🔥 is FIRE Right for You?
🔥 is FIRE Right for You?
FIRE 101 | Wisdom Letter 267
Exploring the Financial Independence, Retire Early Movement
Ever feel like you're stuck in a never-ending cycle of work, with retirement as a distant dream? You're not alone. That's where the FIRE movement comes in, offering a radical approach to financial freedom.
I first stumbled upon FIRE about 6 years ago, and it completely changed my perspective on money and work.
While I haven't fully embraced the most extreme versions of FIRE, incorporating some of its principles has significantly improved my financial health and overall life satisfaction.
What is FIRE?
FIRE stands for Financial Independence, Retire Early.
It's a lifestyle movement focused on extreme savings and investment to allow for early retirement.
The goal is to accumulate assets until the resulting passive income is enough to cover living expenses, freeing you from traditional employment much earlier than the typical retirement age.
If you can survive a year on 4% of your total savings then technically you can achieve FIRE. (More on the 4% rule later)
My FIRE Journey: The "Indie FIRE" Approach
When I first learned about FIRE, I was intrigued but skeptical. The idea of saving 50-70% of my income seemed daunting. However, I've developed my own approach that I call "Indie FIRE," and it's transformed my life:
I built up substantial savings - enough for a two-year runway.
I left full time job back in 2021, using my savings as a safety net.
Instead of aiming for completely passive income, I focused on building multiple micro-businesses with limited startup costs and maintenance needs.
These businesses now provide independent income that sustains me and my family.
I've achieved this without outside investments or returning to traditional employment.
This "Indie FIRE" approach has given me financial independence and the freedom to work on projects I'm passionate about.
It's not about not working at all, but about having control over my work and time. The peace of mind and fulfilment this brings is invaluable.
Freedom over anything else.
Types of FIRE
The FIRE movement isn't one-size-fits-all. Here are some variations:
Traditional FIRE: Aims to save 25-30 times annual expenses before retiring.
Lean FIRE: Focuses on minimalism and extreme frugality to retire on less.
Fat FIRE: Saves more to maintain a more luxurious lifestyle in early retirement.
Barista FIRE: Works part-time after leaving full-time work to cover some expenses.
Coast FIRE: Saves enough early on to 'coast' to traditional retirement age without additional contributions.
Indie FIRE: Builds savings, then transitions to running multiple micro-businesses for independent income.
The 4% Rule: The Magic Number of FIRE
At the heart of many FIRE calculations is the "4% Rule". This rule of thumb suggests that if you withdraw 4% of your investment portfolio in the first year of retirement and adjust for inflation each subsequent year, your savings should last for at least 30 years.
Here's how it works:
Calculate your annual expenses
Multiply that number by 25
The result is your FIRE number - the amount you need to save before you can retire
For example, if you spend $40,000 per year, you'd need $1,000,000 ($40,000 x 25) to retire according to the 4% rule.
This rule originated from the Trinity Study, which analyzed historical market data to determine safe withdrawal rates. While it's widely used in the FIRE community, it's important to note:
It's based on historical data and future market performance may differ
It assumes a 30-year retirement, which may be longer for early retirees
It doesn't account for potential changes in expenses or unexpected costs
In my "Indie FIRE" approach, I use the 4% rule as a guideline rather than a strict rule. My micro-businesses provide income, reducing the pressure on my investment portfolio. This hybrid approach allows for more flexibility and potentially a higher withdrawal rate if needed.
Potential Benefits of FIRE
Embracing FIRE principles, even partially, can lead to:
Increased financial security and peace of mind
Greater awareness of spending habits and values
Improved work-life balance
More career flexibility and negotiating power
Opportunity for early retirement or career change
Reduced financial stress and anxiety
Development of frugal and minimalist habits
How to Implement FIRE Principles
If you're intrigued by FIRE, here's how to get started:
Calculate your current savings rate and net worth.
Track all your expenses for at least a month.
Identify areas where you can cut spending without sacrificing happiness.
Increase your savings rate gradually. Even small increases make a difference.
Explore ways to increase your income through side hustles or career advancement.
Educate yourself on investing and consider low-cost index funds.
Define what financial independence means to you. It doesn't have to mean full retirement.
Create a long-term financial plan with clear milestones.
Regularly review and adjust your plan as your life circumstances change.
Remember, it's a marathon, not a sprint. Be patient and celebrate small wins.
Use the 4% rule as a starting point to calculate your FIRE number, but be prepared to adjust based on your specific situation and risk tolerance.
Considerations Before Embracing FIRE
Before diving into FIRE, keep these points in mind:
FIRE requires significant lifestyle changes that may not suit everyone.
Extreme frugality can lead to burnout if not balanced with enjoyment.
Your FIRE number (savings goal) should account for potential market downturns.
Healthcare costs can be a significant factor, especially for early retirees.
Consider the non-financial benefits of work, like social interaction and purpose.
The FIRE Challenge
Ready to dip your toes into FIRE? Here's a beginner-friendly challenge:
For the next week, track every single expense you make. At the end of the week, categorize your expenses and see if you can identify three areas where you could reasonably cut back. Then, calculate how much you could save in a year if you made these cuts. You might be surprised by the results!
I'd love to hear about your experience!
Just hit reply and let me know.
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That’s it for today.
See you next week 👋
We’ll be back with more interesting notes, highlights and curations.
Cheers,
Ayush & Aditi