You’ll see a dozen memes online every day talking about how everyone wants to retire early and live a life of peace and quiet in a cute cottage somewhere far away from society.
But there’s a considerable truth behind these jokes; people are sick and tired of the prospect of working their whole lives away to retire in their cranky old age. Millions of young people nowadays don’t want this to be their reality and are scrambling to find a plan to help them retire as early as possible.
The FIRE method is one such solution that’s pretty popular with the youth. FIRE stands for Financial Independence, Retire Early, and the idea is to save as much of your income as you possibly can, even if it means living a frugal life, paying off all your debts, and being free to live in comfort for the rest of your remaining days.
Sounds like a dream, doesn’t it? Many would call it downright impossible – after all, you never know what disasters life could throw at you which would make you break you break your bank, and have half your savings go down the drain.
And yet the FIRE method works for many people, and it is a hill that many youngsters especially are willing to die on. So the question arises; does the fire method of saving work? Or is it all just some big scam?
What is the FIRE saving method?
Where does the FIRE saving method even originate from? Its main ideas create from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez.
The goal of the FIRE method is to retire in your 20s or 30s by using saving techniques like setting aside half of your earnings and generating an income through passive investments.
This is a perfect life trajectory for those who wish to quit work entirely and not have to stay at any job or business for their entire lives, are dissatisfied with consumerism, and want to gain financial independence.
The FIRE saving method gained massive appeal because of the pandemic in recent times. According to research done by Moneyfarm, one in four individuals aged between 18 and 34 are making an early retirement their new financial goal.
There are also subtypes of the FIRE movement, so there’s no one way to go about it, and not every type has to be extreme.
1. Fat FIRE
With this method, you’ll live a traditional lifestyle, saving only a bit more than the average professional.
2. Lean FIRE
If you go for Lean FIRE, the idea is to restrict your lifestyle to the bare minimum, spending when it’s necessary, cutting off all other needless expenses, and saving the rest.
3. Barista FIRE
Your goal under the Barista FIRE method your goal is limited financial independence. So you’ll take on part-time jobs or freelance work to cover some immediate expenses while relying on your savings for the rest.
4. Coast FIRE
The Coast FIRE method will let you have enough for complete financial independence, but you’ll have to rely on a part-time job for all of your everyday needs.
The principles of FIRE saving
First thing’s first, understand that if you are going to go with the FIRE saving method, then about 70% of your income will become savings. So when they say it’ll be a frugal lifestyle, they mean it in every sense of the word.
You’ll be majorly cutting down on the many outings with friends that you would go to, and if your hobbies and interests involve spending money, then all of that will come to a halt as well.
Other than that, the goal is to pay off all your debts, including your mortgage, so these will be responsibilities that you absolutely can’t put off if you want this method to work in the long run.
What does the FIRE calculation involve?
The magic formula involved in the FIRE calculation includes building up your net worth of 25 times your estimated annual spending, and that’s the road that will help you achieve financial independence.
The next step is to withdraw a maximum of 4% from your savings each year. You also have to keep a separate section for emergency savings that will include three to six months’ worth of your salary.
The best way to grow your savings is by investing, and there are various cheap tracker funds you can look towards that mimic performance of the stock market.
Homeownership is essential to think about too. The reason is that retirees will have more disposable income if they have cleared their mortgage already.
Save, invest, earn more, and spend wisely even on your electricity. It is easier said than done, but if you put your mind to it, the FIRE saving method can shift your fate from ongoing work and stress to something more peaceful and relaxed.