If you are like most working professionals, you have probably thought about retiring early. Retiring early might seem like a pipe dream, but for a committed group of financially minded savers, retiring soon is a prime life goal. The Financial Independence Retire Early (FIRE) movement focuses all its money efforts on meeting this financial goal.
If you are a member of the FIRE community, that is what you think about all day long, and you have adjusted your spending, savings, and consumption habits to meet that goal.
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What Is FIRE?
Financial Independence Retire Early, or FIRE, is a lifestyle movement for people dedicated to saving and investing aggressively to build a portfolio that allows them to retire much earlier than the average American. The FIRE community is hyper-focused on saving as much as they can as quickly as they can to gain financial freedom by having their income from investments exceed their expenses.
Authors Vick Robin and Joe Dominguez first coined the term “FIRE” with the release of their “Your Money or Your Life.” Their book walks through creating a life that aligns your goals with your financial choices and fundamentally changing your relationship with money to achieve financial freedom.
5 Ways to Consider Catching FIRE
If you want to achieve financial independence and are drawn to the FIRE movement, here are five ways to get started:
1. Set Goals
The financial and lifestyle aspirations of the FIRE movement can seem lofty at first. However, to build a retirement portfolio that gives you financial security, you must create and adhere to your financial goals.
An often-cited FIRE goal is having a certain amount of cash saved by a set date. For instance, if you need to build a portfolio of $500,000 to retire by 45 years old, you need to reverse engineer how to achieve that goal through monthly and yearly action items.
Outside of your financial goals, you can also have lifestyle goals. Perhaps you don’t want to work full-time after you are 50 years old. If that is your goal, you might want to ensure you have enough passive income to replace the earnings you are giving up for more lifestyle flexibility.
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2. Make A Budget
With your FIRE goals in mind, you can start planning your tactical approach to achieving goals. You need to create a very detailed budget and stick to it. Budgeting means accounting for every dollar in your life and carefully planning for all your expenses.
With only two real levers to pull - income and expenses - you must be highly disciplined to achieve your FIRE goals. As a result, this could mean drastically reducing your fun or travel budget while you vigorously save for retirement (making every dollar count).
3. Take Advantage of Benefits
Employers have a buffet of benefits that most employees do not fully utilize. Members of the FIRE community are always looking for ways to maximize their benefits.
For instance, you might have a 401(k) matching program through your employer-sponsored 401(k) plan. You should absolutely contribute the minimum amount necessary to qualify for your employer match, which can add thousands of dollars to your retirement portfolio.
Do you feel behind on your retirement savings? Read about the Average 401(k) Balance By Age.
4. Control Your Expenses
As your career progresses and you begin earning more income, lifestyle creep is one of the most difficult financial phenomena to resist.
Lifestyle creep is a spending problem that occurs when you begin earning more income and, in parallel, spend more money. This increase in spending offsets your ability to increase your savings.
The FIRE movement advocates for increasing your income while at the same time keeping your expenses artificially low to avoid any lifestyle creep. This allows you to maximize your savings to generate passive income streams, invest, and save for retirement.
5. Automate Your Finances
Once you plan to achieve your FIRE goals, you can automate your finances to reduce decision fatigue.
Automating your finances is what the author of Atomic Habits, James Clear, refers to as a commitment device. A commitment device is “a choice you make in the present that controls your actions in the future.” Automating your financial ecosystem is one of those decisions that, when made upfront, can drastically streamline your life and set you up for long-term financial success.
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3 Flavors of FIRE
As with any financial goal, you can modulate your behavior to meet your goals faster or slower. In the FIRE community, there are generally considered to be three flavors of your approach to the FIRE lifestyle.
There are three popular FIRE approaches:
Lean FIRE
If you are inclined to a minimalist lifestyle, Lean FIRE could be right up your alley. Those who approach FIRE from this standpoint are advocates of living highly minimalist lifestyles, and as a result, putting away massive portions of their salaries for savings and retirement.
The LEAN FIRE members are insanely committed to the game of liberating themselves from the need to work anymore. They incorporate extreme spending cuts, purchasing little, for the ability to increase their savings drastically.
Fat FIRE
For those who like living a little high on the hog, then FAT FIRE might be the right flavor of FIRE for you. These investors generally like living on larger salaries and don’t necessarily want to change their lifestyles later in life when they retire.
These investors save in a big way (although not quite like Lean FIRE) so that they can enjoy themselves in retirement. You can think of Fat FIRE investors as super savers aiming to build super large retirement portfolios, with a focus on still enjoying the present.
Barista FIRE
Savers who want to work on their passion income tend to fall in the Barista FIRE camp. This group of investors wants to maximize their savings and continue working in the future. These savers build up enough savings to transition more to lifestyle design.
Barista FIRE investors want to trade their full-time office job for a part-time job or another passion project, such as starting a business, writing a book, or freelancing, to earn more income later. After they have saved an initial pallet of retirement funds, Barista FIRE investors want a trimmed-down working life.
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What Are the Downsides of FIRE?
Saving aggressively early in your professional life is a smart money decision.
Mental Health
Focusing too much on one goal at the expense of everything else is not a recipe for long-term success. However, maintaining a healthy view of your spending, savings, and financial goals can give you the clarity you need to perform at your best.
Increasing Costs
The best-laid plans can go awry abruptly. For example, unforeseen inflation can wreak havoc on your portfolio (especially if these rising costs are in hefty areas of your budget). If your medical bills suddenly skyrocket because of an unforeseen medical emergency, they can exhaust your retirement savings before you planned.
Underperforming Investments
Whether you are FIRE or not, underperforming retirement investments can weigh on your retirement savings portfolio balance. Adopting the 4% rule can be helpful to get a sense of how much you will be able to spend each year during your retirement.
It is vital to think about investing in the long term. To mitigate against underperforming income-producing investments, invest in multiple income streams and get a side hustle for peace of mind.
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Retirement Isn’t for Everyone
Working hard to save as much as possible for retirement can be extremely rewarding. However, you may find that at the end of your saving journey, you feel surprisingly unfulfilled. Psychologists call this the arrival fallacy, which is the illusion that once we achieve a goal, we will have lasting happiness.
The transition from working full-time to retirement can feel abrupt. Implement a soft landing by creating a transition plan for your full or semi-retirement. Like Barista FIRE, you can transition into another phase of life. It is critical to plan for this along your FIRE journey.
Smart Summary
Saving for retirement is a financial goal that everyone should take seriously. Most people must adopt a do-it-yourself type of approach to retirement. If you find yourself drawn to the idea of early retirement, the FIRE movement could be a perfect fit. By focusing on securing your emergency and slush fund, you can move on to investing for early retirement.
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