What the flip is FIRE?

No it is not the thing we sit around and toast marshmallows in (well it is but that’s not what we’re talking about here).

FIRE, in the finance world, stands for Financial Independence, Retire Early and it’s the movement many millennials swear by, but is FIRE actually as hot (ha!) as its converts would have us believe? To start out, let’s define what the FIRE movement is.

FIRE started in America in the 90’s and it saw people opt for living frugally in their teens and twenties so they could retire in their thirties or forties. The general idea is that you’ll have nailed financial independence and be able to retire early when your net worth is 25 times your yearly living expenses.

Why 25? Well the whole movement is underscored by the 4% theory, a rule that assumes when the money you've saved is invested smartly and safely, it'll increase in value by about 7% each year. Then you add the standard inflation rate of 3% to that and you’re left with a rate of return of around 4% a year. 

Maths.

The crux of the idea is that you’ll have enough saved and invested to live off just that 4% each year, and subsequently your initial investment will last you forever - but what are the pros and the cons of the movement and is it right for you? So very glad you asked.

The best bits

You live your life on your terms

The biggest drawcard is FIRE lets you live your life the way you want to, providing an alternative to the 9-5 grind. It reimagines what life can look like and challenges what we’ve always deemed a ‘normal’ existence. Financial independence is financial freedom, and that’s our key driver at SOTM.

Your money is making money for you

The passive income part of FIRE is something we talk about all the time at SOTM and is a very smart way of making your money work for you. If you do the work now, then that compound interest will look after you in the long run. Regardless of whether or not you choose to adopt the FIRE strategy long-term, taking time to get your head around how a passive income is achieved and the basis of investing will be so beneficial to you.

Investing low-risk generally pays off and there’s not a lot of risk here if you invest well

Trying to achieve an early retirement by taking a punt on the stock market is definitely not advisable, but if you really know what you are doing with those investments then the risk is reduced. Lots of FIRE chasers invest in ETFs & LICs, which we know are generally perceived as reliable choices when it comes to the stock market. 

The things to really think about

It’s not possible for everyone!

One of the big issues is that FIRE just isn’t possible for people who may already be in harder financial situations, or who don’t earn those big six-figure salaries, have multiple debts, twenty kids to feed and so on. To make FIRE work, you have to save really aggressively - like 50–75% of your income - and for most of us that’s just not plausible. 

You have to be frugal. Really frugal

A massive part of getting FIRE right is living very frugally - there won’t be any lavish dinners or holidays in your life when you’re chasing FIRE, which for many just isn’t something we’re willing to part with. Our twenties are for living up and sacrificing the fun of this decade for some more freedom in the next in our opinion, is not a worthy tradeoff.

FIRE assumes the best

FIRE doesn’t really consider the life occurrences that inevitably pop up like ill health, death, divorce and car qualms that can throw a spanner in the works and muck up our plans, so it’s not always as straightforward as it sounds. While it’s great on paper, there are unforeseen things that pop up and if you’ve been unemployed for 13 years and then need to go back because one of your income streams has been unexpectedly compromised or you’ve had to finance a huge family emergency, then you may find it hard to get back into the workforce and could fall behind.

Your mental health

Having forty years of retirement sounds good in theory, but for lots of us having too much time can actually be a dangerous thing. Really think about what your world would look like without work before committing to this method.