Posted 25 April 2023
What Is the FIRE Method?
The FIRE method is a relatively new movement that stems from a book called “Your Money or Your Life” published in 1992 by Vicki Robin and Joe Dominguez. FIRE stands for financially independent, retire early. The premise is you should evaluate all expenses by the cost in working hours, and then trim as much of the excess as possible to focus your efforts on investments of the saved income. Many young people have subscribed to this idea, as FIRE promotes the possibility that you may be able to retire as early as 40.
The FIRE method works through rigorous budgeting and expense cutting. Most people who use the FIRE method try to save anywhere from 25% to 75% of their gross income. Then, they can reinvest the savings into the market and use compounding interest to grow their nest egg quickly. Some proponents of FIRE live on as little as $25,000 a year.
FIRE is a great goal to have and can work well for a lot of people. If you decide to use this method, have a plan for what you’ll do after retirement. Sometimes people who are successful with the FIRE method will save and save to retire at 40 and then realize they had not planned for what comes next. If you choose to subscribe to the FIRE method, make sure you have a plan for the future.
Another potential conflict with FIRE occurs when following the 4% rule. The 4% rule is when you convert 4% of your portfolio each year to cash. Using this rule, if you only save the usual $1 million dollars, this amounts to $40,000 a year. While for some of the more hardcore FIRE practitioners, this may be a pay raise, for others it may be a significant cut. Make sure when you retire, you’re ready to live off what you’ve saved and invested.
FIRE can be an effective tool to achieve financial independence but should be tempered with a dose of reality. Make sure you know how much you need, and what you are going to do after you retire.
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