What is FIRE?
If you’ve ever considered early retirement, you could join the FIRE movement. FIRE stands for “financial independence retire early.”
During their working years, FIRE investors invest as much of their income as possible in hopes of attaining financial independence at a young age and maintaining it for the long term—a.k.a. retirement. Their goal is to live off their investments so they’re free to enjoy an independent lifestyle without needing income from a traditional job.
Not all FIRE investors have the same approach to financial independence. They don’t necessarily work 70 hours a week, live in a tiny house, and eat ramen noodles every meal. The FIRE movement has a diverse following, and each investor has their own “rules” for pursuing financial independence and security.
How to think like a FIRE investor
The level of commitment to living frugally and investing aggressively varies by investor, but most FIRE investors adhere to the following best practices.
Plan ahead
Make a specific retirement goal. Start by asking yourself a few questions:
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What’s my income?
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What’s my current retirement balance?
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What’s my savings rate (the percentage of income I’m saving)?
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What’s my spending rate (the percentage of income I’m spending)?
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How do I envision my post-retirement lifestyle? Do I think my spending rate in retirement will be higher, lower, or the same as it is today?
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How could my expenses or income change through my long retirement? Do I plan on moving house? Will I need to consider the age pension in my future plans?
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How soon do I want to retire?
Avoid debt
Avoiding debt is good advice for anyone, but it’s especially crucial to investors who’d like to live off their investments long-term. Bottom line: If you have debt, make a plan to pay it off. And don’t take on any new debt, especially high-interest debt like credit cards.
For example, let’s say you have a $5,000 credit card balance with an interest rate of 15%. If you pay $100 a month, it will take you about 6.5 years to pay it off, and you’ll have paid almost $3,000 in interest—money that you could’ve been investing.
Reduce your spending
The aim here is to reduce discretionary spending where possible. This may be challenging for some, so a strategy to help may be to wait a set period of time before purchasing anything over a certain dollar amount. This will give you time to carefully consider how the purchase will impact your life and eliminate the temptation of instant gratification.
Earn as much as possible
Take advantage of any opportunity to increase your income. That could mean taking a higher-paying job with less convenient hours or filling your spare time with a part-time job or freelance work.
Invest as much as reasonable, and invest appropriately
Your asset mix affects your investment returns more than any other factor within your control. Choose an asset allocation that complements your goals, time horizon, and risk tolerance.
Do it your way
The best part of the FIRE movement is that it’s not all or nothing. You can tailor your spending and saving behaviours to align with your goals. But even if you choose to follow just a few FIRE best practices, you can help improve your financial outlook over the long term.
Source: Vanguard November 2021
Reproduced with permission of Vanguard Investments Australia Ltd
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