Have you heard about the FIRE movement? Here is an overview of financial independence (aka FIRE) and a lot of great concepts to apply to your financial plan for the new year.
My interest in financial independence began with Choose FI
I mentioned in my 2021 word of the year post that I’d gotten interested in the FIRE movement in the second half of 2020. (Chalk that up to wanting to feel grounded and secure amidst a world of chaos.) While I use YNAB for my budgeting, I use Personal Capital to track my savings for the future. I think their retirement calculator is the best out there! I have plugged in 100 different scenarios to see how the numbers shake out. (FYI, both of those are affiliate links.) Having been a listener of the Dave Ramsey podcast for a long time (I finally broke up with him when he got far too conservative for me), I was searching for a new resource for financial information.
Then I stumbled upon the podcast Choose FI (I either heard a cross-over interview on another podcast or found them searching for a specific topic – I forget!) Brad and Jonathan live in Richmond, Virginia, so I immediately felt like we were friends!
Financial Independence is much more about life optimization than it is about money.
Rather than debate theoretical investment strategies or get into the nitty gritty of taxes, I like my financial advice mashed together with real life. AKA I want to know how real people are using it and applying it.
The Choose FI podcast is packed with interviews and stories of how real people are hacking life. Some are on the path to FI, some have reached it, and some are simply aiming to be 1% better each day.
The first step to financial independence: FU Money
Brad and Jonathan often say that the ultimate goal is to separate your time from money. If you had enough money to live on forever, work would be optional. You would choose to work because you found fulfillment in your job and not because you had to pay bills.
Those in the community refer to the first step to becoming FIRE as having “FU money.” Which is enough money to be able to walk away from a job you dislike and find a new one without worrying how you’ll pay your bills. It’s the freedom to walk away.
But before I lose you at something that seems impossible, know that the podcast is about financial efficiency more than anything else. The more you can optimize your spending and avoid the lifestyle creep that comes with raises, the better chance you have to build wealth and maybe after a while, become financially independent.
You don’t need to be a multimillionaire or have a high paying job to achieve FI
What you do need is a margin between your income and your spending that is proportionally sized to your goals. This is referred to as your savings rate.
What’s a good savings rate?
It depends on who you ask! Generally the financial community encourages people to save 15-20%. Most people don’t hit that.
The FIRE community encourages folks to strike for a high savings rate, especially in your early years. If you can sock away $100k in your twenties you can never save another dime and have a million at retirement. (Check out the site We Want Guac for some Gen Z advice!)
Some in the FI community aim to save 30 percent of their income. Others save up to 70 or 80 percent. As you can imagine the percent varies dramatically based on how much you earn and what you spend.
How to calculate your savings rate
- You can make $60k a year and live on $30k and be at a 50% savings rate.
- Or you can make $200k a year and live on $100k and be there too.
- Or you can make $200k and live on $30k have an 85% rate, but few unicorns do that!
All that to say, it’s a lot easier to make more money than it is to cut your expenses super duper low.
Cool case study by my BFF Jesse Mecham of YNAB: A 50% Savings Rate Is Impossible, Isn’t It?
There are at least Three Types Of FI
Perhaps the most popular name and one of the longest running blogs in the FI community is Mr. Money Mustache. His extremely frugal spending is at one end of the spectrum. Others aim for a FI number higher than a million with larger spending goals.
This sub category is for those who have a very frugal spending plan. I would lump them as $40k and below. Check out A Purple Life who spent less than $20k in 2019. She retired on $500k.
These are people who want to be FI with a generous spending plan (think first class flights and dining out). I’d say $100k and above. Here’s an article about FatFIRE. FatFIRE probably sounds most like what “normal” people are trying to save up by age 65 so they can play golf and travel the world.
This sub category is for people who either can’t or don’t stop working but they have saved enough to hit their FI number in a number of years without aggressively saving any more. Maybe you love your job and want to keep working but you want to take your foot off the gas with your savings or work part time hours.
How to calculate your FIRE number
You calculate your FIRE number by multiplying your annual spending (ALL of it – don’t miss annual expenses!) by 25. Why 25? Because it’s the inverse of 4%, which is the amount you can comfortably take out of investment accounts each year and never run out of money, inflation included. While some people think using 3 or 3.5% is even more conservative, 4% is generally the gold standard. Check out Big Ern’s Safe Withdrawal Rate series if you love math!
- If you spend $40k a year, you need $1 million in investments to be FIRE.
- If you spend $100k a year, you need $2.5 million in investments to be FIRE.
- Or if you’re uber frugal like The Purple Life and you spend less than $20k a year, you can retire on $500k.
To those people, not having to work is more important than all the things in the world.
Ways to Hack your lifestyle
If living off of $30k seems impossible (and trust me, it does for me!) some of the ways people do it are by “hacking” the big dollar eating categories many of us think of as a given.
Make your living expenses go to 0 by having roommates pay the mortgage or finding the perfect house sitting or house sharing opportunity. (I could never do this!)
Playing the credit card game to earn hundreds of thousands of miles and never pay for a flight or hotel again. (I’m looking into this!) The Choose FI guys are experts on travel rewards and never have to include travel in their spending. Check out their travel 101 course. (Note: you must be extremely responsible and organized to play the credit card game.)
Not owning cars
If you add up a car payment, car taxes, fuel, maintenance, repairs, and saving for a new car, you will realize how expensive cars are. Some FIRE peeps just ride a bike around and save so much money. (It’s also cheap not to have kids LOL!) This falls into the “what is not working worth to you” category. If you didn’t have to work, how often would you drive? It depends on where you live more than anything else, I think.
Rarely dining out
I think we could ALL work on our food budgets – myself included.
A fancy way of saying that you live somewhere with a very low cost of living (especially if you work remotely!) Here’s an article about it: Geoarbitrage.
Maybe the idea of saving 50% of your income seems impossible. The Choose FI guys often talk about getting “one percent better” all the time. Big goals are achieved with small steps. Calculate your savings rate and aiming to make it better – whether 1 or 30% better – the following year.
You might think at first that there isn’t anything you could cut back on, but you have to think outside of the box. The podcast is packed with tips!
I am fired up about FI!
What fires me up most about the idea of FIRE isn’t not working. It’s the mindset of disconnecting time from money.
I am someone who wants to wake up and feel productive. In the periods of my life when I tell myself I’m going to unplug, I still find ways to check in on my businesses. (Not saying that is a good thing!) But I’d probably be someone who retires from one business just to start another. (Brad and Jonathan are this way too – they say one of the greatest gifts of being FI is the ability to be creative with entrepreneurship.)
I also know that I am a Rebel, and I like to be able to work on what I want to work on in the moment. It is the mindset I’m chasing. To know that if I can’t or don’t work one month that everything will be fine.
We have regular budget meetings to discuss the state of the household spending, and I’m constantly trying to improve that savings margin. But it’s easier to add than subtract, so adding a side hustle or increasing your income in creative ways will get you to FI faster than cutting out a coffee shop run that brings you joy once a month.
Curious about financial independence? Learn more here:
If you have consumer debt, start with Dave Ramsey’s podcast.
Then listen to the Choose FI podcast #100: Welcome to the FI Community
Then watch the Playing with FIRE documentary
If you want to learn more about FIRE, these are some of the best sites out there:
- Choose FI + the Choose FI Book
- Big Ern: Early Retirement Now
- JL Collins: The Simple Path To Wealth + his book
- The Frugalwoods
- Millennial Revolution