Financial Independence, Retire Early: What you need to know about the ‘FIRE’ movement

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What would you say if we told you some people willingly deprive themselves of luxuries and save up to 70% of their pay?

Would you think they need some serious mental help and call them crazy? Or would you say they were crazy like a fox?

That’s the fine line that adherents of a new financial movement known as “FIRE” have to navigate everyday!

RELATED: 5 lessons from a man who became a millionaire in 10 years

Taking a closer look at the FIRE movement

For those uninitiated in the FIRE lifestyle, it’s an acronym that stands for “Financial Independence, Retire Early.”

The FIRE lifestyle is an offshoot of the minimalist movement that’s been championed mostly by a subset of highly-paid technology workers in major urban areas.

But despite being favored by young professionals, the endgame of FIRE actually involves giving up well-paid (though high-stress) office jobs and moving to less expensive, often rural, locations.

According to a recent profile in The New York Times, the FIRE lifestyle has become synonymous with short-term sacrifice in order to have more money to save and invest. The long-term goal is to be able to call your own shots and quit working after about 10 or so years of hard work and hard saving.

It’s not uncommon for FIRE adherents to call it quits in their 30s or early 40s, at a time when most people are pouring more and more resources and time into their careers.

Some hallmarks of the FIRE way of life include having an aversion to lifestyle creep, turning your back on the latest and greatest pricey tech gadgets, and avoiding racking up debt to keep up with the Joneses at all costs.

In other words, FIRE is all cash and no flash!

Living a FIRE kind of lifestyle isn’t for everybody. Money expert Clark Howard did it long before it was fashionable.

As a young person, Clark lived on every other paycheck and was able to retire when he was 31 after selling a chain of travel agencies he’d started.

Of course, the lifestyle of an extreme saver simply can’t be adopted by most people. That’s because too many of us are too burdened by past financial choices like credit card debt and student loans.

But if FIRE sounds like something you’re interested in pursuing, follow this advice…

Figure out an extreme savings rate that works for your life

While there’s no hard and fast rule, most adherents of the FIRE movement save between 40% and 70% of their pay.

That’s a far cry from the 10-15% most financial types say you should invest. The 10-15% rule applies to people who plan to work for the traditional number of years — that is, 30 to 40.

But if you want to retire early, you’ve got to jack that savings rate up until it hurts!

Always use a simple low-cost investment strategy

Index funds are just about the lowest-cost investments available. In fact, it’s now free to invest in some index funds thanks to a new unprecedented move by Fidelity Investments.

The Fidelity Zero Total Market Index Fund and the Fidelity Zero International Index Fund both have absolutely zero in the way of fees…which means every penny you invest goes to work for you not, not some stockbroker!

As for keeping it simple, index funds offer a one-stop shop that lets you invest in hundreds or thousands of companies across the spectrum of domestic and international capitalism. It’s a much more cost-effective strategy than relying on a Wall Street whiz kid to pick the next hot stocks for you.

For more help with simple investing, see Clark’s investing guide.

Pay off your mortgage early

It’s always best to put a sizeable down payment on a home to avoid PMI. By doing that, you get the double effect of saving on the expense of mortgage insurance and lowering your monthly payment.

Once you’re in a home, you should aim to pay down the principal as aggressively as possible.

One easy way to do this is to set up your own bi-weekly payment schedule. It’s super easy to do and the net effect is you’ll make 13 payments in 12 months, which means slicing several years’ worth of payments off that debt!

If you can’t get rid of your mortgage altogether, many FIRE followers will at least downsize their house in order to have a smaller monthly payment.

Question the role of a car in your life

Cars tend to be the second-biggest expense in most people’s lives after housing.

A lot of FIRE followers have downsized from two cars to one, and some even ditch cars altogether in favor of biking if their environment is suited to that lifestyle.

Giving up your automobile altogether may not be the right solution for you. But there’s always something you can do to lower your transportation costs.

Some meaningful changes can include buying your vehicles used — not new — and steering clear of leasing a vehicle, with some limited exceptions.

Observe the 4% rule

A lot of FIRE adherents will wait until their investment portfolio crosses the $1 million portfolio to quit working. It’s not uncommon that reaching this milestone will take a decade or more of diligent saving and self-sacrifice.

But once they have that $1 million portfolio, how do they manage it? By heeding the 4% rule.

The 4% rule is a tried-and-true portfolio planning strategy often cited by financial planners. It states that you can preserve your principal 30 years or more regardless of market conditions if you only withdraw up to 4% each year.

So let’s say you manage to amass $1 million in investable assets. Using the 4% rule, you could draw down $40,000 annually as your “salary” in lieu of having a job. Your money would still last for a minimum of three decades and even longer under some market conditions.

Conclusion

If you’re an extreme spender who wants to become an extreme saver, it’s not going to happen overnight. Rather, it’s a process that has to come about through baby steps.

When Clark hears from extreme spenders, he puts them on the 1% plan, where you begin by saving just 1% of your salary into a retirement account. Then, after six months, you increase that by another 1%, and so on another six months down the road, until you get to 10%.

Sure, it’s not going to put you up there with the FIRE followers who save and invest up to 70% of their pay, but at least it’s a start!

If you still aren’t feeling the pain after taking Clark’s recommended steps, allow yourself to save even more. Maybe you’ll surprise yourself and find you can cut the fat out of your budget and retire early, too.

More money & retirement stories on Clark.com

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Theo Thimou About the author:
Theo has co-written several books with Clark Howard, including the New York Times #1 bestseller Living Large in Lean Times. As a single widowed parent of two young children, he strives to bring unique savings tips to men and women like him who must face life without their spouses. He can be reached at [email protected]
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