Financial Independence: The movement known as Financial Independence and Retire Early, or FIRE, has gained a lot of traction in recent years. The FIRE movement may not have had a clear beginning, but some of its ideas were made public by Vicki Robin and Joe Dominguez’s 1992 book “Your Money or Your Life.”
The Desire for Early Retirement
Many people in the corporate world today have a strong desire to retire early and achieve financial independence because knowledge workers are expected to labour nonstop to make ends meet. As such, a growing number of people today have aspirations of becoming wealthy fast enough to no longer require a 9–5 work to support them. Some people want to save up enough money so they won’t need to work anymore, while others would rather keep their money in securities long after they retire and take out only little amounts (3–4% annually) while keeping the rest invested.
Financial Independence and Early Retirement
It literally means to be financially independent and to take an early retirement. Advocates of this theory hold that thrifty spending and larger savings should account for up to 70% of income. An early retirement and financial independence are achieved by FIRE theory adherents through aggressive saving and investing.
Understanding Different Approaches to FIRE
Nevertheless, depending on the FIRE version, there are several approaches to achieve FIRE. Nonetheless, some of the following stages are common to all of these variations:
To accelerate savings, aim to save a significant portion of your salary—roughly 70% of your monthly income. This enables the investor to start saving money early and eventually retire.
Spending In a Frugal Way
Even if they can afford it, FIRE advocates refrain from overspending during their earning years. The goal is to make as many investments and savings as you can.
Disciplined Investing and Planning
To ensure that the saved money has enough time to increase in size, it must be invested as soon as possible and maintained for as long as feasible. But before investing or saving a penny, everything is carefully thought out and planned.
Lowers Risk Appetite
It is not a good idea to risk all of the money by investing in equity because FIRE followers have a shorter time horizon for wealth creation. As a result, investors need to have a smaller tolerance for risk.
The Rule of 25
According to the rule of 25, investors must factor in enough savings for their post-retirement years in order to maintain their current standard of living. They must therefore amass a corpus that is 25 times greater than their yearly expenses. For example, according to the rule of 25, an investor who spends ₹10 lakh in a year will require ₹2.5 crore (10 lakh X 25) in order to retire early.
Usage of Credit Cards
Investors cannot afford to use too many credit cards because the main tenet of the FIRE movement is saving more and spending less. Therefore, for FIRE followers, the use of credit cards should be close to zero.
The hard part of living the FIRE lifestyle comes after retirement; it doesn’t stop with just saving enough money. Since a FIRE investor has a longer retirement period, the annual withdrawal must be as small as possible, no more than 3–4% of total assets.