Planning

What you need to know about the F.I.R.E movement

29 April 2021 | Posted by Frankie Jones

What is it?

The F.I.R.E movement stands for ‘Financial Independence, Retire Early’.

It’s dedicated to helping you achieve financial independence so you can retire early, rather than relying on income from work forever. The aim is that traditional paid work could one day be optional if you follow the F.I.R.E principles which allow you to rely on ‘passive income’ instead. Passive income means earnings that continue after you’ve stopped working. For example, this could be income from investments or from a property that you rent out.

The key focus of F.I.R.E should be on financial independence rather than early retirement specifically. So if early retirement isn’t your biggest goal, you can adapt the movement to suit your situation.

You can be as prescriptive about the ‘rules’ as you want. It’s typically associated with extreme saving, so many people choose to save 50% of their income to allow them to retire in their 30s. Of course, that might not be realistic for others.

The different types of F.I.R.E

You can look at the F.I.R.E movement as a spectrum, as not everyone is able to follow the core principles to the letter given how prescriptive it is:

LeanFIRE – You’re able to retire early on a smaller amount of income and limited living expenses. You’ll still live a frugal, ‘minimalist’ lifestyle during retirement.

FatFIRE – The opposite of Lean F.I.R.E; you’re able to retire early due to a large amount of accumulated wealth and passive income. You’ll have a larger pool of money to dip into if necessary and no concerns about living expenses in old age.

BaristaFIRE – This is the ‘halfway house’ where you don’t have to sacrifice your lifestyle quite as much. You’re able to either live a semi-retired lifestyle of working part-time for supplemental income, or retire fully but with a partner who continues to work.

CoastFIRE – Similar to BaristaFIRE, but you’ll have enough money invested at an early age, that you no longer need to invest because the power of compounding will cover your lifestyle.

How the F.I.R.E movement works

  1. Make a plan to reach your goals

First, you need to consider what’s most important to you. Maybe you do want to retire at 40, or maybe you want to move abroad and live a simple life. If you haven’t given much thought to later life, picture a day when you don’t have to wake up to an alarm clock and go to work. How would you feel? What would you want to do with this free time?

Whatever it is, start by figuring out how much money you’d need to achieve this goal based on your current income and outgoings. This should give you an idea of what you’d need to change to make your dream a reality.

  1. Cut down your spending

The F.I.R.E movement encourages frugal living in order to maximise your savings so it will involve making some sacrifices. It’s all about choosing your priorities. Not willing to cut down how much you spend on eating out? You could try reducing how much you spend on essentials by switching utility providers or cycling to work instead of driving.

If you’re unsure how much you spend on a monthly basis and on what, use Claro’s free budget planner to see which areas you can cut back in.

  1. Stay out of debt

Easier said than done, but if you can avoid borrowing this will help you in the long run. Of course, not all debt is created equal. If you’re hoping to get a mortgage, for example, then borrowing money is almost always essential. 

Be sure to set up an emergency fund with at least three months’ worth of expenses that you can dip into in case of emergency rather than taking out credit.

  1. Save more (if you can)

If you have a low salary or particularly high outgoings, this might be more difficult. But the earlier you start saving, the more you’ll have to play with in the future. So if you can cut your daily takeaway coffee habit and save that £20 instead, it’s something to consider. If you’re not sure where to start, see which habits you need to change in order to save better.

  1. Boost your income

Putting money aside is more important than finding extra pennies. But if you can find additional sources of income, it’ll mean you can save more. You could consider asking for a pay rise if your job allows or take on a side hustle. If you need some inspiration, see if any of these 60+ ways to earn money on the side take your fancy.

Just be careful not to adjust your lifestyle in line with your newly flush salary. If you want to benefit from the F.I.R.E movement, you should save or invest the extra income you receive rather than enjoying a more extravagant life.

  1. Invest your savings

Investing your money is a great, low maintenance way to grow it. You could see better returns than if you were to leave it in a savings account (particularly with interest rates having taken a hit thanks to coronavirus). You’re likely to get the best returns if you lock it in for a long time. It’s one way of making your money work harder for you – isn’t that what everyone wants?

If you do decide to invest, remember your capital is at risk.

How much money do you need to retire early?

That depends what kind of lifestyle you’d like to lead in retirement. If you want to take advantage of luxuries like frequent holidays and new cars, you’ll need more cash than if you were to lead a moderate lifestyle.

According to the F.I.R.E principles, you want to have saved up a pot of money worth 25 times your annual spending (not your salary).

Others claim that to retire comfortably, you’d need around 70% of your normal income. So if you’re used to living off £50,000 a year, you’d want at least £35,000 a year to live off once you’re no longer working.

Of course, the reason most people don’t retire until their 60s is because the longer you continue to work, the longer your money has to grow. So the earlier you can start saving, the better.

Is the F.I.R.E movement right for you?

If you’re the kind of person who’s motivated by instant gratification, then the F.I.R.E movement might not work for you. It’s also been criticised as being unachievable financially for people who have children or are on lower incomes. Plus, it’s incredibly time-consuming if you’re a hardcore follower of the money-saving rules. 

F.I.R.E is all about forward-thinking and putting your future self before your present self. But if you’re happy to sacrifice holidays for a few years, then it could be a great way to keep you on track to reach your goals.

Even if you don’t follow it to the letter, there are lessons in F.I.R.E that everyone can benefit from. Learning how to spend mindfully and staying focused on your future are always valuable skills to have, regardless of how frugal you choose to be.

The most important thing you can do is make sure you’re setting the right goal to start with. Whether it’s early retirement or travelling the world, pursuing a goal you’re truly motivated by is the best way to stay on track with the key principles.

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