What is #FIRE?
#FIRE, otherwise known as the ‘financial independence, retire early’ movement, has more than half a million people talking about it on Reddit. Why? It’s giving people aged 30+ the freedom to stop working forever.
The theory behind it is centred around careful money management, helping followers to save enough for early retirement. It’s driven by a shared goal that people want to feel empowered and independent through financial stability. Whether you’re someone that is looking for the freedom that comes with a secure savings pot, or would prefer to have the choice if you work or not – the appeal is universal.
How do you do it?
The concept is pretty simple: spend less, save more, invest wisely.
This is easier said than done – living frugally is not for the faint of heart, nor is it realistic for anyone to live a totally spend-free life. To help, we’ve pulled together a guide that breaks down how much you would need to save to retire early and how you can get the FIRE going.
How much do you need to retire?
To get started, you need to work out how much you’ll have to spend each year during your retirement. It’s always better to overestimate this number: take into account your mortgage, bills, food shopping and any other expenses like hobbies or holidays. Multiply that by the amount of years you’d ideally like to be retired for and you’ve got a good idea of your total retirement fund.
With today’s cost of living, the fact that inflation skews these figures, and that we’re living longer lives, you may find that sum to be eye-wateringly high. That doesn’t mean it’s unattainable though. Here are a few ways that you can set yourself up and build your wealth for tomorrow.
Increase the money you’re earning
The quickest way to save more, is to earn more. Now, unless you’ve secured your dream job with a great salary, this might be easier said than done. Many people in the FIRE community like the idea of having a ‘passive income’ – earnings that can roll in with little additional effort. This might include selling old clothes, commodifying a hobby, or – if you’re able to – renting out a second property, for example.
If you’ve already got an emergency fund and cash savings for your short-term goals, investing can be a good way to grow your money and, with the potential returns and the effect of compoundingThe return you earn on top of your investment gains by reinvesting your profits instead of withdrawing them. this can grow over time.
Let’s explain what we mean by compounding:
Say two people invest £1,000 in a lump sum at the beginning of the year and they earn a consistent 5% annual return (actual returns will vary). Person A withdraws this at the end of the year, while person B allows their investment to compound over time:
- Person A would invest £1,000 and would withdraw their gains of £50 each year.
- Person B would invest £1,000 and would have earned
- £50 in 1 year
- £52.50 in 2 years
- £55.13 in 3 years
- £57.88 in 4 years
- £60.76 in 5 years
As you can see, over time this snowballs quite quickly.
Please note when investing you may get back less than you invest, and returns are not guaranteed.
Interested in investing? Whether you’re new to it or a seasoned hand, Moneybox offers a range of choices for you to get started. Choose stocksStocks, also known as shares or equities, represent units of ownership in a company., fundsFunds, also called ‘tracker funds’, are financial instruments that have been set up to match or ‘track’ the price of a market index. Investing in a fund lets you get exposure to different financial assets like shares and bonds, without having to buy them directly., ETFs, or one of our pre-made Starting Options to match your risk appetite.
Capital at risk. All investing should be long term. The value of your investments can go up and down, and you may get back less than you invest.
Reduce your spending
Cutting costs can be difficult but not impossible. The quickest way to make a difference is to set a budget and stick to it. Being more aware of your spending is key to managing your finances and it can help highlight any unnecessary expenditures that you have and can reduce – whether it’s a subscription that you’ve never used or choosing to bring a pre-made lunch rather than eating out.
It’s worth keeping an eye on ‘lifestyle creep’ and identify ways to reinvest any gains you make over time. For example, if you get a pay rise it could be a good idea to put some of that extra money into a pension. This is a great way to build up your future savings in a tax-efficient way and you get a £60,000 annual allowance to save across your pensions.
When investing, your capital is at risk. Pension and tax rules apply.
That’s not to say you need to live a totally spend-free life and reinvest everything you make. Building your long-term wealth is all about unlocking the means to more and enjoying the moments that matter to you. It’s worth considering what balance you want to achieve with your spending today, and saving or investing for tomorrow – and making a plan for that!
Capital at risk. All investing should be long term. The value of your investments can go up and down, and you may get back less than you invest.
Tax treatment depends on individual circumstances and may be subject to change in the future.