturday mornings, to earning a full-blown spare income through your own business.
The internet opens up plenty of opportunities to earn more money. Sell your skills and your stuff online.
Start here: How to turn your hobby into a side hustle
6. Keep it going
The FIRE movement is not a set-and-forget money strategy. You’ll need to keep on top of your finances and the market in order to adjust your strategy to stay on track. Basically, your finances need to become a second full-time job to make this work. Really, FIRE is all about working really hard in your early years so you can enjoy your later years.
Which means that for many, FIRE is actually the complete opposite lifestyle to the one they want to live.
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.