The Ultimate Guide to F.I.R.E

When I first read about F.I.R.E (financial independence, retire early), I was instantly hooked.

I have a personality that latches onto goals that seem challenging and unconventional.

So when I started reading about this crazy community of people trying to retire in their 30’s, 40’s and 50’s (or as early as possible), I was incredibly intrigued.

Many of these people were practicing frugal living at a level I had never seen before.

They were saving a huge portion of their income – I’m talking 50% to even 90%.

Some were taking advantage of all types of ‘hacks’ like reward programs, coupons, travel points, and more.

And finally, they were dumping almost all of their savings into high yield index funds or ETF’s (exchange-traded funds).

Is this some type of cult?

That was the first question that crossed my mind.

The answer is, yes – of course it is. But a healthy kind 😉

Like I said – I was hooked.

In all seriousness, F.I.R.E has developed into a positive community of savvy and ambitious young (or young-ish) hustlers who are hell-bent on escaping their traditional careers, and arriving at a more flexible lifestyle. All while having a reasonable confidence that they will be financially healthy for the long term.

In this article, I’m going to share some key principles I’ve learned about F.I.R.E, how to achieve it, why to achieve it, all the what-ifs, ways I’ve adapted it, how to create your plan depending on your risk profile – and much more.

What is F.I.R.E? (Financial Independence, Retire Early)

While the earliest mention of this ‘ideology’ was in 1992, when Vicki Robin and Joe Dominguez published the book – “Money or Your Life”, the movement didn’t gain any traction until the last decade.

So what exactly is it?

It’s achieving financial independence and retiring earlier than the typical age (which is usually 65+)

Participants of the F.I.R.E movement seek to retire early from a ‘traditional’ career, by accumulating enough cash and income-producing assets to sustain their lifestyle indefinitely.

The concept itself is incredibly simple, and so is the theory of getting there, but there can be all types of difficulties that come with it.

The financial target itself is different for every individual or family.

It will depend on your:

• Age
• Income
• Expenses
• Starting net worth
• The type of investment/s you select

The most popular version of FIRE relies heavily on index fund investing. By saving large amounts of your income and allocating that money into index funds and/or various ETFs, the power of compounding can begin to produce its magic.

The basic premise is that you withdraw 4% (approx) each year from your investment account/s, in order to fund your lifestyle.

Again, in theory – a very simple concept. Save lots of money, dump it into the markets. Repeat over and over until you have enough money to retire. You can play around with this calculator if you want to see how much money you would actually need to achieve FIRE depending on your individual variables.

Challenging the Status Quo

The way I see FIRE, is that it’s simply a challenge to the status quo.

We’ve been fed certain assumptions for far too long.

Do you really need to work hard for 40+ years, pay your dues, struggle at every turn, take 1 vacation per year (if that), and finally have the ‘reward’ of retirement at 65, where you can finally do the things you’ve always wanted to do?

As I write that, I’ve just realized another reason why I was attracted to the FIRE movement. I love challenging assumptions.

And it’s not just me, I believe many of us always found the equation above a little ‘off’. Change is in the air.

Debt, Consumerism, and Frugality.

More specifically, another huge factor to FIRE is challenging consumerism. In order to achieve FIRE, typically the average person or family needs to save a large portion of their income. A natural part of that is of course – frugal living.

When many people take a long hard look at their spending habits and lifestyle, it becomes glaringly obvious why they feel they’ve been on a financial hamster wheel.

The FIRE movement has caused many to question their habits. To question their consumerism. To realize they’ve been purchasing things they don’t really care about, to impress people and/or fit into societal norms. Anyone seen the movie 🎬 “keeping up with the Joneses”?

High-interest debt (like that from credit cards), is your enemy if your goal is to rocket your net worth.

Yet this is the type of debt many of us accumulate when we slide into mindless consumerism.

One of the first steps of money management is to eradicate any high-interest debt.

Once you are free of any nasty debts, you’ll be better positioned to save money and start pouring it into your investment buckets.

