What is FIRE(Financial Independence, Retire Early)?
Origin of FIRE
The origins of the term ‘FIRE’ is unknown; however, in 1992, Vicki Robin and Joe Dominguez authored a book named ‘Your Money or Your Life,’ which popularized many of the concepts used by people who are part of this movement.
What is FIRE?
As per ‘Investopedia’s Financial Independence, Retire Early (FIRE) is a movement of people devoted to a program of extreme savings and investment that aims to allow them to retire far earlier than traditional budgets and retirement plans would permit.
In this concept, people live frugally, indulge in extreme savings, and invest money. The savings can be as high as 70-80%. The aim is to accumulate a particular amount of money, after which they can withdraw 3-4% per year or a bit more to cover their living expenses for the rest of their life without any compulsion to earn more. After accumulating that magic number, the returns compensate majorly for the withdrawal; therefore, it is sufficient to sustain expenses for the rest of your life.
It may be complicated to arrive at the final amount, considering an increase in earnings, inflation, and investment return. However, for simplicity, one can go with the popular thumb rule, which says one needs to have more than 30 times of current yearly expenses before declaring themselves Financially Independent.
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Types of FIRE
- Fat Fire.
- Lean Fire.
- Barista FIRE or Coast FIRE.
The FIRE movement is quite flexible in its approach, and a person can adopt any form which suits them. Some of the common variations are the following:
1. Fat FIRE
Fat FIRE is for those who want to maintain their living standards after retirement. In FAT FIRE, a person spends more than an average person, providing more flexibility to spend and live, which generally needs high income, aggressive savings, and investment strategies.
2. Lean FIRE
Lean FIRE requires aggressive saving and minimalistic living or living on a lean budget, which would mean a restricted lifestyle. In Lean FIRE, a person spends less than an average person. In this case, a person may shift to a small town or village to decrease expenses.
3. Barista FIRE or Coast FIRE
Barista FIRE or Coast FIRE is for people excited by financial freedom but not early retirement. Here you need to earn money to cover expenses. However, you don’t have to worry about saving money for retirement. Therefore, even leaving your 9-to-5 job, you can manage your finances with a part-time job. You decide when to retire and back-calculate how much you need to retire, and then you coast to your retirement by just earning to cover your current expenses.
Understanding FIRE with the help of numbers
Let us understand FIRE better with the help of an example. Raj and Rita, who are approximately 35 years of age, recently learned about FIRE from one of their friends and wondered if they could also achieve FIRE.
- Total investible assets (FD, Bonds, Mutual fund, Stocks, real estate, gold, silver, etc.) - 90 lacs
- Total liabilities (All types of loans) - 40 lacs
- Yearly expense - 12 lacs
- Current household income - 32 lacs
- They want to retire at 45 years.
- Assume the inflation rate for India is historically 5-6%.
- Returns on investment they can get (depends on the risk appetite and need) = 8%
Let us do some rough calculations for them; please note that these are approximate and quick calculations to understand FIRE; please do the accurate calculation on an excel sheet considering the inflation rate, increase in earnings, and investment returns, or may even refer to online calculators which are readily available.
Net worth of Raj and Rita = (Assets – Liabilities) = (a)-(b) = 90-40 = 50 lacs
Net savings per year = (c) – (d) = 32-12 = 20 lacs per year
By thumb rule, one must accumulate a minimum of 30 times yearly expense, which will be 30*12lacs = 3.6 crores. However, we have several unseen events, such as high inflation in education and medicine, which may impact this figure; therefore, for simplicity, without going into high inflation adjustment, let us increase it by 25%, which would be approximately 4.5 crores. (Please note that this doesn’t include fancy homes and international holidays.) If you want such spending, the saving must increase accordingly, as done in FAT FIRE.
Currently, the couple’s net worth is 50 lacs at the age of 35 years, and with current earnings and expenses, they can invest 20 lacs per year; therefore, to achieve 4.5 crores with this rate, they need at least 20 years to be near to their FIRE amount, 20 years * 20 lacs = 4 crores which is an extended period. Therefore, with this calculation, Raj and Rita will achieve FIRE status at 35 + 20 = 55 years rather than at their desired 45 years.
But their income and savings will also increase, and their investment will also give at least an 8-10% return so that they may achieve it a few years early. But we have yet to consider what if one of them stops working, then the equation changes, and it would take much more years, making it difficult to achieve in 20 years. However, in the best scenario, this couple can achieve FIRE by age 50 to 55. It can be earlier or later, depending on how much they can increase their income, savings, and investment returns.
But then we heard that people were declaring FIRE at 35 and 40. Is that fake? The answer is both Yes and No. The above calculation shows that achieving FIRE takes time, effort, and discipline, and there is no shortcut. And even after achieving FIRE at any age, one must follow discipline in their spending habits and manage their investments well; otherwise, if the returns are not as planned, the corpus will not be sufficient even after achieving FIRE. Therefore, while it is possible to achieve it early, by the age of 40, it depends on many factors like earnings, savings, expenses, and where they live. A person living in a small town can achieve FIRE with even 1.5 crores as living expenses will be low there, while one residing in Mumbai may need more than 5 to 6 crores. Furthermore, few people declare it fake and sell services to achieve FIRE online.
Here are a few tips to make FIRE achievable.
- Start at an early age.
- Focus on your career and try to increase your income consistently.
- Choose wisely on what to spend.
- Plan for contingency in your journey in the form of an emergency fund and medical insurance.
- Learn investment tricks and deploy your savings for adequate returns per goal.
Is FIRE for me?
Now after knowing the basics of FIRE, do you feel excited? Do you feel like taking a plunge? Both the answers (Yes/No) are equally correct. These days some people declare that they have achieved financial independence and are leaving their jobs at age 35, but it is not the prescription for everyone, and this is not a rat race and a must-have strategy that fits all. You may like your job and would like to work till 60; an early retirement may not even excite you. However, there are a few good things about FIRE.
- It teaches you to live on lower expenses and save with an objective. It will restrict you from spending on things you don't require.
- It motivates you to increase your income to reach your goal early.
- It also encourages you to learn investment basics and how to grow your hard-earned money.
- It gives you confidence in starting a Boutique or a food joint you have always wanted. Even if you continue in your job, you will not fear layoff or lower hikes and bonuses, and will increase your productivity.
The call is yours and how you want to achieve financial independence. You can go aggressive on your savings, increase your income and execute it in less than ten years, or you may decrease your expenses by shifting to a small town in the future. Suppose you don’t want to retire early but want to achieve financial independence. In that case, you can opt for Barista FIRE or Coast FIRE, where you save and invest well with discipline every month for your retirement and carry on your work for your current expenses. One should not be obsessed in achieving financial independence too early in his or her career, instead focus on acquiring skill to increase income and you may increase the number of years needed to achieve it.; you may increase the number of years or your income. After all, the plan should be flexible and enable you to live life fully as you live in the present, not just for the future and retirement.
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