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What does FIRE in Finance Mean?

Updated: Mar 27

FIRE stands for Financial Independence, Retire Early. Read more about how to achieve FIRE and whether it's right for you.

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+ What does FIRE in Finance mean?

+ How do you achieve FIRE?

+ How do I calculate my FIRE number?

+ Why isn't real estate counted in the FIRE number?

+ What can I do to start working towards FIRE?

What does FIRE in Finance mean?

FIRE stands for Financial Independence, Retire Early. It's a movement where individuals and couples aggressively save and invest in order to retire early. This generally involves some creativity in order to maximize savings and investments. Depending on your job, side income, expenses, where you currently live, what you want your future to look like, etc, your FIRE roadmap may look entirely different from someone else's.

There have been many articles written about couples who live very minimally - purposely never taking vacations and living extremely modestly in order to achieve FIRE at an earlier age. That sometimes also requires continuing to live modestly even after FIRE. While others I've seen do not achieve FIRE as young, but are able to live a bit more after they retire.

How do you achieve FIRE?

Before you even achieve FIRE, you need to decide what retiring early looks like to you. What does life look like? Do you want travel the world and live in different cities? Do you want to stay at home with your kids and watch them grow up? Are you still earning some income or will you completely live off of what you have saved/invested? The best way to achieve FIRE is to start by understanding what the end goal is. Then, it's all about saving and investing to get to that post-retirement life.

How do I calculate my FIRE number?

Once you have an idea of what your end goal looks like, you now have to determine how much that retired life costs you annually - also known as your FIRE number. Don't think about your expenses now, but what the expenses look like in your retired life. The general rule of thumb is that you will multiply your annual expenses per year by 25 and that is the amount of money you will need in stocks and cash in order to retire. For example, if I estimated my expenses to be $100,000 per year in retirement (this includes my husband as well), then our FIRE number for retirement is $2.5M.

Some financial experts believe multiplying by 25 may not be enough of a buffer, especially if inflation continues to grow at a rapid pace (ie what is going on now in Q1 2022). They argue the multiplier is closer to 30.5 to be safe. Either way, it gives you a sense of what you should be targeting in order to retire.

Why isn't real estate counted in the FIRE number?

You're probably wondering, "Hmm, I own a home, shouldn't my real estate be a part of my FIRE calculation?" Not necessarily. If you do not plan on selling the home and using it towards your retirement, then it's really not necessary to include it in the calculation.

Many people also don't include their home in their FIRE calculation as a buffer. They fully intend to downsize and move to a smaller home in the future, but would rather keep the difference as a buffer in their FIRE calculation in case anything goes wrong (ie stock market is doing poorly, inflation rate is growing at a faster pace than expected or underestimated retirement expenses). Plus, it's hard to estimate how much your home will be worth in the future if you do not intend on selling it until 10, 20 years later.

What can I do to start working towards FIRE?

Two things: saving and investing. Since these are the two main factors that go into your FIRE number calculation, the best way to work towards FIRE is to save and invest.

Saving money plays a critical part in FIRE and arguably is much more important than investing in the beginning. You have to actually have money to invest and the only way to do that is by cutting down your expenses. If you're not familiar with budgeting, I have a lot of tools and posts that will help you get started. For example, start with learning about zero based budgeting and the 50 30 20 budget rule of thumb.

Once you have money saved, start investing. Investing in the stock market is pretty seamless these days. It's easier than ever and fees are that much lower to invest now compared to what it was even 5 years ago.

If you're ready to achieve FIRE, but aren't sure how to get there, schedule a 1 HR financial coaching session. We will discuss your financial goals and build a customized roadmap on how you can achieve them!

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