The Fundamentals Of FIRE (Financial Independence Retire Early)

FIRE stands for Financial Independence Retire Early. Financial Samurai helped start the modern-day FIRE movement when this site began in 2009. This post will explain the main fundamentals of FIRE so you can decide if it's a lifestyle worth exploring further for your future.

With now over 1 million organic pageviews a month, Financial Samurai is one of the leading FIRE blogs today.

Financial Samurai has written in-depth about the various types of FIRE sub-types: Fat FIRE, Lean FIRE, Barista FIRE, Coast FIRE, Slow FIRE, and even Wife FIRE. That's right, given most of the FIRE enthusiasts are men, there are men who claim they retired early while having a working wife!

Fundamentals Of FIRE

Let's look into the fundamentals of FIRE. Some of the key items you will learn about are listed below.

  • What is the FIRE movement
  • The definition of FIRE
  • Various type of FIRE
  • Who is FIRE for
  • Criticisms of the FIRE movement, and
  • The framework behind FIRE.

Follow the rules of FIRE I've established if you want to achieve financial freedom the right way. If you break the rules of FIRE, you're only fooling yourself.

What Is The FIRE Movement?

The fundamentals of FIRE are all about not waiting until you're old and gray to quit working. Instead of retiring in your 60s or 70s, the FIRE movement is about allowing people to retire early in their 30s, 40s, and 50s to live their best lives as soon as possible.

Financial independence is about living your life without the need for money. Retirement in FIRE terms is very different from retirement in traditional terms.

Following the fundamentals of FIRE doesn’t necessarily mean you have to quit your job. If you love your job, you can still continue to work. But if you are FIRE, you simply don't have to work. This is a key difference.

The FIRE community focuses more on the financial independence portion of FIRE rather than the early retirement portion. The reason is because people who leave work early and achieve financial independence are generally highly motivated people with a lot of energy and time.

Nobody retires from their day job early and does nothing all day. If you are leaving full-time work behind in your 30s and 40s especially, you've got plenty of energy to do other things.

For example, when Sam from Financial Samurai turned 39, he decided to become a high school tennis coach. He always wanted to teach and work with kids. He didn't need the $1,100 a month he earns for 3 months a year coaching tennis to pay bills, but it certainly didn't hurt.

The Definition Of FIRE

One common definition of FIRE is when your net worth equals 25x your annual expenses. In other words, if your annual expenses are $100,000, you are considered financially independent if you have a net worth of $2.5 million, preferably excluding the value of your primary residence.

Financial Samurai's preferred definition of FIRE is when your investment income generates enough passive income to cover your best life expenses.

In other words, if your annual expenses are $100,000, you need to have over $130,000 in investment income from your existing investments. Remember, you've got to pay taxes on your investment income.

To generate $130,000 of investment income using a 4% return rate requires capital of $3,250,000. Financial Samurai's definition of FIRE is more conservative. But as the founder of the modern-day FIRE movement, his definition is what stands. Sam believes it's better to have a little too much than have a little too little.

Financial Samurai's FIRE Portfolio

Below is an example of Financial Samurai's latest retirement income portfolio. Sam's family lives off less than $200,000 a year and saves about $50,000 of his passive income to generate more passive income.

For 2024, Financial Samurai's FIRE portfolio will generate about $150,000 less in income because he bought a forever home in 4Q2023. With two little kids, Sam believes the best time to own the nicest home one can afford is when the kids are at home.

Financial Samurai passive income investments 2023

Estimated passive income after buying a forever home.

2024 Passive Income Investments from Financial Samurai - the fundamentals of FIRE

Different Types Of FIRE Levels

Another one of the fundamentals of FIRE is there are several different types of FIRE ranging from a very frugal retirement lifestyle to a luxurious one.

For example, one of the various FIRE subtypes is the Fat FIRE lifestyle. The Fat FIRE lifestyle allows FIRE adherents to live in the most expensive parts of the country or the world and really life it up in early retirement.

Then there is the Lean FIRE lifestyle, as mentioned above where some people choose to live extremely frugally to live a life of freedom. There's absolutely nothing wrong with this lifestyle, so long as the person isn't constantly stressed about money.

Finally, there's the Barista FIRE lifestyle, which is a hybrid of Fat FIRE and Lean FIRE. The Barista FIRE person choose to supplement his or her retirement income with part-time work out of necessity. But the part-time work is enjoyable. Barista FIRE is also known as COAST FIRE.

Baristas at Starbucks famously get healthcare, which is a big cost for many FIRE strivers. Thankfully, many early retirees are eligible for healthcare subsidies since their active incomes take a hit.

FIRE Fundamentals: Who Is FIRE For?

Financial independence is for anybody who wants to live a life on their own terms. FIRE is definitely for people who hate their jobs and want to do something more meaningful.

In other words, FIRE is for everybody.

But people sometimes pursue FIRE wrong by being too impetuous. They quit their jobs too soon without a game plan. Instead, people need to plan for years before leaving their jobs. Further, a core tenet of FIRE is to never quit a job, but to get laid off instead.

If you get laid off, you generally get a severance. If you are going to retire early anyway, you might as well try and negotiate a severance. You have nothing to lose.

Financial Samurai introduced this new concept in 2012 when he wrote the book, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye. Sam's severance provided for six years of living expenses so he could enjoy early retirement and grow Financial Samurai without the pressure of trying to make money.

