Updated: May 6
What is FIRE?
FIRE stands for “Financial Independence Retire Early”. The FIRE movement started to get popular around 2010 via online blogs. The concept is to have a frugal lifestyle and invest all your savings in the total stock market or the SP500, which in the long term would help you achieve an early retirement lifestyle.
1. Why the stock market?
Because it is proven. Historical data shows that for the last 30 years, the average return is 8% or more.
2. Why the SP500 index? What about diversification?
The SP500 Index is already diversified for you! It is a fund that consists of 500 stocks that meet the specific requirement and criteria to be in the SP500 Index. By investing in the index fund, you are owning a small percentage of each of those 500 stocks. An example is the Fidelity 500 Index Fund. It has 508 stocks. Even with just the top 10 stocks below, you are well diversified.
Here’s an example. Using our investment calculator below, if you start with $0 and contribute $1,500 every month with an 8% return for 30 years, you will have $2.2 million dollars when you retire
The FIRE methodology for making money is pretty much based on compound interest returns. Compound interest is a very powerful thing in the long term. You often hear the phrase “time is money,” but in this case, it is literal. Imagine if you have $1 million, and you invest it in the market with an 8% return and forget about it for 10 years, you will have $2.2 million
That is $2 million dollars for doing nothing! And you wonder how the rich get richer? Investing in the stock market is one of the best and easiest ways to make your money grow.
Therefore, the earlier you start your FIRE journey and the earlier you start investing, the better.
Time is Money!
How do you know your FIRE number?
Everyone’s FIRE number is different because it depends on the cost of living of your planned retirement location. To calculate this number, you will need to add all your monthly expenses (including rent, mortgage, insurance, utilities, life insurance, health insurance, cell phone bill, internet, and so on).
Once you have the monthly expenses, convert it to a yearly expense (multiply by 12), and then multiply it by a minimum of 30 years. Why 30 years? That is roughly how long people may live when they retire at age 65-69.
To help you calculate your FIRE number, I have made a calculator on the home page. In this example, we will calculate my number.
From the calculator result, my FIRE number is around $1.3 million dollars with a yearly expense of $44,400 dollars. It also has my current saved up money from my 401k, IRA, etc. It gives me an estimate of how long it would take if I were to contribute monthly with a different amount.
With my current total savings of $103,200 invested in the market with no monthly contribution at an 8% return, it would take me about 32.8 years to reach my FIRE number of $1.3 million dollars. This is ok if I’m not in a rush to retire, but if I want to speed up and reach my FIRE number faster, I could contribute $4,000 each month, which would change the number of years to roughly 13 years.
Now that we know our FIRE number, what do we do now and where to start?
The FIRE methodology is built on the below rules that people follow.
1. Live within your means.
The goal here is to live on just the necessity and don’t try to be flashy or impress anyone. You don’t want to look rich but actually have a poor bank account. If anything, you want to look poor but actually have a rich bank account! You need to evaluate your current lifestyle and what is essential for you or your family.
You should evaluate your current monthly expense and see what can stop spending to save more.
3. Save 50%-75% of your household income.
This is pretty self-explanatory. You have to save a lot to grow your retirement money bucket, the more you save and invest the faster you will reach your FIRE number.
4. Eliminate your debts.
This means eliminating your HIGH-interest rate debts like credit card debts, car loans, student debts, or mortgages.
5. Get more money.
How do you get more if you already have a full-time job? You can start a side gig/hustle. Either getting a second part-time job to earn extra money or turn your existing skills into service to get more money and fuel your investment.
6. Invest all your money in the total stock market or SP 500 index.
It is a fact that for the past 30 years the stock market has an average return of 8% or more.
As you see below, historically, the Dow Jones and the SP 500 Index have always recovered after a crash and rose even higher.
There are those who are trying to have an extremely frugal lifestyle and follow these rules religiously calculating every dollar and cent to cut costs. I, myself, have nothing against that and I congratulate those who can stick to that extreme frugal lifestyle. However, I like to think of these rules as guidelines. Find what is frugal and sustainable for you and your family in the long term.
