As the Financial Independence, Retire Early (FIRE) movement continues to grow and attract people from all walks of life, new variations of FIRE have appeared.
The concept of FIRE is quite simple
You have achieved FIRE when you have saved more than 25 times your annual spending.
If all your projected living expenses are $40,000 per year, you would need $1 million to achieve FIRE.
Once you have saved $1 million, you could use the 4% rule to safely withdraw $40,000 per year from your $1 million savings to cover your living expenses.
What FIRE means to me
The Financial Independence, Retire Early (FIRE) movement is not about being rich and spending money to live a life of luxury.
To me, the FIRE movement is about using your wealth to acquire the single most valuable asset in the world: time.
Specifically, to have the freedom of time. The freedom to do spend each moment of the day doing something that brings you happiness or fulfillment. It's about designing and living your life on your terms.
To fully understand FIRE it's best to break FIRE down into its two components. Financial Independence (FI) and Early Retirement (RE)
Financial Independence (FI)
You have achieved Financial Independence (FI) when your passive income can cover all your expenses in life. It is the point where you no longer need to work to fund your lifestyle
Retire Early (RE)
The second part to FIRE is “Retire Early”. Once you have achieved FI, and your passive income can cover your expenses moving forward, you put yourself in position to “Retire Early”. Early retirement is just as the name implies, you have decided you are done working.
Fat FIRE
A few years back the concept of Fat FIRE appeared. This is the non-frugal version of FIRE. The generally accepted definition of Fat FIRE is when you have enough passive income to fund a minimum of $100,000 per year.
To achieve Fat FIRE, you would need a minimum of $2.5 million ($100,000 X 25) in the bank.
Running the numbers in a compound interest calculator, it would take someone 40 years to save $2.5 million if they were starting from scratch, investing $1,000 per month and earning a 7% return on investment.
This should make it clear that Fat FIRE is not a realistic goal for people with a lower income.
Lean FIRE
Let’s be clear. Fat FIRE is not a reasonable expectation for the average person. It’s highly unlikely that someone making $50,000 per year (before taxes) could save up $2.5 million by an age where their retirement would be considered “early retirement”. Fat FIRE is generally available only to high-income earners.
Even “standard” FIRE is incredibly difficult. A $40,000 per year cost of living is not exactly extravagant. Still, you would need $1 million to achieve FIRE on that budget.
Running the numbers on standard FIRE. It would take someone nearly 27 years to fund a $40,000 annual spend if they invested $1,000 per month.
That is why I am a big fan of the concept of Lean FIRE. This is where you have not reached full FIRE, but have enough passive income to cover your basic needs. There are all kinds of definitions out there for Lean FIRE and even a SubReddit devoted to Lean FIRE.
I have a very simple definition of Lean FIRE. You have achieved Lean FIRE when you have saved enough money to cover your “big 3” living expenses; housing, transportation, and food.
An example of Lean FIRE
Let’s say your “big 3” expenses were as follows.
Housing: $1,000 per month ($12,000 per year)
Food: $500 per month ($6,000 per year)
Transportation: $500 per month ($6,000 per year)
Total annual big 3 expenses=$24,000
Savings required to achieve Lean FIRE= $600,000
You might be thinking that $600,000 is still a lot of money. You’re right, it is. There is no “easy” path to any form of FIRE, including Lean FIRE. This journey requires constant attention to your finances.
However, what Lean FIRE shows is that by embracing frugality, anyone can achieve Lean FIRE.
Let’s say, for example, you decided to trade your car in for a bus pass and transportation costs decrease from $500 per month to $100 per month.
That one change means you’ll only need to save $480,000 rather than $600,000 to achieve Lean FIRE.
Now let's say you drop your grocery bill from $500 to $300 per month. Now you only need to save $420,000 to achieve Lean FIRE.
Embracing frugality can make Lean FIRE attainable to people with a low income. Frugality has two benefits to helping achieve Lean FIRE:
The less money you spend, the smaller your nest egg needs to be to fund your lifestyle.
The less money you spend, the more money you have each month to build that nest egg.
Action item: If you want to cut your spending you need to have a budget. If you don't have a budget, you need to start one today. Go to google and type "free budget template" and you will be presented with hundreds of great budget spreadsheets. You can also use this free tool and start your budget this very moment.
What I love about lean FIRE
It takes the pressure off
While Lean FIRE does not put you in the position that you can stop working, it can go a long way to reducing financial anxiety.
Most people live paycheck to paycheck, meaning if they stopped receiving paychecks it would not be long before some nasty things would start happening in their lives.
If you’ve achieved Lean FIRE and you lose your job you would need to seriously tighten your belt until you find a new job. However, you could rest assured knowing you have enough money to pay the rent, get around town and put food on the table.
It’s a great foundation to begin taking career risks
Since so many people live paycheck to paycheck they “play it safe” at work. Priority number one when you depend on a paycheck is never doing anything to jeopardize that paycheck. Often this leads to people never applying for new positions or voicing their opinions.
Once you know you can cover your basic living expenses without your job, it puts you in a position to begin taking more risks with your career.
Once you hit Lean FIRE and begin moving towards full FIRE you are in a great position to start a business or pursue some other entrepreneurial pursuit or passion project. If you have enough passive income to cover basic living expenses, you might be able to get by on a reduced income while you get a business off the ground.
Final thoughts
As you move further down the road towards FIRE, more possibilities become available that you may never have thought to be realistic. What I love most about the concept of Lean FIRE is that it makes clear that Financial Independence is all about the journey, not simply the final destination of full FIRE.
It can be tempting to think of FIRE as a binary, either you have achieved it or you have not. Since FIRE is a goal that takes years or decades to achieve, it’s important to realize that it’s not a binary.
Financial Independence is not a single door at the end of a very long road. Each step along the journey opens up new doors and more possibilities that allow us to begin crafting a life on our terms.
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This article is for informational purposes only, it should not be considered financial or legal advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions