FIRE stands for Financial Independence Retire Early, a popular American movement that's starting to make waves in Australia. The FIRE phenomenon began back in 1992 when Vicki Robin released her book Your Money or Your Life. Since then, it has inspired many articles and blogs around the world, including popular US blogs Financial Samurai and Mr. Money Mustache. Let's take a look at the FIRE movement and see whether it can help you move your retirement date forward.
After a lifetime of working and paying the bills, most people look forward to the day when they can finally retire. While retirement age varies a little around the world, people are normally well into their 60s before they can put down the tools or move away from behind the desk. While patience is a virtue, a growing number of people are attempting to become financially independent earlier by living off their investment income and retiring in their 50s or 40s. In order to meet the FIRE target, people need to adopt new lifestyle and financial habits both before and after they retire.
To put things in the most simple terms, you need to spend less than you earn, ideally at a young age, and invest the surplus to compound returns over time. While the theory behind this practice is fairly basic, understanding how to invest your money can be challenging. Low-cost investing is generally preferred by FIRE practitioners in order to minimise costs and maximise returns. Once your investment income exceeds your existing and projected living expenses, it's time to sit back and enjoy the benefits of early retirement.
Household debt is on the rise in many western nations, with Australia one of the worst examples. While we undoubtedly enjoy a good quality of life, we also rack up a lot of debt in the form of large mortgages, car loans, and credit cards. “Earn more. Spend less. Enjoy the journey.” is one of the taglines of the FIRE movement, with people looking for ways to reduce their debt without affecting their lifestyle. By learning to prioritise your spending on income-earning assets rather than the consumption of goods and services, you're laying the foundations for an early FIRE retirement.
In order to start the FIRE journey, the first thing you need to do is calculate your net worth. While this can seem scary and may put you below zero, everyone needs to start from somewhere. Making the decision to be more disciplined about your spending habits is the next step, with some FIRE proponents investing as much as half their monthly income. While this is only an option for people with high paying jobs, even a much smaller target will put you in the right mindset to question your consumer habits and spending decisions.
Once you have your spending under control, it's important to look at your investment options and create a long-term strategy based on your income, your age, and the time frame of your financial goals. In Australia, people generally set their FIRE target based on a combination of superannuation income and personal investments. Whether you decide to buy an investment property, get involved in the share market, or find other ways to generate passive income, the FIRE movement is about placing limits and making clever decisions now for the promise of future freedom.