I wish that someone had shared this investment knowledge with me when I was young. As a matter of fact, back in 2008 when I first took interest in the stock market, I was trying to find a stock that has guaranteed percentage returns, and back then there were CDs being offered at 5% for 5 years locked-in.
However, I knew nothing then and didn’t know where to look, so I gave up and focused on short-term trading by chasing penny stocks trying to get rich quickly, and that didn’t turn out well. I did not understand the power of compound interest in long-term investing then. Now thinking back even the 5% CD offers was a good investment when you have no clue about investing.
Now that you know that the stock market could give you a guaranteed average of 8% return, why would you not invest in it? This is literally free money by doing nothing.
Let’s look at another example:
My goal is to reach my FIRE number fast. As of March 2021, the Fidelity 500 Index Fund (FXAIX) give 13% doe 10 years returns. Let’s say I have $189k in my savings and contribute $500 every month into the SP500 for 10 years.
The calculation show I would have $810,684 in 10 years just by being consistent in my contributions every month.
If you look at that total contribution without the existing $189K, I only put in $60,000 for 10 years to make $561,694. This is the power of compound interest over a long period of time. Therefore, I encourage you to start investing early and let your money grow.
I know there are people out there that are well-disciplined traders and able to make more than 8% returns, and there are those who lose 50%, and sometimes even everything, by betting on penny stocks and new start-ups that may or may not make it.
My point is if you are just an average person who wants to keep your money safe and let it grow over time without doing anything, then I encourage you to look into invest in the total market or the SP 500 Index.
For those of you who are iffy about the stock market and thinking “Oh the stock market is too high I don’t want to invest in it, it's going to crash”:
Yes, the stock market may be at its high at the moment, but if you look at the end of 2020 everyone thought it was high, then in early 2021 it went ever higher, then it started to correct late February 2021. Now it’s the end of April 2021 and the market is at its all-time high again.
As a matter of fact, as of April 26, 2021, the SP 500 is up 11.49%. So if you keep thinking the market is too high and keep waiting for a perfect pull back you will miss all the opportunity. Let say you have a company 401k, and you invest in a targeted date fund, each paycheck is automatically deducted out base on a percentage of your income you want to put away for retirement.
Where do you think the targeted date fund is investing in? It’s investing in the stock market and bonds. You can read more on my analysis on “Target Date Funds a Good Investment?”.
If you have a chunk of money saved and want to invest and think the market is too high, I suggest just invest a small percentage each month and continue to do it. If you are able to catch a good dip then buy all in. As you can see the market goes up and down like a wave, but in the game of long-term investment it always goes up.
Okay, before you start changing your lifestyle and go crazy throwing all your money into the stock market, you should consider the points below.
First, you must build out your emergency funds. This is the number one thing that you must do first, this fund should be a minimum of 6 months or 1 year of total expense money saved up. If something happens to you, you would have access to this money to use until you can get back on your feet. You can read more about it here "Before Investing".
I also recommend that if you can’t put a lot of money into your 401k, at least put 100% of the amount your company will match. If your company will match 6% of your total income, then put 6% to get that free money. Keep in mind the more money you put away and invest the faster you will reach your FIRE number, so I think anything over 10% of your income to start out with will help you get there faster to your goal.
Retirement is not based on the traditional retirement age of 65-69 years, but it is a financial number or the dollar amount that can sustain your retirement lifestyle so you can live comfortably. No one says that you can’t retire early, you just have to figure out what is your FIRE number and work towards it to achieve that freedom or do something else you love.
To work towards your FIRE number you just need to start changing your spending habits and work your way up.
I hope that this has encouraged you to get your FIRE journey and maybe provided a new sense of financial security in your life that you didn’t realize was possible before.
Remember the FIRE methodology should be a guideline on how to save and work towards that financial freedom or retirement so just tweak it as you see fit. To be successful, you must have consistency in saving and investing in the market monthly or yearly. It’s the slow and steady game that will make your retirement account grow over time, so the earlier you start the better.
*Disclaimer. I am not a financial advisor. The contents on this site are referenced as opinions and are for information purposes only. It is not intended to be investment advice. Please seek a duly licensed professional for investment advice.