F.I.R.E. Explained: A Simple Guide

Dreading working until your mid-sixties? Dreaming of an easier life not dictated by full-time work? It can be done, and many have achieved it by their 30s.

It’s Financial Independence Retire Early, a fringe movement that is gaining traction in the mainstream.

Mr Money Mustache, aka Peter Adeney, retired just before his 30th birthday and wrote a blog about how. By doing so he accidentally started a cult – the Mustachians. The reason his theories struck a cord with so many people was because early retirement was seen as achievable by almost anyone.

And when he says early retirement, it doesn’t mean not working again. It means having the freedom to choose when and if you do work, if you’d rather do volunteer work, or take a year off (or more) to travel.

Peter Adeney didn’t receive a windfall of money such as an inheritance or by winning lotto. He was able to retire early through saving money and investing.

Yep, that’s it. Saving and investing. It wasn’t about how much he could earn, it was about how much he could save. Of course, having a higher income helps with saving.

How these penny-pinchers retired in their 30s

How F.I.R.E. Works

First and foremost, F.I.R.E. is about saving as much money as you can through living frugally. People on target for early retirement save at least 50% of their income. The more money you save and invest the quicker you reach financial independence.

F.I.R.E. followers do this by cutting back expenses wherever they can. It may mean moving to a smaller house, moving to a cheaper area, moving closer to work, bike riding or walking instead of driving. If you do drive, consider a cheaper second-hand car, especially if you needed a loan to buy your car.

There are so many ways to reduce your living expenses just by being less of a consumer, and less polluting on the environment. It helps to get the best deal possible on your electricity and gas bills, phone bill, and reduce your power consumption and insurance premiums to help save money.

Even simple things such as cooking at home, cancelling subscriptions to Netflix or Stan, borrowing books from the library instead of buying, purchasing your clothes second hand – these all make a difference to your savings.

Consider not buying lunch and lattes when out and watch your savings grow. The 752 Rule will help you to understand just how much these small purchases add up over time.

25 Frugal Habits

But wait a minute, I want to enjoy life now.

This is where you need to flip your thinking. Instead of working for around 45 years, wouldn’t you rather work for 10 – 15 years to save for your financial freedom to do what ever you want for the rest of your life?

Still not convinced? Write a list of the ten things that make you happy. How many of them involve thoughtless spending? I’m guessing that for a lot of people the things the make you happy are family, friends and nature, not mindless consumerism and debt.

The Maths Behind F.I.R.E.

One of Adeney’s best known blog posts is about the Shockingly Simple Maths Behind Early Retirement.

It goes like this: figure out how much money you need each year, debt free, to live what you would consider a comfortable life. For Adeney, it is $25,000 a year. For others, it may be $40,000. If you feel you need more money to spend each year, that’s fine too. Personal finance, is personal. It’s whatever you decide, remembering that a higher annual budget will take longer to save for.

Let’s take the middle road of $40,000 per year. To achieve this income for the rest of your life, you will need to save 25 times that amount.

25 x 40,000 = $1,000,000. Right now you might be saying, that’s crazy – who can save one million dollars?

Here’s a scenario – there’s two people each earning an after tax middle income salary of $60,000. That’s a combined income of $120,000. They’ve committed to living off $40,000 per year and saving $80,000 per year.

Using the Money Smart compound interest calculator, $80,000 saved for 9 years at 8% interest equals $1,052,368. In just 9 years our middle class couple have reached financial independence. They now have the financial freedom to do whatever they want for the rest of their lives.

It’s recommended that savings are invested in the share market in low-cost index funds such as Vanguard. Index funds are diversified across a broad range of shares reducing your risk. We are not talking day trading here but rather long term investment.

Sure the share market goes up and down, however we are talking long term investment. The average rate of return for the stock market is 10%.

Living Off Your Investments F.I.R.E. Style

So where does the $40,000 a year come from and how can it never run out?

Imagine, conservatively, your investments are earning 7% every year. On $1,000,000 that comes to $70,000. Now to allow for inflation and to ensure your money never runs out, you only ever withdraw 4%.

$1,000,000 x 4% = $40,000

This 4% is called ‘the safe withdrawal rate’. This is the maximum withdrawal rate you can take from your investment for your money to last for the rest of your lifetime. For a more in-depth discussion on the safe withdrawal rate follow this link to The 4% rule: The Easy Answer to How Much Do I Need For Retirement.

For explicit advice on Australian shares based on how the experts invest have a look at the Aussie Shares For Beginners blog post.

Feeling excited about financial independence? This blog post was written as a simple guide to give you awareness that there is another way of living which does not involve working until your mid-sixties or beyond.

I highly recommend you watch this TED talk from Mr Money Mustache to gain a greater understanding of the philosophy behind the F.I.R.E. strategy.

There are many blogs and YouTube clips from other people who have also achieved financial independence by following the F.I.R.E. method. Check out the Firecrackers at the Millennial Revolution, or the Frugalwoods, or the Mad Fientist to name a few.

Another great way to learn about FIRE is to watch the documentary Playing with Fire. It follows the journey of a couple with a young child as they decide to reject the standard narrative of adult life and save up to buy their financial freedom.

What are your thoughts on the Financial Independence Retire Early movement?

Disclaimer: I am not a financial advisor. This blog post is a general overview and includes many links for you to follow if you wish to research the topic of F.I.R.E. more in-depth than what is covered. As Scott Pape, the Barefoot Investor, is famous for saying, ‘Tread Your Own Path’.

Please comment below with the age you see yourself being able to retire?

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