What is the FIRE movement? A guide to financial independence and early retirement

The Financial Independence, Retire Early (FIRE) movement has been growing in popularity as individuals strive to gain control over their finances and retire early. With working life taking up more time than ever, and the standard retirement age on the rise, working toward achieving early financial independence is becoming an ambitious goal for many.

This article includes tips, suggestions, and general information. We recommend that you always do your own research and consider getting independent tax, financial, and legal advice before making any important decision.

This article delves into what the FIRE movement is, its variations, and how it can be achieved.

Understanding the FIRE movement

FIRE, which stands for Financial Independence, Retire Early, is a movement or lifestyle that prioritises saving to accumulate enough wealth early in life to gain financial freedom and retire earlier than usual. Achieving FIRE typically requires a commitment to living frugally, and saving as much as possible.

Here is FIRE's core principle:

• The rule of 25. Many of those committed to FIRE, adhere to the rule of 25, which involves saving 25 times their annual expenses to reach the so-called FIRE number, which covers one’s financial needs during retirement.

But it's important to note that FIRE has expanded to include different versions over the years to cater to various lifestyles.

Lean FIRE, fat FIRE, and barista FIRE

Not all FIRE movements are created equal. Some individuals may want to live on a tight budget after gaining financial independence. Others may desire to live more luxuriously. Still others like the idea of holding a low-stress job.

From early saving to budgeting and expense tracking, the FIRE plan typically involves several key components working in tandem to help speed up the path to financial independence.

Early saving

Starting early is important to potential success in the FIRE movement, setting it apart from traditional retirement planning. While conventional retirement strategies usually aim for financial independence at 65 or later, followers of FIRE often target retirement in their 30s or 40s. The much earlier timeline to retirement demands a much more aggressive approach to saving, allowing individuals to benefit earlier from the power of compound interest.

Budgeting and tracking expenses

• Budgeting is one of the foundations of FIRE. Creating a detailed budget and tracking every expense down to the last penny helps to identify areas where costs can be cut.

• Breaking down spending into categories such as housing, food, and transport can provide an overview of expenses.

• Assessing each category can help identify potential areas where adjustments can be made to boost savings.

• Using digital tools and money management apps, such as PayPal, make it easy to budget and save money as well as track expenses, ensuring that individuals stay on track with their goal of achieving FIRE.

Additional income streams

Generating more income — with a side business, picking up part-time work, finding an opportunity to earn passive income — could be another way to help speed up the path to FIRE. This extra money allows one to save more aggressively.

Alternative paths to financial independence

Buy now, pay later (BNPL) and credit card rewards

Avoiding unnecessary debt is an important component of the FIRE movement. Buy now, pay later programmes and credit cards offered by PayPal and others may help individuals spread out payments over time or enjoy interest-free periods so they can keep more of their money for longer.

Also, credit card rewards, when used wisely, can provide cash back, travel rewards, or other benefits that may help cut expenses. But it’s important to stick to a budget and avoid the urge to overspend just to get a reward.

Considerations of FIRE

Before embarking on the FIRE journey, it’s important to be aware of some potential risks or limitations, such as:

• The possibility of running out of money if unexpected expenses arise in retirement

• Vulnerability to economic changes or market downturns

• Potential feelings of isolation or loss of purpose after early retirement

Preparing contingency plans for the unexpected is useful in retirement planning. These can include:

• An emergency fund. Maintaining a liquid savings account with six to 12 months of living expenses can help cover unexpected costs or economic downturns.

PayPal and your FIRE journey

PayPal and other financial platforms simplify transactions and include money management, and expense tracking, features. They offer tools that can assist in budgeting and increasing rewards for purchases.

The psychology of FIRE

Living frugally may be challenging at times, particularly for those with a more liberal psychology of saving money. It’s not uncommon to lose motivation on the journey towards early retirement, as the goal may seem a long way off.

Surrounding oneself with like-minded individuals may be one way to stay on track.