A Beginner's Guide To FIRE Finance

Is the FIRE financial method a hot trend or life changer? This article provides an introduction to the strategies and thinking behind the 'financial independence, retire early' movement.

Retiring or semi-retiring early as a financially independent individual may sound like a dream scenario. One that many believe is only available to the incredibly rich or lucky. But for over a decade now, a movement under the banner FIRE has been growing online, driven by individuals looking to achieve these unique financial goals for themselves.

But what exactly is FIRE, how does one achieve it, and is it the right financial strategy for you?

What Is the FIRE Financial Method?

Sometimes abbreviated as FI/RE, the acronym FIRE stands for "financial independence, retire early." But more specifically, it refers to a school of thought on achieving these goals.

The movement behind FIRE originates in the book "Your Money or Your Life," by Joe Dominguez and Vicki Robin, a pair who reportedly left their jobs and lived on a combined $12,000 annually from their savings.

Dominguez and Robin never mentioned FIRE in their book. Still, many of the key concepts behind FIRE can be found within its pages. Including the core idea of retiring early and living on passive income and safe withdrawals

But what financial independence and early retirement means may differ from person to person. And so, too, may the strategies they utilize, with many financial experts proposing differing versions of FIRE.

For some, achieving FIRE might not necessarily mean leaving the workforce but taking on a lower-paying job they love or working part-time.

Yet, whatever approach one takes to FIRE, achieving it essentially boils down to prioritizing investments over other expenses. And it requires a degree of financial know-how, dedication, and discipline.

Variations of FIRE and Key Terms

Again, several variations and strategies fall under the school of thought known as FIRE, many of which have dedicated online communities. Here, to help you navigate these groups and concepts, are some of the key terms surrounding FIRE:

Coast FIRE: refers to having enough money already invested to retire by your expected retirement age.

Barista FIRE: refers to taking a less-stressful, possibly part-time job having achieved Coast FIRE.

Lean FIRE: Approaching the FIRE strategy from a minimalist and frugal mindset, whereby your investments cover little more than your necessities.

FAT FIRE: Essentially the opposite of Lean FIRE, FAT FIRE is a goal for those looking to retire early with passive income covering high yearly expenses. This strategy is only available to the highest earners or those with more daring investment strategies.

Chubby FIRE: For those that fall between the Lean FIRE and FAT Fire schools of thought, namely middle-class earners.

Calculating FIRE

At the core of most FIRE strategies are the 4% and the 25x rules. The former is an old rule of thumb used to calculate how much money a person can safely withdraw from their retirement fund without fearing running out of money one day. So, for example, someone with a $1 million retirement fund could theoretically spend $40,000 in their first year of retirement without having to worry about money later on.

The 25x rule is used to calculate how much money a person needs in their retirement fund to be able to rely on the 4% rule. It's simply a person's yearly expenses times twenty-five. The real trick with FIRE is to reach the resulting number earlier by investing more money in a shorter period than usual.

Some point out that the issue with FIRE is that advisors designed these rules with older retirees in mind. And not people in their thirties and forties who might live for another half century or more.

Thankfully, historically, the 4% rule often overperforms, and you can generally live longer on such a retirement fund without issue. However, if you're looking for more security, experts such as Michael Kites suggest aiming for a 3.5% withdrawal rate instead. Others meanwhile suggest aiming for a lower number still.

Of course, these are ultimately all ballpark figures. And the exact amount of money you aim for to reach FIRE will depend on the level of security you want and if you wish to lead a luxurious or frugal retirement.

Tips for Achieving FIRE

Stick With Fundamental Investments

Picking individual stocks isn't necessarily the worst idea if you're savvy, knowledgeable, and confident regarding investing strategies. But for most exploring FIRE, a selection of index funds and ETFs will typically form the core of their portfolio.

You may also benefit from diversifying your portfolio by looking into real estate through direct or indirect means (such as real estate crowdfunding). But even three or four reliable index funds should offer an excellent foundation to build your retirement fund and passive income.

Take Your Family Plans Into Account

There's no getting around the fact that it's much harder to retire early and become financially independent when there are children involved. That's because it costs, on average, around $250,000 to raise a child into adulthood, even more still if you plan on putting them through college.

That's not to say that it's impossible to achieve FIRE with children, but it is something that you'll have to take into account if you're serious about retiring early.

Embrace Frugality and Hard Work

It only makes sense that less annual expenses you have, the easier it is to achieve FIRE. Likewise, the higher your income, the easier it is to accomplish.

With this in mind, two key strategies to retiring faster are tightening your expenses and earning more. The problem with focusing too much on the latter is that lifestyle creep can soon set in, and you might find yourself overworking. On the other hand, focus too much on the former, and you might discover yourself leading a life that isn't to your comfort level.

Ultimately, you have to be realistic with your situation and what you are or are not willing to let go of or embrace in life to achieve financial independence. Still, being a little tighter with your money and being willing to work hard are two essential components if you want to succeed with FIRE.

Assessing if FIRE Is Right for You

FIRE is not your run-of-the-mill strategy; it requires a lot of dedication and sacrifice. As a result, it's certainly not for everyone.

Furthermore, FIRE isn't without risk. Calculate the amount you need to invest wrong, for instance, and you might find yourself heading back into the workplace after years away and starting right back at the bottom of the corporate ladder again. Likewise, financial disasters can potentially put a FIRE strategy off course.

Of course, retiring early certainly sounds like a dream come true. But you might find that working reasonable hours at a job you enjoy into retirement age is preferable to putting in extra hours and living frugally to become financially independent sooner. Ultimately, it all depends on the person and isn't something anyone should throw themselves into on a whim.

Final Thoughts

Again, aiming for FIRE requires serious consideration. But now you should have a good understanding of the core tenants and ideas behind FIRE and can start to form a judgment on whether chasing FIRE is right for you and how best to approach it if so.