In the world of finance, everyone is looking for a sure-fire solution to getting out of debt, building wealth, and eventually achieving financial independence. You could spend years of your life learning and practicing the fundamentals, or you could learn a basic system that could feasibly produce the same results.

This is the philosophy behind the FIRE movement, a fast-growing financial philosophy that's found popularity across multiple age groups but especially Millennials. The acronym stands for Financial Independence, Retire Early, which already sounds good. But can the tenets of the system really deliver what it promises?

How FIRE Works

Let's start by dissecting how the FIRE movement works. The concept made its first appearance in the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez, and is based on the idea that it's better to save as much money as possible than to spend it on unnecessary expenses and items.

Proponents of the FIRE approach may recommend different specifics, but they always suggest living as frugally as possible, and then saving up to 70 percent of your yearly income. Investing this money allows you to earn compounding interest, helping you grow your savings even faster.

Once you reach an amount roughly 30 times your yearly expenses (or, in some cases, $1 million), you could hypothetically quit your regular job and start making small withdrawals of 3 to 4 percent of your principal per year. As long as you're investing in a diversified portfolio, you'd never outlive your savings.

There are also subtypes of the FIRE movement, including:

  • Fat FIRE. In the Fat FIRE method, you'll live a more traditional lifestyle, saving only slightly more than the average professional.
  • Lean FIRE. In the Lean FIRE method, you'll restrict your lifestyle to the bare minimum, spending only when absolutely necessary and saving the rest.
  • Barista FIRE. In the Barista FIRE method, you'll strive for limited financial independence, using part-time jobs or freelance work to cover some of your expenses while relying on your savings for the rest.
  • Coast FIRE. In the Coast FIRE method, you'll have enough for full financial independence, but will still rely on a part-time job for the majority of your regular needs.

The question remains: Can this method really help young professionals become independently wealthy?

Viability and Vulnerability

The movement is based on a number of solid principles. For example, financial experts have recommended for years that retirees withdraw no more than 3 to 4 percent of their principal every year in order to avoid outliving their savings. Most people realize how powerful compound interest can be, capable of growing even a modest investment to extraordinary wealth, and the FIRE method exploits that compound interest power. And, of course, it's always a good idea to live a frugal lifestyle; living below your means is one of the most important factors for long-term financial success.

That said, there are some inherent problems with the FIRE movement:

  • Salary and expense discrepancies. FIRE works well for someone making a large salary, or someone who lives alone and doesn't have many expenses. But what about someone with little to no education who has a spouse and children to support? There are some expenses that can't be cut easily, and if you don't end up with much to save, FIRE may not work for you.
  • Investing and portfolio balance. What do you do with the money you save? Your answer will have a massive impact on your eventual results. If you invest too much in one type of asset, or if you invest too conservatively, you might not see the growth rate or consistency necessary to grow your savings over time.
  • Vilification of full-time work. The FIRE philosophy treats full-time jobs as something to be avoided, and something to leave as early as possible. In reality, it may be better for your finances, your health, and your family life to choose a career path that you genuinely enjoy.
  • Neglect of long-term earning potential. FIRE also doesn't give much time or attention to the possibility of increasing your salary, or growing how much you can earn long-term. For example, if you make $50,000, the tenets of the FIRE movement would focus more on saving as much of that $50,000 as possible, rather than setting yourself up to make $100,000 in the future (which would hypothetically double both your expense tolerance and your yearly savings).

So will the FIRE movement make you financially well-off enough to retire early? Not by itself. The FIRE movement is based on solid financial principles that, if followed, can help you grow your wealth and retire earlier. However, there are nuances to finances that FIRE neglects, and you'll need to educate yourself on them if you want to be successful.

Published on: Apr 18, 2019