How to Set Your Money On FIRE

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The title of this post might lead you to think it’s about wasting your hard-earned dollars, but it’s actually about the opposite. FIRE is about ultra-frugality and commitment to building long-term, sustainable wealth.

What is Financial Independence Early Retirement (FIRE)?

FIRE stands for Financial Independence and Early Retirement and refers to achieving a level of wealth that produces an income that will allow you to withdraw from the workforce and live entirely on your investment returns.

Since it seems most people hate their work (which is simply not an ideal way to spend 40+ hours per week, but that is another post for another time), the idea of having a self-sustaining pile of money that let’s you do whatever you want all day is very, very attractive to most people.

Fundamentally FIRE is less about having gobs of money and more about having complete freedom. Usually, the people that seek and achieve FIRE are doing it on modest six-figure sums, not copious millions. The possibility of enjoying a life of leisure on only a few hundred dollars makes FIRE even more attractive and accessible to the average earner. In fact, the less accustomed you are to a high income and its usual accompany high spending lifestyle, the more likely you are to be able to afford it.

How much do you need for FIRE?

Probably much less than you think.

A $500,000 investment portfolio can generate $30,000 to $50,000 (or even more) in income per year, which means you don’t need to hit any magic seven-figure sum in order to withdraw from the workforce. While a few will think they need more than $500,000 to FIRE, many will achieve the dream on much less.

Additionally, the portfolio is working for you long before you hit $500,000. If you’ve only banked $300,000, it’s still growing by $15,000 to $30,000 (or more) all on its own. One of the things that make FIRE possible is once you commit to it and do the legwork at the beginning, it really starts to take care of itself.

Your first $100,000 in savings is the hardest, whether FIRE is your goal or not.

Once you get $100K in the bank and continuously reinvest interest and dividends, you’ll see it grows at a pace that puts raises at your job to shame. For this reason, if you’re on the fence about FIRE, at least follow the steps for it until you bank that first $100,000 and then decide then if you want to commit for a few more years. Whether you’re FIRE-y or not, you need $100,000. Save it.

Ruthlessly slash expenses

The easiest way to afford FIRE is to make sure it doesn’t cost very much in the first place. To do this, you must learn to live on less. And I mean way, way less.

FIRE necessitates modest housing costs, low to no transportation costs, and absolutely minimal miscellaneous spending. It depends that you make sacrifices and trade-offs on even the most basic expenses that most people consider necessities. A FIRE bank balance is only possible with a FIRE lifestyle and more often this includes:

  • never buying new and always seeking secondhand for everything from furniture to clothing
  • foregoing car ownership, and limiting transportation costs by opting for a free commute, like cycling
  • going without or seriously limiting the purchase of consumer electronics and their associated costs, like having a cellphone plan with no data
  • living in smaller or less desirable homes, or with roommates in order to reduce housing costs
  • often (but not always) not having children
  • not owning pets
  • never dining out or spending money on things like concerts or events

The FIRE lifestyle is all about desperately toeing the line between extreme frugality and being straight-up cheap, to the point where you decline social events in order to avoid spending money on gifts or going out. To make it work, you must really want it to work — more than you want beers on a Friday night or even a Netflix subscription.

As far as I’m concerned, the reigning king of FIRE frugality and one of the first personal finance blogs I ever started reading is Jacob of Early Retirement Extreme. He no longer updates the site, but you can sift through old blog posts for super-FIRE ideas like showering with cold water in order to save on your utility bill. Jacob is inspirational, motivational, and a little bit crazy, which is the best kind of people.

The frugality necessary for a successful FIRE lifestyle discourages many, myself included. You have to really, really want financial freedom more than friends or a normal dating life or, in extreme incidences, hot showers. FIRE subscribers will tell you this isn’t true, but that’s because they genuinely get more joy out of putting $5 in their savings account than they do spending it on a coffee date with a friend — and that’s totally cool. One of the most important rules when it comes to managing your money successfully is ensuring that it is serving you in the way that makes you happiest. For some people this is not spending money unless absolutely necessary, for the rest of us, it’s not.

Save at least 50%+ of your income

Saving 50% of your income accomplishes two fundamental tasks necessary to achieving FIRE:

  1. living on a very small income
  2. accumulating a massive amount of savings in a short time

Think about it this way: for every year you bank half of your salary, you earn a year of retirement. After 3 years of saving 50% of your income, you will have 3 years’ worth of liveable savings.

Actually, thanks to interest and investment returns, you’re likely to have more. This means every year you reduce your lifestyle now, buys you more than a year of financial freedom later. It’s an attractive trade-off, which is exactly why it spurs so much enthusiasm for the FIRE-y millennials that dare to undertake it.

The more you earn, the faster you can set your money on FIRE. Let’s say anyone can live on the tight budget of a $25,000 per year income. For someone earning only $30,000 per year, this gives them only $5,000 to tuck away for the future. But if someone is earning $75,000 per year, they can dump $50,000 in a savings account — a full two-years worth of cash for their $25K lifestyle. Which brings me to my next point.

Earn as much money as you possibly can

This is a good rule to follow whether you want to FIRE or not.

Virtually everything in life is easier when you have money. Money offers financial security, as well as fun. Money gives you choices, and the more of it you have, the fewer of those choices are wrought with stress.

