What is FIRE?
The term FIRE stands for ‘Financial Independence, Retire Early.’ In other words, it means becoming financially independent and retiring (much) earlier than the standard retirement age.
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What is the FIRE movement?
The FIRE movement is a growing community of people who are consciously working on financial independence. The idea is to spend less money than what comes in, with the goal of investing the remaining money to become financially independent. The movement is particularly popular among people in their twenties and thirties, and is growing fast in the Netherlands and other European countries.
The origin of the FIRE movement
The FIRE movement originally comes from the United States and was inspired by the book Your Money or Your Life, written in 1992 by Vicki Robin and Joe Dominguez. Another influential source is the book Early Retirement Extreme by Jacob Lund Fisker from 2010. In both books, you can read how to quickly become financially independent with a minimalist lifestyle.
The popularity of the movement grew further worldwide with the arrival of the blog Mr. Money Mustache. Since 2011, you can find tips on this website to become FIRE. In the Netherlands, there are increasingly more blogs, podcasts, and online groups where experiences and strategies are shared.
What is the goal of FIRE?
The goal of FIRE is to become financially independent. It doesn’t mean that you necessarily never want to work again. It is about being able to choose when, how much, and where you work yourself.
Financial independence means something different for everyone. For one person, it means early retirement because they don’t want to work until the pension age. For another, working part-time sounds attractive, or the freedom to go on a long trip around the world beckons. So, FIRE is not just about money, but mainly about quality of life and more freedom.
How does the FIRE method work?
The FIRE method works quite simply. You spend less money on your daily oat lattes at the coffee shop around the corner and invest the money left over at the end of the month. So, if you spend € 3.50 five days a week, you can save or invest € 70 monthly, for example in stocks or ETFs (Exchange Traded Funds), if you don’t order a drink. Of course, you can save on even more things. FIRE followers often save 50% or more of their income. That seems extreme, but every extra percent can help.
You continue with this strategy until you have enough money to (temporarily) stop working. Achieving FIRE is therefore not a magic trick, but the result of a series of conscious choices.
How much money do you need to become FIRE?
There is no fixed rule of thumb that determines how much money you need to become FIRE. A frequently used starting point within the FIRE movement is the 4% rule. This states that you can get by if you can withdraw 4% of your assets annually to live on. Next, you multiply your annual expenses by 25 to calculate how much money you need. Do you spend € 30,000 annually? To become FIRE, you need € 30,000 x 25 = € 750,000. € 30,000 is 4% of € 750,000.
How much money you need to become FIRE depends on your personal situation, expenses, any debts, and lifestyle. Do you live quite luxuriously? Then you need more money to maintain this lifestyle. Do you already watch what you spend, and do you find saving important? Then you most likely need less money.
Become FIRE in 5 steps
Becoming FIRE isn’t rocket science. The idea is that you become more conscious of your income and expenses. The five steps below help with this:
- Define your goal: Think about what you want to achieve with FIRE. What are your financial goals? Make them SMART to stay motivated.
- Map out your financial situation: Make an overview of your monthly expenses and income. You can use a simple notebook or a special app for this.
- Lower your expenses: Look at what you can save on. Are those luxury sandwiches for lunch necessary? Or do you really need subscriptions to six different streaming services? By spending less money, you increase your monthly savings amount. Saving = faster FIRE.
- Increase your income: FIRE isn’t about a higher salary, but extra income can help. You can increase your income, for example, by negotiating your salary. Or raise your rates as an entrepreneur. A side hustle can also help to generate extra income.
- Invest: At the bottom of the line, you have money left over. You can put that money in a savings account or invest in financial products like stocks and ETFs. Most FIRE followers strive to invest at least 25% or more of their income. Note, investing involves risks.
4 alternatives to Financial Independence, Retire Early
FIRE is not suitable for everyone. Critics find FIRE unrealistic because (extreme) frugality is the starting point, you are dependent on your own goals, and the 4% rule can be unfeasible. That is why different alternatives have arisen within the FIRE community over time. These are the four most popular variants:
- Hot FIRE: This is a milder form where complete financial independence is not the goal, but more freedom. For example, by working one day less.
- Barista FIRE: This is also a less extreme form. You work part-time and save money to cover part of your costs. This allows you to live more freely.
- Fat FIRE: You save or invest extra without lowering your standard of living. The emphasis is on increasing your income.
- Coast FIRE: You save and invest the maximum amount in the first years of your career. Then you stop doing that and let the investments grow further.
Is the FIRE movement for you?
FIRE is a challenge. So consider carefully if this movement is something for you. If you value freedom, peace, and independence, then FIRE is certainly worth considering. For that, you do have to live frugally and invest for a longer period, and you need financial knowledge and discipline. So consider carefully if you are willing to live (extremely) frugally and invest in exchange for your ultimate goal.
FIRE and investing
Many FIRE followers invest the money they have left over monthly to achieve a return. By investing in, for example, ETFs, they keep costs low and hope to become financially independent faster.
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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
