FIRE Movement
The Financial Independence Retire Early (FIRE) movement has absolutely gone mainstream and been blowing up over the past years. It’s (mostly) providing motivation and information to thousands on how to attain independence in their current lifestyle and Retire Early. Early being before the usual 65-ish…
Those pursuing FIRE are focused on budgeting, income, and investing. This is about bringing these skills together and striving for the freedom to work when they please and retire when they want. Financial Independence refers to working in a way that you need (or can sustain) and allows you to retire early. This could mean retiring at 30 or 60. Think of FI as giving you enough “screw you money” (we’ll take a polite spin) to not have to work again. Once you hit that number (it varies based on the person, income, quality of life in retirement and comfort/risk level). It’s not that you won’t work, just that you don’t have to.
This amount that you hold in investments or real estate can let you pull enough income yearly to sustain the lifestyle you want. Most people will lean on the 4% rule. This being if you withdraw 4% of your investments yearly (pre-tax) you are relatively safe from running out. If you had an account balance of $1,000,000 you could reasonably withdraw $40,000 a year (pre-tax) to live on. This doesn’t account if you have a pension, rental income, etc…
What Was Found
TD Ameritrade and The Harris Poll decided to dive into those committing their lives to a FIRE lifestyle. They wanted to find out why there was so many individuals striving for this. You can find their press release here as well as their specific findings in a short PDF listed here.
Here’s what they found in this study of 1,500 individuals, 753 of those were financially independent or on the path.
Most people think the goal of financial independence is to retire early (convenient enough in the acronym), but the study found differently. Individuals had a greater desire for the freedom it offered. The freedom to live life without needing to work and being able to spend more time with family and friends. Only 1 out of 3 said their desire was to avoid work. On average a person began working towards financial independence at 37 and achieved it by 57 (but continued working until 62). An interesting note is that those wanting financial independence retired 4 years earlier than the rest. Imagine if you started on this path at age 35, or 30, or 25? What about age 20? Individuals engaging in a FIRE mindset focused on the following 5 areas as the primary ways to achieve their goals.
1. Avoiding High-Interest Debt, this can refer to student loan debt, mortgages, car loans, and especially credit card debt. This will absolutely weigh you down and hurt your ability to invest and save.
2. Sticking to a budget. 2 out of 3 financially independent individuals said they would prefer to increase their savings rates by cutting spending as opposed to earning more income.
3. Investing in the stock market. Financially independent individuals invest nearly double the percentage of their income (16% of their income compared to 9%). 94% of individuals were invested in the stock market compared to 68% of those who are not considered financially independent.
4. Maxing out retirement savings.
5. Downsizing lifestyles.
Misconceptions
A common misconception of those in the FIRE community is that they are choosing to live as an ultra-minimalist, never spending money. That they are frugal to the extreme (hoarding pennies on the sidewalk), avoiding living life, etc.. How many times have you heard the “Well I don’t want to wait to live when I’m old”. Guess what? You can do both! The report includes that 67% of people said that if they had to live like that they wouldn’t do it. Those individuals said it was not worth it if they had to live like they were broke and nearly half did not want to avoid vacations. In fact, it was split 53% to 47% for who considered themselves frugal. The others considered their purchasing decisions to be based on decision-making based on intent and usage.
This is something the Mrs. and I have been engaging in over the course of 2018 and now into 2019. How many of us have purchased stuff only to find it 6 months later wondering why we ever bought it?
Finally the study looked into income sources and the effects of investments. Those financially independent reported only half of their income came from employment, followed by a quarter of it from investments (primarily dividends) followed by inheritances, owning a business, freelancing, and real estate. The side hustle game is strong with those in the FIRE community. Check out J$’s ever-growing list over at Budgets Are Sexy.
This was an interesting study and one of the most comprehensive out there. If you are interested in taking a closer look at budgeting or tracking your investments, check out my post comparing Mint to Personal Capital.
Thanks for reading!