A New Type of Retirement

When people retire early, you might think they would spend their days binge watching Netflix, sipping cocktails and enjoying their new found freedom.

However typically something interesting happens. They don’t actually end up doing nothing. Shocking, I know.

What early ‘retirees’ have found, is that they end up starting or growing all types of projects and side hustles. Yes, you might say – probably through blogging about retiring early?

Yes, that’s one way! But in addition to blogging, there are hundreds of side hustles you can start either during your FIRE journey and/or once you ‘retire’.

Remember that calculator I mentioned above, that assumes you will earn no active income after your ‘retirement’, and you will simply withdraw your 4% (or an amount suitable for you/your family) each year for living expenses.

But what if you actually do generate some income? What if you keep feeding your investment machines? Let’s just say your net worth will thank you for it.

That’s one of the benefits of ‘retiring’ early. You still have the health and energy to pursue projects that truly get you excited! Some may generate income. And other projects, you may just do purely for the joy.

These days, thanks to the internet, there is almost always a way to earn some revenue through your passions.

Love growing your own fruits and vegetables? Start a blog about it, and turn it into a side hustle!

Love antique cars, buy some old bangers, spruce them up and flip for a tidy profit (read my article on flipping). And then blog about it too! (read about blogging and ad-revenue). Now that’s meta!

You can very simply build a stack of active + passive income sources these days.

Why Do People Pursue F.I.R.E?

There are many reasons why people pursue FIRE, some of which are:

Spend more time with family and friends

There are many people I know that work 40+ hours per week – and are still social butterflies. Others find it hard to balance a career grind while still being there for their loved ones. Every situation is different, as there are so many variables – but this is certainly a common motivation.

Pursue more meaningful work

For others, the type of work in their regular/traditional career is simply not fulfilling and rewarding. Like I mentioned above, almost everything is monetizable these days, so many people would rather have more time for doing work they truly enjoy.

Location independence

While some jobs are remote (increasingly due to COVID19), many jobs are not. And that alone can be the reason for someone pursuing FIRE – to be able to travel, live abroad, try van-life or alternative lifestyles! This is a very personal thing. Some people love a ‘home base’ and don’t like moving around constantly. Others love the nomad lifestyle. That’s why your motivations are unique to you!

A Big Audacious Challenge

For others, probably like myself – I’m a sucker for a big audacious challenge! Retiring at 30 was a huge challenge and risk. Many people who have a large appetite for risk, and perhaps, an addictive, competitive personality choose to pursue crazy goals like this for no other reason than the journey itself!

A FIRE Journey – the “How”…

Where does one actually start in the FIRE journey?

While there are no official rules/steps to FIRE, here’s the way I like to think of the journey:

Step 1: Crunch your numbers
Step 2: Create your ‘cheat’ codes
Step 3: Set up your money machine
Step 4: Set up your money multiplier
Step 5: Optimize the system
Step 6: Adding fuel to the FIRE

Step 1 – Crunch Your Numbers

The first step to FIRE is to crunch your numbers and understand them inside and out.

You do this by sitting down with your computer and massive roll of parchment (paper will also suffice!)

Here are the numbers you need:

Your current monthly income (household) 🤑 – the total amount of monthly income that comes into your bank account/s. This includes money from any job/s, freelance work (average), royalties, real estate rental income, dividends – everything.

Example figures:
Salaried job: $4000/month
Freelance graphic design: $500/month
Total: $4500

Your current monthly essential expenses 🥸 – the total amount of monthly essential expenses. These are things like your mortgage/rent, utilities/bills (heat, electricity, water, internet), essential transport, food, essential healthcare (depending on what country you live in).

Example figures:
Mortgage/Rent: $1500/month
Utilities/Bills: $250/month
Food: $400/month
Transport: $150/month
Total: $2300

*The above figures are completely fictional and for example purposes only. Write down all your real income sources and expenses. Everything.

