What is FIRE? (Financial Independence Retire Early)

I often (falsely) assume that things I’m interested in are known and shared by just about everyone. Because of that false assumption, I wanted to shed light on something extremely interesting to me: FIRE. Now before we get going, I want to manage expectations here: we are not going to be talking about heat or combustion. The fire I’m talking about stands for “financial independence retire early”. 

Right off the bat, those words all sound like good things. Being financially independent would probably reduce most people’s stress levels, and if there’s anything you might want to do early, it might just be retiring. We have a catchy acronym and words we like, but what are the core tenets and principles of FIRE?

[Skip to Principles of FIRE]

[Skip to Misconceptions of FIRE] 

[Skip to Can you FIRE?]

[Skip to How much is enough for FIRE?]

[Skip to Final Thoughts]

Principles of FIRE

Positive thoughts and fuzzy feelings are great, but they alone won’t get us all the way to financial freedom or retiring early. While people’s thoughts and opinions differ when it comes to FIRE, there are some general overlapping themes and principles we can look at. 

Aggressive Saving

If I had to choose one principle, it might be aggressive saving. To retire early you need to do things a little differently, and this is a foundational layer of FIRE. Aggressive saving has a hidden benefit: in addition to saving more (good), you also reduce your spend and expenses (also good). 

In later posts, I will share the effects of aggressive saving at different levels to show how many years you can shave off from retiring by increasing your savings rate by x% of your take-home pay.

tl;dr: the more aggressively you save (and consequently the less you spend) the closer to FIRE you will be. 

Investment Strategy

Unfortunately, saving aggressively alone is not enough to get you to financial independence or early retirement. The reason for this is our archnemesis: inflation.

If we saved a million dollars and wanted to live off of it for 50 years, that’d give us $20k/year to live off of.

The problem is inflation will eat at our purchasing power and within just a few years, $20k won’t be able to afford you the lifestyle it once did.

Because of inflation, once we get in the flow of aggressively saving, we need to immediately invest our money. Our money needs to make money to at least outpace inflation and our monthly expenses (assuming we have no additional cash flow streams–we can talk about this more later).

The reason I chose “investment strategy” instead of simply “investing” is because I think the vast majority of FIRE folks do have a strategy. If you’ve looked at your bank’s CD yields lately, it’s clear things have changed since the 90’s. Where we (in this case Americans) could once lock in our money at rates of ~5%, today yields of ~<0.5% make this strategy unattractive. While this yield is guaranteed it would not even keep up with inflation (~2%) not to mention we can’t live on $0 per month.

The typical strategy I have seen the bulk of FIRE folks employ looks something like this: 

70-100% (of your portfolio) equity ETFs 

0-30% debt ETFs

I will expand more on ETFs (among other fun acronyms) in a later post, but for now let’s simplify:

UPDATE: ETFs vs Mutual Funds vs Index Funds: Investing 101

Equity = stocks (stakes in publicly traded companies; e.g.: Apple/AAPL)

Debt = bonds (an IOU either to a country, a bank and/or a corporation; e.g.: US treasury bond)

An ETF is an investment vehicle (typically referred to as a basket of securities) to help you diversify your investment. Instead of investing just in Apple, we can invest in all 500 companies within the S&P 500 or the total US stock market. Instead of buying a bond from a single corporation, we can buy bonds from the total bond market in the US.

I will do another deeper post on investing in stocks vs bonds, but for now it’s important to understand stocks are riskier but have more upside/return whereas bonds are less risky but provide less upside/return.

Lastly, it’s important to note most people on team FIRE are choosing to invest in ETFs not only for diversification but also for extremely low fees. For now all you need to know is lower fees equal more gains for you and more money in your pocket.

tl;dr: inflation is not your friend, you need to invest in stocks and bonds to get returns to beat inflation & your expenses, and low fees are your friend

Geoarbitrage

Okay, you’re doing great so far, so don’t let this funky, five-syllable word slow you down. 

Arbitrage basically means taking advantage of differing prices for the same thing. Lots of folks probably leverage arbitrage opportunities all the time without thinking about it:

Geoarbitrage is the same as regular ole arbitrage except now we’re adding location to the fold. Geoarbitrage typically implies traveling to an overseas or international destination to take advantage of differing prices but doesn’t necessarily need to. 

The crux of geoarbitrage for FIRE is to go to places where similar things are cheaper than at home. If you read my cost of living report on PV (or even if you didn’t), you’d know two of the largest expenses are accommodation and food. Many FIRE folks go to places like Latin America, Southeast Asia, and/or Southern/Central/Eastern Europe to take advantage of the more inexpensive cost of rent/accommodation and groceries/dining out.

tl;dr: go to places where your heaviest expenses (e.g.: rent and food) are much cheaper 

Side Hustle

I debated including this one in here as a principle but thought it wouldn’t hurt to include it. While many FIRE people don’t need a side hustle because their portfolio can cover their costs, many people in the FIRE community do have a side hustle.

