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Personal Finance

What is the FIRE movement?

September 5, 2019


It’s in the news. From MarketWatch, to CNBC, to CBS, to The Guardian, to the hundreds of people blogging about it, the FIRE movement has been gaining traction and mainstream attention recently.

But what exactly is it? And is it something that you should care about?

Financial Independence Retire Early (FIRE)

The Financial Independence Retire Early, or FIRE as it’s popularly known as, is about raising your savings rate, investing your money, and reducing your expenses in order to retire earlier than traditional plans.

By raising their savings rate from anywhere between 50-90%, members of the movement plan to retire decades ahead of their golden years.

The regular milestones of investing don’t apply to members of the FIRE movement but instead focus on a more compressed version of it.

Where did FIRE start?

Retiring early is not a new concept. But the FIRE movement has its roots in the best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez.

The book, first released in 1992, is a 9-step program to transform your relationship with money and achieve financial independence.

The movement gained momentum more recently with a popular blog called Mr. Money Mustache. The blog was created by Pete Adeney who retired from his career as a software engineer in 2005 at the tender age of 30 by raising his savings rate, investing heavily, and living a simple life.

As the blog gained popularity along with its active forum inspired other members of the movement to create blogs of their own such as The Mad Fientist, JLCollinsNH, and Millennial Revolution to name just a few.

Although the majority of members are based in the US, today the global community is thousands strong and the growth has been gathering more steam with the wider mainstream media coverage.

The Reasons for FIRE

As the movement grew, more people started posting about their own reasons for pursuing FIRE.

Among the most common ones are:

  • To escape a job or routine they hate
  • To spend more time with family
  • To travel the world
  • To pursue more passion projects

It all boils down to creating more freedom in their life to do what they want. FIRE is not about sacrificing the important things in life in order to retire early, it’s about finding what’s important and designing your life around that.

And what better time to enjoy the important things in your life than in your prime before you’re too old to fully enjoy it.

The 4% Rule

At the very core of the FIRE movement lies the Trinity Study, more popularly known as the 4% Rule.

The rule states that in order to achieve Financial Independence your annual expenses must be equal or below 4% of your total investment portfolio. Based on historical data of market growth, this is the safe amount that you can withdraw from your portfolio without reducing the annual value of the total.

To put it another way, your portfolio needs to amount to 25 times your annual expenses.

 

This total portfolio is what you would call your FI number since when the earnings from your investments already provide 100% of your annual expenses, you don’t really need to work for money anymore. You are Financially Independent.

When you know your FI number and your savings rate, you can easily figure out when you can retire. Here are a few calculators available

How to Pursue FIRE

Anyone can start pursuing FIRE. Starting early, even starting to invest as students, has a massive advantage as you have time on your side.

Before you start down this road you have to make sure that all the parties involved in your finances are on the same page. Money can be a big issue especially for couples and it’s prudent to discuss, agree, or compromise before making any radical changes like moving the money in your retirement accounts.

FIRE is approached from two directions: Income and Expenses. If you raise your income then you can reach your FI number faster. If you lower your expenses then your FI number also goes down. 

Figure Out Your Expenses

The amount of an investment portfolio can vary from one FIRE member to another and figuring yours out starts by finding out what your annual expenses are. This is the total money that you need for one year factoring in regular expenses, discretionary spending and including contingency plans like an emergency fund and insurance.

Make sure to write down everything you can think of. It’s important to try to not skimp on anything that’s important to you and your family.

For example, if you migrated abroad and have a lot of family in your home country, factor in the cost of the plane tickets and associated travel expenses.

Spend Less

Once you figure out your annual expenses, you can start figuring out where you can cut back. It’s up to you to find areas in your life where you can cut back.

Experts say that happiness does increase with wealth, but the correlation peaks at earning $75,000 per year. [source: https://www.cnbc.com/2017/11/20/how-much-money-you-need-to-be-happy-according-to-wealth-experts.html]

But this may not be you. FIRE members annual expenses can vary from the extremes of $7,500 up to the millions, with the average number being around $40,000.

The point is to find your minimum amount that you can find the maximum happiness in your life.

Another important part of spending less is to minimize the fees that you pay for investments. As interest compounds so do fees so it’s important to keep these down. Companies like Vanguard offer very low-cost funds and other companies like Fidelity offer zero-fee funds and DiversyFund offers zero-fee platforms to invest in alternatives.

 

Invest the Rest (and Side Hustle)

Once you figure out your annual expenses and reduce them, you can put more money into vehicles that make it grow.

Index Funds

Index funds are very popular in the FIRE community due to low fees, small upfront time investment to build a plan, and very good diversification.

It’s basically investing in a certain segment of the market in a fund that includes hundreds to thousands of companies. They are less managed than other types of funds and therefore have lower fees.

Popular indices, like the S&P 500 can have funds provided by multiple companies like Vanguard, Schwab, and Fidelity.

Own Businesses

You can run anything from a taco stand to a design firm. Having been around longer than money itself, making money from business is definitely what you would call a classic.

Though not a lot of members of the FIRE movement have their own businesses, there have been people who converted their side hustles into full blown businesses.

Invest in Property

Some people like to invest in actual brick and mortar. Property is a solid investment option if you take the time to research and study how it works and the market you plan on entering. 

One of the main challenges is the relatively high up-front cost to actually own a property which usually ranges in the thousands to the hundreds of thousands. A good option around this is to invest in a Real Estate Investment Trust (REIT).

REIT companies like DiversyFund pool individual investors’ money to buy income-producing real estate. This means you get to invest in the same market with a lower barrier of entry, plus no real estate experience necessary!

There are a lot of ways to make money. You just have to be imaginative, try things out, and figure out what works for you.

The FIRE is spreading

In a nutshell, the FIRE movement is taking the world by storm. More and more people in their 20’s and beyond are learning how to maximize their earnings and reach their Financial Independence.

If you do decide to be part of it, or even if you don’t, it’s important to learn and start investing today so you can reap the rewards tomorrow.

 

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