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Understanding FIRE: a philosophy for financial independence and retiring early

Set FIRE to the rainy day fund.
Set FIRE to the rainy day fund.
Image: Reuters/Tim Wimborne
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The promised land, in personal finance, is early retirement. Most of us would be lucky to reach it by age 60. And yet there are software engineers in Colorado and financial analysts in New York City crossing the finish line by their 30th birthdays. Say what?

Yes, there’s a new path toward early retirement and you won’t read about it in your parents’ Kiplinger subscriptions. It’s an internet movement inspired, in part, by millennials and their changing perceptions of work, the rise of the gig economy, and skepticism toward traditional finance and its related institutions.

Even the name of the system inspires energy and passion. Are you ready to set your life on FIRE?

FIRE is finance and philosophy

FIRE (short for Financial Independence, Retire Early) is served in many flavors, all of which are based on core ingredients listed on Reddit’s financial independence sub-reddit.

At first blush, the principles look like they’ve been copied and pasted from your garden-variety personal finance blog: spend less, grow your income, harness the power of compounding. But FIRE really is more of a life philosophy than anything, combining personal finance with a DIY work ethic, opportunistic side hustles, life hacking, and the tenets of anti-consumerism.

Where the FIRE community definitely breaks from the personal finance pack is in its approach to spending and saving.

Set your savings on FIRE

Perhaps you’ve already internalized the lessons of investing in low-cost, tax efficient mutual funds; of contributing just enough to your 401(k)s to get the employer matching; of padding the pot with some part-time work or other side hustle that brings in cash. That’s great, but it’s probably not enough to achieve FIRE.

When it comes to saving, FIRE does not screw around. According to the aforementioned sub-reddit, FIRE’s adherents strive ”to save a large percentage (generally more than 50%) of your income to accelerate achieving FI.” This is quite a break from the dismal US savings rate, which clocked in at 2.7% in 2016. Layer in our proclivity for debt (and lingering student loans) and you can see that FIRE is an indirect rebellion against consumerism.

Now, there are two ways to boost your savings: by (not-so-easily) increasing your income or by (painstakingly, but anyone can do it) reducing your spending. Guess FIRE comes down on that one? “Your wants and needs aren’t written in stone, and less spending is powerful at any income level,”  the financial independence subreddit reminds us.

And yet it’s one thing to cut spending here and there, and quite another to follow the FIRE principle of “simplifying and redesigning your lifestyle to reduce spending.”

Just researching this story, though, I picked up some non-obvious behaviors that, put to regular use, might help me hit an aggressive savings goal, while simultaneously improving my quality of life. For example, I could take advantage of living in a dense and bike-able city to cut down on commuting expenses, all the while forcing myself to exercise. And instead of eating out, an alternative “affordable luxury” could be learning to cook. This could even become a productive family bonding activity that also satisfies a creative urge, all the while improving our health (and of course saving money).

The next level of FIRE includes elaborate strategies around credit-card churning and travel hacking, neither of which are for the fainthearted. The former involves signing up for new credit cards to capture the bonus (typically cash or airline miles), hitting the minimum spend, and then canceling before you have to pay the annual fee. To hit the minimum spend (and liberate yourself to move on to the next card) there are more aggressive strategies like buying gift cards to places where you know you’ll shop in the future (i.e. Target or Amazon) or prepaying large expenses like insurance. While churning can be a profitable activity, it requires meticulous organization (one missed payment can wipe out the gains) and can hurt your credit in the short-term.

Most of the rewards from churning are in the form of airline miles. Travel hacking is the practice of arbitraging these miles to get the, umm, most mileage. Travel hackers delight in the fact that each accumulated point has a plethora of conversion options to maximize its value as a mile. A vanilla airline mile is generally understood to be worth 1 cent to 1.5 cents, yet travel hackers boast about redeeming a first class flight at what equates to amounts as high as 9.7 cents per mile.

Finally, there’s our largest expense: the rent. Blogger JP Livingston saved $2.25 million by the time she was 28, in part by living in a 325-sq-ft walkup apartment with her husband and their pet dog. Want to FIRE even sooner? You can draw inspiration from the Google engineer who saves 90% of his income by living in a truck.

What makes these sacrifices worthwhile? The holy grail is getting your total savings to equal 25 times your annual spending, a calculation implied by the Safe Withdrawal Rate, or SWR. The SWR, generally accepted to be 4%, is the amount one can safely withdraw from their nest egg, without risking running out of money.

Makes sense, but it ain’t for me

Thankfully there are different kinds of FIRE to fit different kinds of lifestyles. There’s FatFIRE, for example, for those living in high cost cities (i.e. requiring $2 million of savings in New York City) while seeking to achieve FIRE with a “great lifestyle;” and leanFire for those capping expenses at under $40k.

Still unconvinced that FIRE is for you? Consider the final principle on Reddit’s main financial independence page:

Discovering and achieving life goals: “What would I do with my life if I didn’t have to work for money?”

This cuts to FIRE’s existential core and applies to everybody. What is the relationship between your happiness and your money? What is freedom from the corporate grind worth to you—but more importantly, what would you do with this newfound freedom?

For those of us slogging away at our desks decades away from retirement, it might feel like a moot point. But are we just subconsciously avoiding contemplation of the deeper meaning of our lives?

Mr. Money Mustache (nee Peter Adeney) is the frugality movement’s de facto chief evangelist. A former software engineer who blogs about personal finance, he says he and his wife cut back on spending and regularly saved two-thirds of their salaries, enabling them to retire in their early 30s. Free from the grind, Adeney theorizes that money obfuscates our understanding of ourselves and that FIRE is a mere beacon toward happiness. As he once told the Mad Fientist’s Financial Independence podcast:

By understanding what happiness means and helping to decouple the idea of happiness from owning certain things, you can really amaze yourself at how fun your life can be—because that’s the whole secret to living a rich life; it’s not feeling like you need more than you already have. … [R]etirement and early retirement and financial independence, it’s really a quest for happiness. So study that independently of the money, and then that makes the money part easier.