FIRE and the quest for financial freedom

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Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.  Albert Einstein

The FIRE movement is literally on fire at the moment but if you haven’t yet come across it yet then we are here to put you straight and give you a summary of what its all about and the steps you can start taking to get in on the act.

What is FIRE exactly?

Financial Independence Retire Early – is the commonly agreed description of the FIRE acronym amongst those in the community and consists of two separate ideas lumped together; financial independence and early retirement.  These two ideas have different philosophical merits and we will consider the pros and cons of each over the following series of articles.


The traditional interpretation of retirement, at current rates, is calculated somewhere between the age at which you can start drawing the state pension and when your private pension kicks in which for the average person means between 60-65 years old.  Although this age tends to rise over time in an index linked fashion the enduring image is always of a grey haired worker who has expended their lot and have now earned the right to a peaceful decline into obsolescence!


However the FIRE movement seeks to turn accepted wisdom on its head with people striving for retirement much earlier than this; usually in their 40’s, 30’s and sometimes even 20s.  I recognise this might seem ridiculous to someone earning £40k or less and still paying off student debt and we’ll get to that later as many FIRE enthusiasts acknowledge the privilege of the movement. 


Whilst early retirement is the literal definition of the movement there is a much more robust meaning once you dig into the principles behind FIRE, namely it’s about flexibility.  Ultimately it means that you can shape your life without having to take money into consideration.  Most of us have to consider our finances in nearly every decision we make, or maybe even make decisions solely based on money. But once we reach financial independence, we get the freedom not to be bossed around by what we earn or what we have saved.


Contrary to our traditional view of retirement, FIRE doesn’t necessarily mean you have to quit your job, either. The movement works on a loose, non-traditional definition of what it means to be “retired”.  In fact, the FIRE community seems to focus less on the “retire early” aspect of the movement and more on the financial independence component, which is a powerful aspirational goal that is readily achievable if people are willing to make some small, but important, optimizations in their lives.


There is even a concrete definition in the community of what it means to be financially independent (FI): When your net worth is 30 times your annual expenses, you’re considered financially independent.  So for example if your annual expenses are £40,000 then you are financially independent when your total net worth is £1,200,000. 

Who is FIRE for?

The short answer is that anybody can theoretically become FIRE however it tends to boil down to a trade off between principles and means.  You might imagine that someone with a high paying but soul-destroying job would be a typical candidate for going FIRE.  However retiring early because you don’t like your job is a bad reason for doing it and a recipe for being bored and aimless afterwards.  It is better to do the ‘internal work’ first, better to align purpose and meaning in your life and work so that money no longer becomes the object.  Then FIRE can be a powerful goal. 


To be clear achieving financial independence does not mean that you actually need to quit your job it just means that your job needs you more than you need it which puts you in a much stronger negotiating position in terms of salary, hours worked or vacation time required.   It’s less about escaping the need to work and more about an all-round lifestyle upgrade – optionality is the key here and one thing worth emphasising is the absolute imperative for each of us to always be “doing” something.  Without purpose and meaning the danger of nihilism is always close by – whether you are unemployed or financially independent is irrelevant. 


One subject that is sometimes overlooked is the privilege associated with being able to pursue a FIRE strategy in your life.  Some FIRE enthusiasts claim that absolutely anyone can do it and if you can’t, they argue, it’s because you’re not saving or cutting back enough.  This fails to account for factors such as wage stagnation against rising inflation and increased costs of living.  So while financial independence does require cutting back on expenses, it also requires a decent income.  It does seem to be a particularly western privilege in that not everyone can save enough to retire early if they live in a country that doesn’t value a lot of professions or commit to a basic minimum living wage.  Indeed, one FIRE technique involves exploiting geographical arbitrage and actively making use of the polarisation between high earning/savings countries whilst living in low cost regions where ones resources are in effect multiplied.



The principles of FIRE


The maths behind FIRE is ridiculously simple: spend less than you earn and save the difference in low-fee investments like index funds or invest in rental properties or other passive income streams.  Once you have achieved passive income that is equal to or greater than your expected cost of living then you become financially independent.  Frugality – the discipline of reducing your personal cost of operations to their most lean and efficient is a significant factor behind achieving FIRE.  The less money you need to live, the less money you need to save in order to fund the rest of your years.  You can think of it in terms of three key elements to FIRE: income, expenses and time.  The goal is to increase the space between income and expenses and the amount of space you put between them dictates the time it takes to become financially independent.


The rules are simple but getting there is not.  Ultimately it comes down to choices and behaviour.  Achieving FI is an exercise in delayed gratification – do you need those new clothes? A new car or a bigger house?  It is the application of a contrarian approach to everything that society is geared up for us to do namely spend money unintentionally.  The global economy is structured around a virtuous cycle of earning and spending and it needs consumers to uphold their end of the bargain.  The secret is that for those who can actually discipline themselves they will achieve financial freedom much sooner than others.


If any of this sounds appealing and realistic to you, the experts all pretty much agree: The first step is figuring out your “why.”  So if you want to retire early and achieve financial freedom you must be clear about why you are doing it.  Have you always dreamed of starting your own business? Or do you want to travel more, give back to society or spend more time with loved ones?  It doesn’t matter what they why is as long as it is specific and tailored to who you are as a person.  This requires deep introspection and self knowledge – something we talk about a lot on this site – combined with humility and honesty.  Once you know why, you can tailor your money to match what you want in life.  You must also recognise that goals and aspirations can change over time so it is worth factoring in some adaptability to your plan to cater for the unexpected.


Now the hard part. Tracking your expenses. Check out your bank statements, credit card statements, online budgets, and make note of what exactly you’re spending money on and whether or not those purchases are meaningful or necessary.


Most of us are shocked to realize how much we actually spend.  After you’ve started tracking, figure out how much your lifestyle costs per year, look for what you might be able to cut out to shrink that number, and then start working on increasing your savings rate. Those are the hardest parts of the journey, and the rest is just a matter of waiting for the money to add up and compound.  The key is to spend more mindfully and to take stock of the expenses that actually matter to you.  FIRE followers follow an intentional approach to expenditure one based on value rather than excess with the aim of removing a much excess from their lives as possible.  This enables monthly expenses to be lower and thus increases speed to financial independence.  Once you’ve conquered your spending, it’s time to look at your net income and compare the two.  Subtract your fixed mandatory expenses from your income and then adjust your discretionary expenses as necessary.  The rest is down to maths and mechanics.

Like all goals, the theory is easy in practice everything else requires resourcefulness, discipline, and patience.  You can start your goal at any point and then move forward but the speed with which you’ll reach your goal will always depend on those three basic variables: income, spending, and time.