But when it comes to FIRE, a higher income will get you to your goals faster, particularly if you’re following steps #1 and #2 I outlined above. There are a number of ways to do this, from asking for a raise to working a second job to monetizing a hobby or all three. Many FIRE diehards are modest earners of $40,000 to $60,000 per year, but plenty more push themselves to bring in north of $100,000 only to live on a fraction of it and bank the rest.

When you think about it, it’s kind of a shame such ambitious high-earners are pushing themselves to big incomes with the intention to leave the workforce entirely. Ah well.

Even if FIRE is not for you, some if its lessons might be

I’m not into FIRE. I can’t do it. I could when I was an underpaid, debt-laden new grad accustomed to a shoestring budget, but once my income ballooned, I let my lifestyle inflate with it — and I loved it. Nevertheless, even I subscribe to some of the lifestyle suggestions encouraged by FIRE from when I was toying with retiring at 35 myself.

Choosing to spend less or go without certain luxuries because of the cost will benefit your finances whether or not you want to opt out of the workforce at an early age. Not owning a car has easily saved me over $100,000 by now. Investing in the stock market gave me ample savings and financial security before age 30. I don’t shower with cold water, but I don’t have cable either, so there remains evidence that I once subscribed to an admirably frugal lifestyle.

You can pick and choose what aspects of FIRE appeal to you, too. And, hey, if you want to go all-in, then there’s no downside to that!


10 Comments

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  1. We’re pursuing FIRE and it’s been an amazing journey. We’re so far off from being able to retire early, but it’s been worth it. We can breathe so much easier when it comes to money. We don’t have nearly as much pressing, horrible debt and don’t live paycheck to paycheck any more.

    Even if retirement isn’t your aim, financial independence is worth pursuing.

    Reply
  2. SP

    While pursuing FIRE is 100% optional, pursing the “FI” part of it really isn’t, at least not for a personal finance blogger! It is just a matter of how long it will take to get there.

    Some FIRE bloggers have extremely high dual incomes and don’t seem to have that extreme of frugal lifestyles. They are conscious about their spending, but they are no ERE Jacob.

    I admire the FIRE movement, but am just pursuing the FI part. I avoid unnecessary spending, except I have a car (shared with husband) and a pet and a house, and live in a high cost area. So, it will take a long time and we have a larger number in mind, but that’s OK.

    Reply
  3. Kate

    I’d suggest checking out Mr. Money Mustache for why a lifestyle with FIRE actually IS entertaining, fulfilling, full of social activities and friends, and results in heavy personal growth (and can absolutely include healthy, happy children). This post makes it sound like it’s all about sacrifice and only reasonable when you already know the feeling of having debt, but really, enjoying FIRE is more about taking the time to intentionally enjoy life. Why blow $60 on a fancy restaurant meal with cocktails when you can have friends over and cook something amazing for a fraction of the cost? Living without a car sounds like a sacrifice, but is it actually about enjoying bike rides in beautiful weather while keeping yourself healthy? FIRE isn’t supposed to bring hardship. It’s a different, but absolutely as valid and pleasant, way of looking at the world and finances.

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    • Bridget Casey (Author)

      Because $60 for a chef-cooked meal and fine wine in a restaurant is a steal? Because I live in Canada where winter weather reaches -40 making bike riding impossible?

      The idea that going to a restaurant is “blowing money” and not a way to “intentionally enjoy life” is ridiculous. As is assuming everyone lives in a climate where they can bike to work year round.

      FIRE is a sacrifice if you enjoy the alternative. And many, many people enjoy the alternative.

      Reply
  4. Jeff

    Bridget, Another wild andcrazy FIRE guy is Canadian born “Mr. Money Moustashe” in the U.S. He’s a bit “back to the land” and a lot of “live” frugally!

    http://www.mrmoneymustache.com/

    Reply
  5. Giovina

    Jacob is early retirement EXTREME for a reason. He lives on something like 14k/year in a trailer if I remember correctly. MMM is a better example in my opinion, although he’s drifted a bit since becoming super rich from the blog so his early posts are more representative for the average person. I’m pursuing FIRE on a moderate income, and it’s not an all or nothing proposition. I still eat out, but not that often, and I pack lunches most days. I cycle 8 months, transit for the 4 coldest, and don’t own a car. I still go on international trips, but I don’t stay in fancy hotels. This middle path allows me to save 25-30% of my income, but I don’t feel like I’m sacrificing, just optimizing. By minimizing my recurring expenses and learning to be happy with less I end up with a smaller environmental footprint, more satisfaction from the little things, and a more creative mindset when it comes to finding the best value.

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  6. $500,000 invested might or might not be enough to retire on. If you live in expensive city like Toronto, and you live in a house the $30,000 potential before-tax earnings on your half a mil will be quickly eaten by property taxes, utility expenses, and property maintenance. For many retiring in Canada on $30-$40 K per year is a pipe dream.

    Reply
  7. I always appreciate your perspective. The RE part is appealing (and I still don’t plan on waiting until 62 or older), but as are things like traveling now and getting those passport stamps. I’m a fan of Jacob’s ERE site and MMM – both offer interesting perspectives, even if I don’t subscribe to all their methods.

    As with most things in life, it’s all about balance. Finding what you’re okay sacrificing and spending money on what you enjoy is what matters. I think we can all benefit from toying with what we can and can’t live without.

    Plus, I think for millennials, “retirement” is going to mean something entirely different. It won’t mean never working again, but really the FI part – side hustles here and there, but knowing you don’t *have* to work full-time in order to survive.

    Reply