How to Set Your Money On FIRE

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 a commitment to building long-term, sustainable wealth.

What is Financial Independence Early Retirement (FIRE)?

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

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

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 thousand dollars makes FIRE even more attractive and accessible. 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 FIRE.

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. This 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.

Your portfolio will be 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. You can 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. Way, way less.

FIRE necessitates modest housing costs, low to no transportation costs, and absolutely minimal miscellaneous spending. It depends on you to make sacrifices and trade-offs on even the most basic expenses. 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
• foregoing car ownership, and limiting transportation costs
• going without or seriously limiting the purchase of consumer electronics and their associated costs
• 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. You will 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. 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. 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. 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.

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. That’s 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.

RELATED: How to Earn an Extra $5,000+ This Year

But when it comes to FIRE, a higher income will get you to your goals faster. 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.

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!