Although it's much easier to achieve FIRE on a high income, achieving FIRE is more about developing a solid financial mindset through aggressive saving and living below your means. But FIRE is also about trying to develop more income beyond one's day job through side hustles.

See an example of achieving financial independence on a modest income of $40,000 in Manhattan.

The First Steps to Reach FIRE

The most important step to achieving FIRE is to save aggressively.

Financial Samurai says, “If the amount of money you're saving each month doesn't hurt, you're not saving enough.”

Please follow Sam's motto in order to get into the great habit of saving aggressively and often.

Below is the Financial Samurai early retirement savings chart. As you can see, the higher percentage of your income you save, the less amount of years you need to work, provided you continue to live off the same amount of income.

Early retirement savings rate chart

Focus On The Fundamentals Of FIRE

In addition to aggressively saving for retirement, it's important to identify WHY you are saving so aggressively for. Some common savings reasons include:

  • Saving to negotiate a severance at 40
  • Building a travel fund so you can travel around the world
  • Saving to pay for your child's college education
  • Putting money aside so you can pivot and work in a lower paying field that you love
  • Saving to drive fast cars around Europe

Find your why! Your desire for saving will change over time. Write down your top 5 reasons why you want to achieve financial independence and circle a specific FI date.

Track Your Finances Diligently If You Want To FIRE

Another important step is to track your net worth using a free financial tool like Empower. Check out your bank statements, credit card statements, online budgets, and make note of what exactly you’re spending money on. Then decide whether or not those purchases are meaningful or necessary.

After you're done checking all your expenses, check your investment portfolio for excessive fees. Then run Empower's free Retirement Planner tool to see whether your retirement cash flow is on track.

Personal Capital Retirement Planner Free Tool
Empower's Free Retirement Planner

Best Passive Investment Income Types For FIRE

The final step is to invest your savings wisely in various passive income generating investments.

Financial Samurai highlights the top eight most popular passive income investments and objectively ranks them based on five different factors.

The best investments for FIRE are dividend stocks, private real estate, public real estate, physical real estate, creating your own products, and fixed income. Essentially, any investment that has a strong income component to it.

Best Passive Income Investments Ranked

The goal is to make your money work hard for you in a risk-adjusted way so you don't have to. Over time, the trend in the stock market and real estate market are up and to the right. Investors should have exposure to at least these two markets and invest steadily over time.

The FIRE Movement Critics

With the emergence of any popular movement, there will always be critics. Some say the FIRE movement is a bunch of BS. Here are some of the main criticisms:

  • FIRE bloggers are simply trading their time making money from a day job to making money for themselves through blogging, podcasting, writing books, and selling e-courses
  • The majority of FIRE bloggers and FIRE adherents have only invested during a bull market since 2009 and do not know what it's like to experience a downturn. See: DIRE: Delay, Inherit, Retire, Expire
  • FIRE bloggers are predominantly white people who lack diversity and representation of Americans today.
  • FIRE bloggers and adherents are predominantly based in the Midwest and South, despite half the population of America living on the coasts.
  • Many FIRE followers are not really FIRE because their investment income does not cover their best lifestyle expenses.
  • Many FIRE bloggers are young and don't have kids. Therefore, they haven't fully calculated how much their lives will truly cost.
  • FIRE is also becoming obsolete post pandemic thanks to work from home

Many of the criticisms have merit. However, only you can decide what's financially best for you and your family. The entire goal of FIRE is to live your life on your own terms because of the financial cushion your investments provide.

If you want to work as a greeter at Walmart, go ahead. If you want to write about your journey in a blog, go ahead. Everybody should have a website and plant their flag online. It's the internet age.

That's the beauty of the FIRE lifestyle. You can do whatever you want, whenever you want.

Final FIRE Tips For Everyone

Here are some key things you can do to help you achieve FIRE faster.

  1. Spend no more than 10% of your gross household income on housing costs
  2. Follow the 1/10th rule for car buying
  3. Always max out your pre-tax retirement accounts such as your 401(k), 403(b), and IRA
  4. Diversify your tax-advantageous retirement accounts by contributing to a Roth IRA
  5. Invest in low cost index funds and ETFs
  6. Get neutral inflation by owning your primary residence
  7. Generate more than one income stream beyond your day job
  8. Focus on generating enough passive income to cover your best life's living expenses
  9. Shoot to save 50% of your after-tax income as each year you save is one year of living expenses

As long as a FIRE seeker is steadily building investment income, achieving FIRE is an inevitability.

Striving for FIRE is not full of sacrifices. Instead, the greatest sacrifice you will find is not living a life true to yourself.

Read The Best Book On How To FIRE

If you plan to FIRE and retire early, then you must read How To Engineer Your Layoff. The book teaches you how to negotiate a severance package. Given you wanted to quit anyway, there is no downside in trying to negotiate a severance.

Sam negotiated a severance that paid for five plus years of living expenses. It was his #1 catalyst to leaving his well-paying finance job behind. Think about a severance as giving you a financial runway during your transition or buying back time.

Sam incorporates all his wisdom and strategies on how to negotiate a severance package in his book. How To Engineer Your Layoff is now in its 6th edition as it's continuously updated with new strategies and rules. Use the code “saveten” at checkout to save $10.

How to engineer your layoff - learn how to negotiate a severance package and be free - the best book on FIRE and how to achieve financial independence

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