Happy July, and no, I hope you aren’t on fire! But I do want to talk more about this movement. F.I.R.E. stands for “Financial Independence, Retire Early.” The goal is to save and invest very aggressively—somewhere between 50–75% of your income—so you can retire sometime in your 30s or 40s.
That’s right: You need to save at least half your income. That’s pretty aggressive saving, you might be saying, or hell no! I can’t save that much. I hear you, but I do want to make you aware of what millennials are considering, as it definitely has merit.
A simple mindset shift, more bicycle riding, and other small adjustments to your daily routine can move your retirement date years or even decades earlier, says personal finance and lifestyle blogger Pete Adeney (a.k.a Mr. Money Mustache)
By turning a cold shoulder to consumerism and embracing an alternative perspective, people can dramatically reduce their expenses without sacrificing their lifestyle, F.I.R.E. proponents argue. Even more, Mr. Money Mustache believes, and I agree, many of the same lifestyle changes required to live on a smaller portion of your income can actually improve your life. A simple lifestyle is easier and cheaper.
How do people do it? In order to be able to sock away that much money toward investing, folks who are on F.I.R.E. are always looking to do two things: keep their expenses extremely low and raise their income. The general idea is that the higher your income is and the lower your expenses are, the faster you can reach financial independence.
For those in the F.I.R.E. movement, “financial independence” doesn’t just mean sitting on some tropical beach or playing golf all the time. It means reaching the point where you don’t have to work a full-time job if you don’t want to. You can scale back to a part-time job or simply stop working altogether. The choice is yours.
Becoming wealthy (and having the option of early retirement) is way simpler than most people realize. It depends solely on your savings rate, which is the proportion of your take-home pay that you can save, while living happily on the rest.
If you double your salary and then double your expenses, you are not a single day closer to retiring earlier, even if you are saving a higher number of absolute dollars. If you let lifestyle creep get the best of you and your expenses steadily rise over a lifetime as your pay increases, then you’ve become accustomed to living on a much higher level of annual expenses. Subsequently, you’ll need a much larger portfolio from which you can safely withdraw money each year to fund your retirement lifestyle.
No matter where you are on your financial journey, there are some key lessons we can all take away from the F.I.R.E. movement:
1. Plan for the Retirement of Your Dreams
Define what you want your retirement to look like and make a plan to get there. This puts you ahead of over half of Americans who haven’t saved for retirement.
2. Keep Your Expenses Low
Seriously consider where you are spending your money. Define your wants vs. needs and cut out spending money where it’s not in alignment with your values.
3. Increase Your Income
If you want to retire really early as in F.I.R.E., there’s no way around it. You need to maximize your income, and that may include a side hustle.
4. Prioritize Saving and Investing
If you want to retire early, you have to save and invest. The earlier you do it, and the more you save, the earlier you will retire. Maybe saving 50% sounds like way too much right now. That’s ok. Start with saving 15% for your retirement, max out your 401(k) or IRA, and then keep increasing to the 50% mark.
IF you save at least half of your after-tax income, you will go from zero to financial independence in just 17 years. IF you can live on one-third of your income, you’ll be financially independent in just 10 years.
Why aren’t more people doing this?
One reason saving far more than 10% of your income sounds so difficult to the uninitiated, Adeney argues, is simply because it’s unconventional. Many Americans “make supremely inefficient decisions which cause them to spend a lot of money without getting much happiness in return, leading to a very low savings rate or, even worse, spending most of their lives in debt,” he says.
Do you want a different outcome than $30,000 car loans, thousands in credit card debt, an anemic savings rate, and minimal savings (if any at all)? It’s easy, as long as you make different choices than your peers and neighbors.
Revisit the Idea of Happiness!
The underlying assumption in rich countries is that “More spending equals more happiness.” But it turns out, this is completely wrong. In many cases, you can spend less money and end up much happier.
Just one quick example. Imagine that you’re choosing a place to live. One is 4 miles from your workplace, and the second is 20 miles away. Most people barely give a second thought to this difference, especially if they like something more about the further location — nicer backyard, better appliances, or some other minor factor.
But this tiny decision will destroy about $54,000 of wealth every decade in car costs alone, plus about 1,600 hours of your time (which might be worth another $80,000), and could make the difference between a healthy, muscular physique and being couch-bound and dosed on heart medication, when compared to living closer to work and choosing to commute by bike. Even better — your mental health will see a similar boost.
Where do you look for places to slash expenses?
Housing, clothing, haircuts, vacations, weddings, gifts, sports, leisure and recreation activities. All of this is completely under your control, but all of your peers are completely out of control, so they will tend to make average choices. And they will tend to spend at a level proportional to their income, which prevents them from ever getting ahead.
While it certainly sounds doable to cut back expenses in some of these areas, do F.I.R.E. followers have to be a star player in every category to retire far earlier? Not at all.
It’s important to note that you don’t have to get everything right. If you live in San Francisco, you do have the option of moving. But you can also choose to stay and just understand that your housing will cost more.
You can make up for expensive choices in one area by earning more money and/or streamlining in other areas. There is plenty of wiggle room, as long as you always apply a critical eye to your spending and do your best to be efficient at least most of the time.
How do I rethink my income?
On the income side of life consider: promotions, job changes, owning rental properties or choosing a house where you can offset some of your mortgage by renting out a room. Also consider a side hustle for additional income.
Understand Human Cognitive Biases and Herd Mentality
The key to escaping from the social pressure and persuasive marketing messages that can get us into financial trouble is to be aware of our human flaws and biases and know how to turn them on their heads.
For instance, instead of playing into the herd behavior of buying an inefficient vehicle you can’t afford just because all of your neighbors have one, you should make this herd behavior your ally by being the herder, Pete says. By being a leader instead of a follower, you can not only save fifty grand on a truck you didn’t need in the first place, but also influence others around you to similarly be wise with their money. More importantly, you’ll likely have more time to spend with others and more energy to be a better friend, as you won’t be enslaved to payments you should have never signed up for in the first place.
Adeney specifically advises people to take the time to better understand human cognitive biases so that we can recognize when we are being irrational.
Enjoy the Journey
Some people take things to the extreme and cut out too many of the joys of life along with the waste, in hopes of getting to retirement even faster. Don’t be this person.
Yes, you should always challenge your assumptions and embrace challenges. Walking home from the grocery store on a winter night with a heavy backpack is exhilarating and fun. But watching your children have to dodge speeding traffic and inhale car exhaust because you moved to a car-centric neighborhood to save money is not.
Because remember, the only point of financial independence in the first place is to make your life happier and more fun. So why not insist on making the journey there happy and fun, as well, so you can start getting the rewards immediately instead of 10 years from now?
Here’s more information on budgeting and establishing an intentional money spending plan.