The FIRE movement is very well known in the USA thanks to bloggers such as Mr Money Mustache and the Mad Fientist (to name a couple), but is still relatively unknown here in Australia. Thankfully the movement is rapidly gaining attention thanks to Australian bloggers such as The Aussie Firebug.
FIRE stands for “Financial Independence, Retire Early”. The FIRE movement is a lifestyle movement and those who take part aim to become financially independent at a young age (such as in their 30s or early 40’s) to give themselves the option to retire early should they wish to.
Most people who have reached FIRE tend to not fully retire, instead they have the freedom to pursue the things they are most passionate about. Many run successful businesses or blogs educating others. Some choose to volunteer in charity organisations that they truly believe in.
I know that when Cam & I reach FIRE, we will not be sitting around twiddling our thumbs! We love that we will have the freedom of making the choice to retire should we wish to. Cam very much enjoys his current job and may prefer to stay in his position for a little longer. We are both very entrepreneurial and no doubt will run businesses until we are old and grey because we love it so much!
How Do You Reach FIRE?
So, what do you need to do to actually reach FIRE? The basic formula for FIRE is to spend less than you earn, save/invest what you don’t spend. You can do this by finding ways to maximise your income or by decreasing your spending/expenses (or both!).
Firstly you need to pay off personal debt fast, starting with the worst first (highest interest rate) – credit cards (20%), personal loans (13%) the home mortgage (3% currently). If you have all of these types of debt, Cam always says you would be crazy not to bundle them into one low 3% home loan interest rate and then hammer down that loan. A common mistake is to treat them all separately to stay in ‘control’ – your money is your money and at the end of the day the aim is to pay as little personal loan interest as possible.
Our aim was to turn the corner with no personal debt and build our property and LIC share portfolio with a growing rental/dividend stream paying us. We call this the money snowball effect. Many people stay on the debt snowball – paying more and more interest by buying more things they don’t need and spending on things that keep them hostage to a job they don’t enjoy. As our recent video interview with FIRE pioneer Dean explains in a recent video this money snowball works the same way once you start building income producing assets.
After removing personal debt or even just getting on top of it, you can accumulate assets such as shares, property, businesses, etc. to generate a passive income that will ultimately fund the living expenses that you will require in retirement. The FIRE movement and the financial planning industry generally works on the 4% rule – your passive income should pay you an average of $4 for every $100 you have invested (4%).
You can learn more about this rule and find out how to calculate your own FIRE number on our previous post.
Lean FIRE vs Fat FIRE
Now that you know a little more about what the FIRE movement actually is, let’s move on to the two different types of FIRE – Lean FIRE and Fat FIRE.
What is Lean FIRE?
Lean FIRE is generally for those who are content to live on a modest retirement income. This suits those who are on a low income (although is not exclusive to low income earners). You can most definitely achieve FIRE as low income earners and to do this, you will need to live very frugally in order to maximise your savings rate.
The beauty of lean FIRE is that you don’t need a big number – eg. if you only need $30k p.a for living expenses, you multiply that by 25. So $750k becomes your FIRE number, this means you will need $750k in income generating assets. You will live off the 4% income while the asset base grows over time, producing more income to adjust for the cost of living.
What is Fat FIRE?
Fat FIRE is for those who want to have a little extra (or a LOT extra) so that they can retire comfortably and enjoy being able to do things like going on regular holidays, upsizing their home, shopping freely, etc.
Fat FIRE can be achieved by high income earners – it is not impossible for lower income earners, but you will have to work a lot harder to get those figures working for you.
Whatever type of FIRE works for you is awesome, there is no right or wrong. Aiming for FIRE in any way is amazing! Cam & I sit somewhere in between these two. We are happy not living a particularly lavish lifestyle, but we would love the freedom to have some fun when we reach FIRE.
What type of FIRE do you relate with? Please let us know in the comments below, we’d love to learn more about your own journey!