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Extreme saving – pros and cons of joining the FIRE movement

01 May 2019

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

The FIRE (Financial Independence, Retire Early) approach to saving and investing is catching on. Find out if living frugally now for a future of financial freedom is all it’s cracked up to be.

What is FIRE all about?

In a country with a tragic history of bushfires, you’d expect a website called Aussie Fire Bug to be banned immediately. But the FIRE this bug is blogging about stands for Financial Independence Retire Early and it’s a movement that’s starting to ‘catch on’ here in Australia. Popular US based bloggers Financial Samurai and Mr. Money Mustache have been preaching about their own FIRE practices for some years. The original spark for the whole phenomenon, Vicki Robin, started her own FIRE campaign back in 1992 with her book Your Money or Your Life.

So what is all the fuss about FIRE?  The name summarises the results you’re aiming for quite neatly. But it doesn’t tell you about the financial habits and lifestyle you can expect to adopt if you want to stop relying on a salary for your income and enjoy early ‘retirement’ instead. And when we say early, we don’t mean 59 instead of 65. Some FIRE devotees plan to become financially independent, living off their investment income, by the tender age of 40 or younger.

How you get to this point is very simple. You spend less than you earn and then invest that surplus. Low-cost investing is preferred by FIRE practitioners so that more of your savings are exposed to compounding returns over time. And when you’ve reached a point where your investment income matches, or even exceeds, what you can afford to live on, you’ve reached that point where you don’t need a job anymore. ChooseFI podcast co-host Jonathan Mendonsa reckons there’s a formula for your FIRE target based on annual living expenses. Once your total net worth (assets minus liabilities) is 25 times what you spend in a year, you’ve made it in the FIRE game.

How a FIRE mindset can help

“Earn more. Spend less. Enjoy the journey.” This tagline for Mendonsa’s podcast delivers a positive and enticing message for everyone who feels stuck in a rut in life, particularly when it comes to money. With household debt on the rise in Australia, finding a way to get spending under control is something many could benefit from. So if you can adopt the FIRE approach and make smarter budget choices as a result, it could well lead to less financial stress and a greater sense of control over your money and your future.

In the FIRE context, earning more doesn’t mean asking for a pay rise or starting a side hustle. At heart, FIRE demands that you limit your spending on possessions and experiences so you can prioritise ‘spending’ money on income-earning assets instead. Essentially, you’re putting investing before consuming. And if you already have the discipline to live with less, you’ll only need a modest income from your investments to make ends meet.

The ‘enjoy the journey’ part comes from the freedom you have to make lifestyle choices on your own terms. When earning money from a job isn’t in the equation, how you want to spend your time is a more open-ended question.

 FIRE rules to follow

Borrowing elements of the FIRE approach can certainly do wonders for your finances. Here are five FIRE rules that make sense for anyone looking for more financial stability, now and into the future:

1. Know where you stand financially

Getting on the FIRE bandwagon starts with calculating your net worth. This includes your savings, debts and assets you already own, such as property or shares. While it might be scary to recognise you’re below zero at the start of a new savings journey, at least you’ll know how far you’ve got to go.

2. Be clear on what your goals are

While saving 25 times your annual budget, as Mendonsa suggests, may not be the goal you have in mind, it’s still important to have a clear and tangible savings target. Whether it’s for a house deposit, retirement or your kids’ education, knowing how much you actually need to save can help you stay motivated as you track your progress towards your goal.

3. Get to know what you spend

Paring back spending to save around 50% of your income is a pretty extreme target that’s been put out there by a couple of FIRE bloggers. And if your salary is pretty high, this may not be so hard to achieve. But even if your income is closer to average, being in the know about where it goes is key to cutting back on non-essential spending, and saving that money instead.

4. Question every spending decision

In her book, Robin talks about resisting the ‘thrall of consumer culture’ and being more aware of how you’re managing your ‘life energy.’ As Robin points out, we spend many hours working to earn while making split-second decisions about spending. By considering how much ‘life energy’ you’re putting into each purchase, you might think more carefully about your consumer habits.  

5. Invest to boost your potential passive income

Once savings start to pile up, you can start to think about your investment options and a strategy that suits the timeframe for your financial goals. However, getting debt-free and having an emergency fund on hand are two goals you should aim to meet before looking at potential returns you can earn from your savings.

The problems with FIRE

This final point highlights a couple of the drawbacks that have been overlooked by many FIRE ambassadors. Most FIRE success stories come from people in high-paying jobs, who make no mention of having debts to settle at the start of their FIRE journey. If you’ve got debts to pay off, or your income is modest at best, then you shouldn’t fall into the trap of thinking that financial independence is just around the corner, if you can tighten your belt a little bit.

Another problem is that the whole concept of planning for the unexpected doesn’t seem to feature in the FIRE manifesto. Health problems, divorce and death are just some of the more extreme things that could mess with your perfect life plan. To the FIRE disciple, personal insurance premiums might seem like a waste of money. But in the greater scheme of things, financial independence is also about protecting your wealth as well as having the discipline to save it and spend it wisely.

The FIRE approach also depends on placing limits on how you live now for the promise of future freedom. Retiring half-way through your life sounds like a fun outcome, but achieving this might make you quite miserable in the meantime. Instead of trading-off a lifestyle you enjoy now to bring forward your retirement, striking a balance between the two might be a better approach. Based on expert advice on your financial goals from a CERTIFIED FINANCIAL PLANNER® professional, you can help yourself live well now and put a plan into action that will see you saving and investing to keep living well in the future.

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