The reason for this is fairly simple: since FIRE folks no longer have a job they have more time for a hobby. Their hobbies (not always but often) turn into activities that generate income (e.g.: a blog, a book, becoming a speaker, running communities/events for other FIRE folks). 

Additionally, a side hustle is one of the keys to retiring early (I’ll write a post(s) on this as well). Because a side hustle creates additional income/cash flow streams, it reduces the amount of money you need to save and consequently shortens your path to retirement!

tl;dr: FIRE folks don’t need a side hustle but end up growing one out of a hobby; a side hustle is a great way to get to FIRE earlier

Misconceptions of FIRE

Now that we’ve talked about the high level general themes and principles of FIRE, I wanted to debunk (or at least shed light on) some of the more common misconceptions.

Starving and eating beans only to get to FIRE

So this one might be oddly specific, but I’ve read multiple comments/blogs on folks referring to people starving themselves and living on beans to get to FIRE. While this honestly may be true in some cases (I mean, I’m sure someone(s) did this to get to FIRE), it’s clearly not the norm. 

While aggressive saving was one of my core FIRE principles, it doesn’t mean you need to starve yourself. More typical ideas on saving more aggressively (and still being able to eat) might be walking or taking public transit more in lieu of Ubering or making more meals at home vs going out/ordering in. 

Like anything, saving/getting to FIRE needs to be sustainable (and to some degree enjoyable) if it’s going to work out long term. 

FIRE quality of life is terrible

I think it’s easy to picture someone living in a shared-room hostel, eating… beans and assuming that because FIRE folks retired early they’re living on scraps. Based on the blogs/people I follow digitally, I would argue the FIRE quality of life is as good if not better than the typical American/First World lifestyle.

Because of geoarbitrage, FIRE folks can live in places most people want to vacation at, stay in nicer places relative to home, and eat at better restaurants that cost less than delivery/takeout. While one person’s FIRE quality of life might be worse than someone’s typical/American quality of life, it really depends. What is less subjective is that if the world is your oyster, you will have more options and flexibility to take advantage of nicer accommodation, restaurants, etc. at cheaper prices relative to home. 

Can ONLY do FIRE if you live in Southeast Asia 

This kind of goes hand in hand with the above. A lot of folks think that due to the nature of people retiring early and being financially independent, that it only works if you live somewhere where rent might only be $300. 

While many people may voluntarily choose to live in cheaper locations, many FIRE folks live in Western Europe or even expensive cities like San Francisco. Again, choosing to move somewhere(s) cheaper will get you to FIRE quicker, but it’s not a prerequisite to achieving FIRE. 

Need a six-figure job to retire early

I’ll be the first to admit that making more money/having a higher income will certainly help you get to FIRE faster. However, the key to FIRE is more about the ratio of your take-home pay you save than it is about your top line income. 

Someone can make $200k per year and spend all of it (or more!) while someone else might only make $36k but manage to save $10k per year. While making more money certainly helps, the rate at which you spend is much more important and ultimately guides how soon you can retire. 

With that said, I will almost always tell people (if they ask) to move to a city/place with a higher salary even if the cost of living is higher. The reason is simple: it’s typically easier to find ways to reduce costs/expense than it is to simply increase your pay/income. 

Can you FIRE? 

In short, yes. But probably more accurately: it depends. FIRE will mean different things to different people. If we assume the average retirement age is 65, is retiring at 64 FIRE? Maybe yes, maybe no. 

The first thing to do on your journey to FIRE is decide what FIRE means to you personally. Once you have decided what financial independence means, it will make the path to FIRE clearer for you.

Which leads me to a quick aside: you can FIRE without retiring/quitting your job. Although half of FIRE stands for retiring early, there’s no reason you can’t FIRE and keep your job. If you love your job, but want to become financially independent, then that’s FIRE for you. This is what some folks refer to as F You money, but I’d rather call it “no, thank you” money. What I mean by this is being financially independent enough that if your employer/boss/manager asked you to do something you don’t want to, you can simply say “no, thank you”. While this would typically lead to you being fired (and the reason most people can’t say no or F you), it won’t matter because you’re already financially independent. 

How much is enough for FIRE? 

In short, it depends! The first thing you need to think about is how much money you need per month. An easy (but, IMO, misguided) way to do this, is to simply look at your current monthly spend/expenses. I am a broken record at this point, but I will write a much more in-depth article on how much it takes to FIRE/retire early. 

For a quick preview, once you know your current spend (or want to use a forecasted future set of expenses), you can simply multiply the monthly spend by 12 to get your annual expenses and then multiply that annual expense by 25. This simple math is where we get the 4% rules, and–you guessed it!–I will happily be writing a post on what the 4% rule is and what a safe withdrawal rate is. 

Final Thoughts

I know I threw a lot at you today, but I hope you learned something intristang. Please, please let me know in the comments if you have any questions AND if any of the things I’d said I’d write later resonate with you (will prioritize future posts based on feedback!).

Again, thank you for reading, and if you thought this was worth reading, please share with your friends/family/colleagues/neighbors/strangers.

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