The basics of FIRE & why I’m striving for it!

So if you’re new to all of this you may have noticed me and a lot of other finance bloggers talking about FIRE🔥. But what is it and why do I want to achieve it?

FIRE stands for Financial Independence Retire Early, it is the concept of building up enough in investments that you are paid a passive income through dividends or returns thus enabling yourself to live without working.

So why I am striving for FIRE? Simple I want to be able without being tied down to a job for my entire life, working simply to live, and living to work. When we think of retirement or not having to work, our minds turn towards 65-year-olds as this is the norm, but it doesn’t have to be. With FIRE you can give yourself the ability to retire in your 50’s, 40’s, or even 30’s.

Will I retire when I achieve financial independence? probably not. But the freedom to do so, or the ability to devote my time to other projects is what is so appealing. It gives you a choice. If an interesting opportunity were to come your way being financial independent allows you the freedom to give it a go without worrying how you are going to pay the bills. It’s this idea that is most attractive to me. Fire gives you flexibility.

So how do you light that FIRE?

First, you need to work out what your “magical number” is, to get a general idea either take 25x your annual expenses or 20x your annual income. These will differ quite a lot but that’s okay, it’s just to get a guiding point. This is the amount more or less you will need to retire early.

You could use another method such as the 4% rule, here you take how much you need to live on annually, say $100,000 and divide it by 4%. This gives you the total amount you would need to have saved to live for 30 years, taking only 4% out per year to live off. In this case, the total would be $2,500,000.

Note that these methods only assume 30 years of retirement or living off a passive income/ withdrawals from investments, so adjust accordingly.

Now that you have some form of figure in mind, it’s time to light that FIRE.

Start now, time is the most important factor here. The sooner you start saving and investing the quicker you will achieve your goal. Remember compound interest is the greatest force in the universe.

In terms of savings, you should be attempting to save at least 30-40% of your annual income. This might seem like a lot but there are plenty of examples where people have achieved FIRE rapidly through saving upwards of 70% of their income, Mr Money Mostache being one notable example. It all comes down to the choices you make and if you are truly hungry for it, you will find room to grow your savings. If you’ve just got a pay rise act as if you haven’t and divert that straight into investments and savings.

If you set yourself goals and push your savings to the limit being able to earn a passive income and achieve lifestyle freedom is 100% doable. It’s just all about mindset and how much you want it. One key note with investing is keeping your costs down, this is best done by using passively managed funds or index funds such as Vanguard* which charge low fees. Over your savings lifetime, this can save you an incredible amount. The difference between 0.2% and 1% is huge over the course of 10+ years.

So that’s FIRE, but although I try to live according to the guidelines I have set out above and have a number on paper for my FIRE it’s important to remember life is full of surprises. As I learnt far too abruptly when diagnosed with cancer, life can turn very quickly so you need to enjoy some things. From my view, there is no point living so frugally that you have no enjoyment in life only to never have the ability to enjoy the fruits of your sacrifice. As with everything balance is key!

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If you need some help getting started on your journey here are some previous posts that might help:

*Vanguard funds are not directly accessible to NZ investors but can be accessed through platforms such as Smartshares and Investnow.

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