Your current monthly non-essential expenses 👀 – the total amount of monthly non-essential expenses. These are things like entertainment, eating out, travel, online shopping etc.

Example figures:
Netflix – $12/month
Eating out – $200/month
Shopping – $200/month
Total: $412

Your current net worth 💰 – This is the sum of all your assets, minus your liabilities.

Example figures:
A: House – $500,000
A: Car – $25,000
A: Stocks – $50,000
A: Retirement fund (e.g. 401k) – $30,000
A: Cash – $20,000
L: Mortgage – $300,000
L: Car loan – $10,000
Total net worth: $315,000

Your savings rate 💸 – This is the percentage of your income you believe you can save based on your number-crunching above!

Example figures:
Total income: $4500
Total overall expenses: $2712
Remaining: $1788
Savings rate: 39.73%

Based on the fictional example numbers above, if you are 35 years of age, it would take you approx 8 years to retire. This is assuming you choose a stock-based investment portfolio (not bonds), and the market appreciates based on historical averages.

Action step: use the calculator here to play around with your own numbers!

Step 2 – Creating your cheat codes

For some of you reading this, you want the shortcuts. You want the cheat codes.

There are only 2 (basic) levers you can pull to achieve FIRE faster. Your income, and your expenses.

Remember when we talked about questioning assumptions?

I’m going to share one cheat code. Keep in mind, I have many in my toolkit, but let’s start with…

House hacking – a short primer

What if you could take your biggest expense, and turn it to dust…

Introducing – house hacking. This could be one of the greatest shortcuts to financial independence.

Here’s the strategy:

1. Purchase a multi-dwelling residential site (e.g. duplex)
2. Live in one dwelling
3. Rent out any additional dwelling/s.

An alternative to this is doing internal house hacking. If you buy a single dwelling, you can rent out individual furnished rooms. However, this is not for everyone, since you may not want someone living in your home!

The primary house hacking strategy allows you to have your own house, and rent out a seperate dwelling.

As I’m sure you’ve guessed, the whole premise of the strategy is to use the rental income you receive to pay your mortgage (or a large chunk of it). By doing this, you can potentially reduce or eliminate your biggest living expense.

Obviously, this involves buying a house, which opens up a can of worms in terms of getting finance, tenants, and other complexities.

However, for those of you who like cheat codes, there you go.

Optional action step: build a house hacking case study!
– Find a duplex for sale in the area you want to live in
– Use an online calculator to work out monthly repayments
– Find similar dwellings, find out how much rent you could get
– Use online calculators and/or talk to a professional about all the fees associated with owning property. Crunch the numbers.
– Use the FIRE calculator again, this time with your updated monthly income/expenses, and see how many years you cut your FIRE number by!

The incredible thing about this cheat code is that historically speaking, real estate appreciates in value, so not only are you reducing your expenses but you’re also growing your net worth through asset appreciation!

Here are some other cheat codes:

• If viable, sell your car (downgrade, or use a bike)
• Learn about how you can eat on a budget
• Start a side hustle. Seriously, start a side hustle – today.
• Get rid of insurance products (except for insuring against things that can cripple you financially or physically – speak to a professional)

Step 3 – Setting up the money machine

I’ll be writing in detail about setting up an automatic money machine, in my upcoming ultimate guide to managing money and getting rich.

However for the sake of this guide, it’s important to have some basics in place when it comes to how your money moves around.

Let’s dig into a very basic set up…

First of all, make sure you bank with an institution that doesn’t charge you ridiculous monthly fees, overdrafts and silly things like that.

If you have no debt, I like this set up:

1. First account – let’s call it ‘live’
2. Second account – let’s call it ‘grow’
3. Third account – let’s call it ‘play’

*highly recommended: set up a savings account, let’s call it ‘rain’, and try to build this account up to $10,000. This is your emergency fund.

If you have major high-interest debt, I like this set up:

1. First account – let’s call it ‘live’
2. Second account – let’s call it ‘grow’
3. Third account – let’s call it ‘play’
4. Forth account – let’s call it ‘debt’

If you only have a small amount of high-interest debt, you may just want to use the first set up, and use the ‘live’ account to terminate your debt (as part of your ‘essential’ living expenses).

