FIRE movement

Video

Have you heard of the FIRE movement? Have you often seen these initials without knowing what they mean? Do you feel intrigued by this trend and want to know if it’s for you? Then you’re at the right place! 

FIRE stands for Financially Independent and Retire Early. It’s a movement of people who have passive income through investments that cover at least their monthly cost of living. They have different sources of revenue than a salary and thus, don’t have to work. They have freedom of choice regarding their time: they can choose to continue working, switch to a passion project, or stop working completely. 

As for any trendy concept, let’s demystify what kind of FIRE there are out there. There are 3 different types: lean Fire, Fire, and Fat Fire. Let me explain. 

• Lean Fire is when you live with half of what is needed to live in a country. If the average monthly cost is 2500 euros per person in your country, and if your investments provide you 1250 euros per month and you manage to live with it, then you’re a Lean Fire. It can mean living in the countryside and having simple needs. 
• Fire is when you live the same lifestyle as people in your country. In my previous example, you’ll get 2500 euros of monthly revenues through your investment to live off of. 
• If you have higher needs, want to live in a capital, or want to have some luxuries, then Fat Fire is for you. In this example, your investments need to provide you with 5000 euros or more per month. 

Now let’s dive into the practicalities. 

The first rule that often comes back is to save between 50% to 70% of your net salary. It’s extreme, it probably means shifting your way of living and making sacrifices, but it’s a good target to have in mind. As you have seen, this number isn’t linked to how much you earn, it’s what you keep that is important! You have to get a strict budget, be super-mindful about your spending, and only spend on things that add value to your life. Some of my clients who want to get there faster become very frugal. From experience and feedback, it’s easier if you work a lot as you don’t have a lot of distractions nor time to spend your money, and there is less social pressure as you are more often on your own. Again, it's not for everyone so please go back to what feels good for you. Some people prefer to restrict themselves for some years while most others prefer not to compromise the present moment. 

To know how much invested money you need to be FIRE, you need to understand the 4% rule. It stipulates that you need to invest 25 times your annual expenses and find assets that give you a 4% net return. There, your annual costs will be covered by your investment returns, and you won’t have to touch your capital. Your pot of money won’t grow as you are drawing all of your earnings, but it stays there which means it’s “perpetual”. 

Let’s do some calculations now. 

If you spend 3000 euros per month i.e. 36 000 a year, you would need 900 000 euros of capital remunerated at 4%, but if you spend 5000 euros a month or 60 000 a year, you would need 1 500 000 euros. Differences grow fast and it’s worth noting that the lower your expenses, the easier you’ll achieve financial independence. 

We also need to be careful here as to get a 4% return, you’ll have to choose which risks you are willing to take (liquidity, volatility, interest rate risk, or else), and it’s not a given you’ll achieve the 4% each year. We are talking about averages. Cryptos for example have a volatility risk which means you can experience great returns but also downs. Your portfolio needs to be monitored and adjusted if needed. 

Now that we have the big amount as a target, we can work backward to know how to get there. The compounded interest calculator will do the math for you. The variables you need to input are : 

• What you can invest from your accumulated savings (in theory everything on top of your emergency fund)
• How much you can invest every month (hence the need to know your numbers)
• What kind of returns you expect (for reference, a balanced investment portfolio can give you 7% on average over 10 years. It can be more or less, depending on the risk you take). 
• In how many years you want this goal to happen

If you play with the simulator (you can use this one: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator), you’ll quickly realize that it’s often the monthly investment number that makes the biggest difference, followed by the time horizon. So please do some hypothesis, play with it, and see what you can afford and how it will work for you. 

Now that you have a direction, you need to understand your options to fill your “how”. How will you get there? What are the possibilities? The different strategies? Implications and energy? The different risks? Asset classes? And here we’ll look at the opportunity cost which is the result of choosing an alternative over another. If you do option A, you might not be able to do option B, etc. To make informed decisions, you need to look at the big picture so that you can pick and choose what suits you. As you have a long-term view, saving only isn’t an option as you have to at least keep up with inflation, if not beat it. Investing in real estate, stocks, bonds, businesses, and cryptos is common amongst the FIRE community. Of course, you want to withdraw your gains to live off them, so if you invest through funds, they need to be distributive, instead of the accumulative ones.

Last but not least, let’s demystify the search for financial freedom. 

• If you have your dream job, you’re already at the right place. Being financially free will not change your life much!
• Some people are FIRE without even knowing! It happened to one of my clients! 
• It’s not because you’re financially independent today that you’ll still be in a few years. Life events do happen and during the COVID crisis, for example, a lot of FIRE got impacted by the fall in value of their investments. You need a sound investment portfolio to secure yourself for the future. This means being financially literate, and having a diverse investment portfolio so that the positive performance of some assets can offset the negative performance of others. Diversification is key and it can come from different asset classes (like cryptos), geography, sectors, or the size of companies. 
• Don’t feel pressured to be financially independent. Some people may well be lean fire but that’s maybe not the kind of life you aspire to. So please go back to who you are, what makes sense for you, and what’s your rich life, everyone is different!

To go further: 

• Money Chill Out episode #49 with Victor Lora, Head of Fire France
• https://open.spotify.com/episode/4QBelNeRi3zF2hPh4ZlCCm?si=334846a89b174c6a
• Money Clinic with Claer Barrett
• https://podcasts.apple.com/ba/podcast/could-you-retire-in-your-thirties-with-fire/id287031335?i=1000535250472

By Marieka Finot, Financial Empowerment Coach, ex-trader, and podcaster