Are your finances on FIRE?

I’ve been interested in personal finance for a long time; my very first job was as a Personal Banker at a large bank, helping hundreds of people a week with their banking and finances. I made it a point to learn as much as I could about finance, credit, lending, and other common questions I would get from clients so that I could help them to the best of my ability. What I found in my research, both through internal documents and from various websites, was that basically all financial models were based on working as an employee all your life and retiring in your early-to-mid sixties.

While much of the advice I gave back then under these presumptions still applies (live frugally, pay yourself first by paying off debt, and utilize tax-advantaged retirement accounts), I have recently learned of a very different long-term approach to finance – the FIRE approach.

FIRE stands for Financial Independence - Retire Early, and it focuses on a primary goal of retiring before you turn 60, and ideally before you turn 50. This is accomplished by attaining financial independence, which at its core means you no longer have to work to survive and can live off your passive income and savings indefinitely.

This sounds great, but it also sounds impossible, or at least it did to me when I first started learning about it - but it’s not! Difficult, yes, but not impossible. Here are the key aspects of the FIRE approach, having spent a lot of time reading and thinking about it:

1.      You must have no debt for this to be feasible

In today’s world of mortgages, student loans, credit cards and car payments, carrying zero debt is extremely difficult to attain. You will have to make a concerted effort to shift large amounts of your income towards debt payment, which means making sacrifices in other areas of your life. The “snowball” and “avalanche” method of debt payment are both effective ways to tackle your outstanding debt, just make sure you find a method that is feasible and sustainable. Once you attain zero debt, your monthly obligations decrease significantly and you will have a primary residence and vehicle that you can use without a related expense, which is crucial in achieving financial independence.

2.      You must have income substantial enough to cover expenses, debt payment, and savings.

Living paycheck-to-paycheck will never lead to financial independence. Your monthly income must cover all of your expense, AND pay off enough debt to get you debt-free by your anticipated (early) retirement date, AND include some amount towards long-term savings to create passive income, whether by investing in the market or real estate. There are two main ways to accomplish this – drastically limit expenses to free up income for these other areas, or find ways to increase your income, either through a career change, self-employment, a second job, or overtime. If you think it is impossible to save enough of your paycheck to accomplish this, then the fact is that you must objectively evaluate your current job/career and create a plan to increase your income ASAP, without taking on a ton of debt. I’m looking at you, Masters/Doctorate degrees.

3.      Early “Semi-Retirement” is a good option, too.

For many people, simply limiting their work to a certain number of hours per week or a certain number of months per year is the ideal “happy medium” for financial independence. If creating a large savings account is too difficult with the amount of debt you have to pay off, then early semi-retirement may be the best option. This is accomplished by either moving to limited hours at work as an employee, becoming self-employed, or working as a contractor for seasonal industries. If this income is enough to support all of your yearly expenses, then you have achieved early semi-retirement! If it covers all expenses and you can save a bit too, then full retirement isn’t far off either. Just make sure you have enough saved to live on for at least six months in the event you lose your income source, or you are not truly financially independent.

4.      This approach is not for everybody

Achieving financial independence takes a great deal of discipline and sacrifice. Your friends will buy new houses, new cars, new toys, and expensive dinners, and you will not. You must stay the course, knowing and believing that the sacrifices you make now will enable you to live happily on your own terms later. However, you will never have shiny toys: the key to financial independence is living a frugal lifestyle that can be supported by minimal passive income. The payoff, however, is huge; when financial independence is reached, you can tailor your life to maximize your happiness, be it through travelling, spending time with family, enjoying hobbies, volunteering, writing that book you always wanted to write, etc, etc. If you are someone who values intangible things like freedom, flexibility and independence over tangible things like houses, cars and toys, then the idea of FIRE should be very appealing to you.

I personally use the free online software to track my household income and expenses on a monthly basis, as well as monitor my assets, liabilities and budget performance. I have a long way to go to attain financial independence, but it feels good to have a blueprint in place and a plan for the future that I can quantify on a regular basis.

I find the FIRE approach to be inspiring and exciting – what about you? If you’re interested in getting a handle on your finances with an eye on FIRE results, I can help. Budgeting and personal finance are passions of mine and I would love to work with you to determine when your early retirement can reasonably occur.


Further Reading/Listening:

Disclaimer – I am not affiliated with any of the above website nor am I compensated in any way for linking to them.