Why have multiple accounts like this?

Because we’re going to set up a money machine for you, giving you total control and visability over your finances!

How does the machine work?

Your income sources go into your ‘live’ account. Now, remember the savings rate we calculated above? You set up a monthly automatic transfer (for example on your payday) to your ‘grow’ account. This is the money you will invest.

Remember the non-essential expenses we calculated together? You set up a monthly automatic transfer that goes to your ‘play’ account.

You’ll use this account to pay for all your entertainment and non-essential expenses. You can use your full allocated amount each month or you can allow it to accrue and use it for bigger things like a vacation or a big ‘play’ purchase like a new gadget.

And of course – if you have massive amounts of high-interest debt, you will have a fourth account, and you need to allocate how much debt you can pay off through that account every month. If you have multiple credit cards, I like Dave Ramsey’s approach of paying off the smallest balance first, then moving to the next.

By the way, the reason you need to pay off high-interest debt as a priority is because when you’re dealing with 15%+ interest rates, historically speaking – that’s higher than what you would earn from index fund investing (which is approx 8-10%).

So it’s a good idea to get rid of super high-interest debt before full steam ahead with your index fund investing. But I still recommend starting to invest a small amount to get the system going.

The only exception to this – is if you believe you can return more than 20% via growth stock investing or other investing strategies. We’ll talk about that later.

So now let’s run through a quick money machine example (from our fictional figures above)

👉 $4500 income goes into the ‘live’ account
👉 $1788 goes into the the ‘grow’ account
👉 $412 goes into the ‘play’ account

You pay for your essential expenses (housing, utilities, transport, food etc) from your ‘live’ account.

You pay for your non-essential expenses (netflix, eating out, random uber etc) from your ‘play’ account

You run your (future) investing from your ‘grow’ account.

I know, I know – you’re getting very excited!

Step 4 – Setting up the Money Multiplier

The next step is to begin the compounding magic. Investing is by far the biggest key to achieving FIRE. It’s the key to multiplying your money.

While there are many investment vehicles, such as:

1. Growth stocks (think tech, e-comm, fintech e.g. Netflix, Apple, Amazon, Square, Tesla, Shopify, etc)
2. Real estate (think rentals, developments, renovation flipping, etc)
3. Angel investing (giving money to your genius nephew in exchange for some shares of his new rocket-gizmo business)
4. Fixed interest accounts
5. Government bonds
6. Stock derivatives (e.g option calls & puts) *very risky ⚠️
7. Buying a business (e.g. franchise or independent business)
8. Cryptocurrency investments

…and many more.

The most sane and research-backed method to reliably growing your money is to simply ‘buy the market’. What does this mean?

Instead of selecting certain stocks, you put your money into a fund that tracks the performance of many companies within that particular index. The most common example of course – is the S&P 500. Inside of this index is 500 of the top US companies. That’s why many call this ‘buying the market’ or as Warren Buffet puts it “buying a slice of America”.

The average annual return of the S&P 500 since 1957 is approx 8%.

Index funds have become popular for many reasons:

• Risk: by tracking the performance of many large companies, the risk is spread and lowered (does not apply to every index fund or ETF)
• Passive: there is no ‘management’ required. No financial statements to read. Just set and forget.
• Cheap: there are many low-cost index funds. And since they outperform most managed funds, it’s become a ‘no-brainer’.

For beginners to investing, it’s certainly a logical investment choice. It’s passive, has low risk (long-term), cheap (low-fees), and history is on your side – the S&P 500 has always outperformed a fixed-interest savings bank account!

At the risk of sounding like a hypocrite, I must admit – I don’t invest any significant amount of money into index funds any more. I have chosen to invest in growth stocks and real estate.

However, these are riskier and not as passive – but come with higher potential gains.

