So… Fairly recently I came across the concept of FIRE and was extremely impressed by the thought of not having to work for money!
A disclaimer first;
This post is from the point of view of a salaried individual and not a business owner. Let’s assume a regular employee who gets a certain take-home salary in the bank account every month. So there’s a limited amount available to spend and to save each month.
What is FIRE?
FIRE stands for Financial Independence and Retiring Early. A lot of people these days have their hearts set on their personal FIRE goals and meticulously plan their finances in order to ensure an early retirement for themselves.
People “retire” at ages as low as 30 and are often criticized for taking such a drastic decision so early on in life, with disgruntled remarks like “What the hell will you do sitting at home when you retire?”. But the key takeaway in FIRE should be, and is, Financial Independence, not Retirement. And who said retirement means sitting at home?
I’m generally not a very “glass-half-full” kinda person. But to me, even though it may be decades away, the thought of retirement brings happiness as it’s when I would finally get to exit this so called Rat Race. Retirement should not merely be an event where you’re kicked out of a full-time job because you’re too old to work. Retirement, early or not, should be cherished as the portion of your life where you stop working for money and start working (if you want to) for your passion. And it need not happen at 60!
It is an undeniable fact that Financial Independence (FI) is a mandatory precursor to retirement. FI means possessing enough money or assets to never have to actively work for money again. Wikipedia defines it as “a state in which an individual or household has sufficient wealth to live on without having to depend on income from some form of employment. Financially independent people have assets that generate income (cash flow) that is at least equal to their expenses”. Whether it’s by choice or due to age, or unemployment, or any other unavoidable circumstances, you would be able to sail smoothly through your post-retirement life if you’ve already met your FI goals. It essentially means that your assets would be capable of taking care of all your financial needs for the rest of your life.
FIRE doesn’t necessarily mean you’d spend your time at home doing nothing. It gives you the financial freedom to do what you want to. You may want to teach, volunteer, paint, take up gardening, write a book, start a business, travel the world, etc. You may want to pursue a hobby to which you probably weren’t able to devote time because of your full-time job. You may want to continue your full-time job even after attaining FI because that may be what your heart truly desires. But knowing you’re doing it because you dearly adore it and not because you absolutely need it is relieving and rejuvenating.
How to attain FIRE?
FIRE requires years, maybe decades, of disciplined savings. Some people may argue that you don’t know what the future has in store, so what’s the point of saving for it? After all, who wants to be the richest person in the graveyard?
I totally agree with this school of thought and would never advocate for obsessive saving. But I would strongly recommend saving a bigger chunk of one’s salary instead of collecting the latest gadgets or spending on things (P.S. I’m all in for spending on experiences or making memories). Because a dollar saved (rather invested) now is worth much much more, decades later, thanks to the magical powers of compounding. A few intelligent investments coupled with compounding (aptly described as the 8th wonder of the world) can pave the way to an early retirement.
I don’t mean to make it sound too simplistic, but basically FI can be achieved by increasing the amount of money you save. This can be done either by increasing your take-home salary or by decreasing your spending. Tackling the latter is somewhat in your hands and probably the lesser of two evils so that is what you may want to focus on.
I wouldn’t discuss much on numbers for the savings or investments part because many professionals talk about it in great detail. Plus, I am no financial expert and therefore my idea here is not to chalk out a FIRE plan for me or for you.
Some people talk about the rule of 4 percent safe withdrawal rate. Some experts say that you must have 25 to 30 times of your yearly expenditure saved up, before you think of retiring. Some folks have designed early retirement calculators to know how much you need to save every month in order to retire in a specified number of years of your choice. But I wouldn’t bank too much on any of these because your earning, spending and financial environment are highly subjective. However, committing a percentage of your take-home income towards your savings, preferably greater than 50%, is a fabulous starting point.
A very simple idea is sticking to a comfortable standard of living, irrespective of how much you make. You do not need to reprogram your way of life every time you get a bonus or a raise. It is important to stick to nearly the same expenditure, year after year after year, to see your savings swell up. It is quite natural to have temptations to upgrade your lifestyle every time you see more money coming in to the bank. Alternatively, you may have to spend more due to an emergency at home. But what’s important is that you make an investment plan and commit to it. Because whether you are fully successful or not, just the process of trying to stick to your investment plan will bring an unspoken discipline to your life.
Another vital requirement before starting your FIRE journey is to ensure you’re debt-free. Do not be caught up in the common antiquated misconception of “I’ll continue this loan because it gives me a tax benefit”. If you do have the money, please make sure to re-pay your loans and be debt-free, instead of hanging on to them for a measly tax rebate. It’s just not worth it. I’m not advising to sell your kidney and be debt-free. I re-iterate again, “Clear your debt, if you have the money”.
Also, another evil kind of debt is credit card interest charges. I’m not against credit cards. As a matter of fact, I can go on record and admit that I absolutely love mine and cannot think of life without it. I accumulate reward points and air miles and also get attractive discounts using it for all my monthly spends. Also, I’ve never paid the yearly renewal charges by easily surpassing the minimum amount for fee waiver as I use it extensively. In short, it’s very easy to use credit cards without any extra charges while enjoying all the amazing benefits they offer. But there are many people who do not understand the working of a credit card. Simply put, it is nothing but a short term debt. The bank basically loans you money if you do not have it in your savings account or you do not wish to disturb your investments or savings or liquid cash. If you pay your credit card bill on time, this little personal loan is interest-free and everything is under control. But if you do not, all hell breaks loose. Not only are you forced to pay exorbitant late fees (fixed), you also end up paying crippling interest amounts in the name of finance charges (depends on your bill amount). Having higher and higher credit limit with no financial discipline is extremely dangerous. I can count umpteen instances where I’ve rejected my bank’s plea to upgrade my card to one with a higher credit limit.
A simple google search, can bring you face-to-face with numerous bloggers who have successfully attained FIRE or are on this exciting journey. You can read about their struggles and their achievements and get truckloads of inspiration. Most importantly, this would help you understand that FIRE is something achievable. You need not inherit millions to retire early, you can achieve this dream even with your savings and investments while on an average full-time job. The key is saving more!
If you are intrigued and want to know how you can retire early you must check out the marvelous world of Mr. Money Mustache. He believes in the power of minimalism and frugality. He has a plethora of information available on his website so its easy to get confused and lost but you can start with one of my personal favorites: The Shockingly Simple Math Behind Early Retirement.
FIRE and I
Attaining FIRE is a super lengthy process and I think I’m not entirely ready to commit myself to this idea and I’m not wholly certain that this could work out for someone like me. I haven’t analyzed how much money I would need or how I’m going to save that money. I also haven’t thought of whether I would want to quit my well-settled job as an aerospace engineer or what I would want to do with my time if/when I actually decide to quit my job. Near-full-time travelling, blogging or opening my own restaurant in the hills, are some of the things I sometimes dream of, but I haven’t thought of the feasibility of these ideas in a practical sense. Also, I haven’t yet decided of an age when I would want to “retire”. I feel that having a rough time horizon on a long term goal like FIRE is a must, in order to know how much money I would need when I retire and how much I’d have to save every year or every month to reach that goal.
For now, FIRE is just something I’ve come across and something I find extremely interesting and maybe, in some happy and hopeful corner of my mind, somewhat doable. I don’t know if I would be able to meet my saving goals for FIRE considering my love for Travel and an optimistic plan of a big trip and multiple small trips every year. But I do want to try to save and invest the maximum amount I possibly can. I also hope to be financially literate to know how, when, and where to invest the money I save.
And if it all works out, I hope to catch FIRE someday soon!