I’ll certainly be writing about my strategy with growth stocks and real estate, however this wouldn’t be a FIRE guide unless we stick with the fundamental strategy – which is reliable, slow, boring growth. And index funds have become synonymous with the basic FIRE strategy.

So what is the best S&P 500 index fund?

One of the oldest, cheapest and most common is:

Vanguard 500 Index Fund – (VFIAX)

Other low-cost options include:

• Schwab S&P 500 Index Fund (SWPPX)
• Fidelity 500 Index Fund (FXAIX)

*Always speak to a financial professional before investing your money!

So how does the money multiplier work?

You automate your investing by creating automatic deposits into your index fund/s of choice. With a phone call to any leading broker, you’ll have this set up like clockwork.

So now with your money machine, and money multiplier set up – what’s next?

Step 5 – Optimization

Like any system or machine – this requires some maintenance and optimization.

You need to allow the machine to run for a while, so you can collect some data and know what to optimize.

Your money machine: are your estimates of your essential vs non-essential holding up well?

Or are you running out of money in your ‘live’ account?

Did you underestimate your income, and you have some surplus money sitting in your ‘live’ account?

Are you using your full non-essentials fund each month, or can you re-do the numbers and allocate more to the ‘grow’ account?

In general, this step is all about looking at the data, and making tweaks to the machine.

It may include things like:

• Changing the day of your monthly auto-transfers
• Tweaking the ‘grow’ and ‘play’ auto-transfer amounts
• Setting up auto-pay for your bills
• Diversifying/adding more index funds or ETF’s + setting up auto-invest
• Reviewing your statements for non-genuine fees/errors/non-authorized purchases, and calling to get them reversed.

You should be getting super excited by now, because in the optimization phase, you should be feeling a high degree of control over your finances.

You’ve set up this incredible automated machine and you are now in the driver’s seat. It should feel refreshing and empowering! Especially if you’ve felt overwhelmed by your money for many years – like it just comes and goes without control!

Step 6 – Adding Fuel to the Fire!

Now that you know your number inside out, have your plan in place, set up your money machine and multiplier, and know how to optimize it all, all that’s left to do – is add fuel to the fire!

I mentioned earlier that there are only two variables you can control if you are following the traditional version of FIRE and investing in an S&P 500 low-cost index fund.

1. Your income
2. Your expenses

However there is a third variable you can control if you choose to do so, and that is manual investing. By investing in assets that can potentially yield double, triple, or even 10x – 100x what index funds can, it’s should come as no surprise that it would have a jaw-dropping effect on your financial position.

So how do you pull the income, expenses, and investing levers to add fuel to the fire?

Adding fuel via income:

• Get a raise at your job
• If you freelance – raise your prices/add more high-end services
• Start an extra side hustle

Adding fuel via reducing expenses (thus increasing your savings rate)

• Audit every expense and question every assumption
• Apply cheat codes
• Move to the suburbs (if viable)
• Cut down your non-essential expenses

Adding fuel via manual investing

• Learn about growth investing (look out for my upcoming guide)
• Buy a managed business (look out for my guide)
• Invest in real estate (e.g. flipping, development, rentals)
• Day/Swing trading (stocks, crypto) caution: ⚠️ very risky!

Adding fuel to the F.I.R.E is not for everyone. Many times it involves extra sacrifice or risk – so it’s important to develop self-awareness. Understand yourself as a person, and make the best choices for your personality and goals.

Cutting a non-essential expense may look good in theory, but if it’s something you rely on to de-stress or bring joy to yourself/your family – it may not be worth it. But perhaps, in that case, adding more income via side hustles might be a better choice. Self-awareness is a vital skill!

I hope you’ve thoroughly enjoyed this guide to F.I.R.E (financial independence, retire early) as well as my hacks to put it on steroids!

If F.I.R.E is not for you, consider utilising some of the principles (such as purposeful spending) to improve your financial situation overall.

And if you’re hooked like I was, and can’t wait to get started – don’t hesitate to scroll back up, start from step one, and begin!