3 rules to know: Achieve financial independence, retire early (FIRE)

WHAT FINANCIAL INDEPENDENCE (FI) MEANS: It may means different things to different people. The common image, however, is someone on the beach sipping fresh, young coconut, living an unhurried life. A textbook definition of financial independence is when you can live indefinitely off your investment — and you don’t have to work anymore. You still can opt to work, but you don’t have to. Your monthly and incidental expenses are covered by your "passive income”.

WHAT DOES RETIREMENT (*R) MEAN? It’s quite simple. You’re retired when you’re out of the workforce. You can do this either by choice, or involuntary loss of employment.

STAY ON F.I.R.E.: It stands for “Financial Independence, Retire Early.” In its extreme form, the goal is to save and invest as early and as aggressively as possibly — somewhere between 50% to 75% of your income — so you can retire sometime in your 30s or 40s.

HIGHER INCOME, LOW EXPENSE: The idea is that the higher your income and the lower your expenses, the faster you can reach financial independence (FI). Some focus on “higher income”, i.e. finding ways to make more money; while others focus on "higher savings”, i.e. looking for ways to save — or a combination of the two as time progresses.

INSPIRATION: The FIRE movement has become a 21st century lifestyle. It’s inspired by the 1990s book “Your Money or Your Life” (9 steps to transforming your relationship with money and achieving financial independence), written by Vicki Robin and Joseph “Joe” Dominguez. It has recently gained popularity among millennials, especially in online forums.

"GAZELLE INTENSITY": Some people do this with “gazelle intensity" — except the gazelle is literally on fire. Gazelle intensity is the term author Dave Lawrence Ramsey came up with to describe the speed and intensity you should have when paying off debt. It’s all about running away from debt — as if your life depends on it (if you don’t run fast enough, the lion will have you for lunch). Dave coined the phrase after reading Proverbs 6:4–5, “Give no sleep to your eyes, nor slumber to your eyelids. Deliver yourself like a gazelle from the hand of the hunter, and like a bird from the hand of the fowler.”

UPSIDE: The FIRE movement encourages younger people to start thinking about retirement —especially since many people are unable to figure out retirement savings needs. That’s like trying to aim for a target with a blindfold on. By starting early, and defining what you want your retirement to look like, you can start the journey to get there early. Even now.

SAVING, HOW PEOPLE DO IT: You need to save at least half of your income. How do people do it? In order to sock away that much money for investing, people who are on F.I.R.E. mode are always looking to do two things: keep expenses extremely low and find ways to raise their income. Many people, including couples, focus first on earning (instead of hard-core saving), then paying off debt, before they’re on track to retire early/

RETIREMENT DOES NOT REFER TO AGE: Retiring early is possible. There's a growing number of people making this their life's goal. But what does it really mean to "retire"? By definition, it means to the time of life when one chooses to permanently leave the workforce. Take it from the money experts. In recent years, a new generation of FIRE advocates have emerged. For them, retirement does not refer to age. Rather, it’s a financial number. And nobody — or no law — requires you to work until you’re 65 to 67.

MIXED FEELINGS: Some have mixed feelings about the FIRE movement. It’s perfectly understandable. The intensity its adherents have toward reaching their target sets them apart. FIRE followers tend to look closely into where their money is going, and make savings where possible, besides expanding their income streams. They turn money-making into a discipline, energised to make it a sort of a sports competition. A starting point: define what “wants” are, apart the needs — then cut spending that don’t make sense. This requires the fortitude to stick to it.

IT’S A MOVEMENT: It's true that early retirement requires an ideal nest egg. While most people do not have that, many young people have set for themselves a target to hit the “FIRE number”. There’s a simple way to compute this number — the so-called "nest egg” — which enable people to retire earlier. 

3 RULES OF “FIRE”: The FIRE rules can be broken down as follows: (1) Find your FIRE number; (2) Follow the 4% Rule; (3) and find an idea savings rate. The first, finding your FIRE number, simply means the amount of nest egg (total savings) you need to have in order to retire comfortably. There’s a simple way to compute this.

RULE #1, KNOW YOUR ‘FIRE NUMBER’: Just multiply your monthly expenses by 12 x 25. For a married person, it should include future expense (if any) such as kids, household, etc. You can do this via a simple spreadsheet or with a budgeting app (like YNAB, Mint, Simplifi, Zeta, etc). For example your expense is $1,000 a month (Dh5,509), your FIRE number is $300,000.

RULE #2, FOLLOW THE 4% RULE: Some experts dismiss this rule as rather outdated. But it’s actually useful as a saving rule, or ballpark figure. This means you only withdraw 4% from the amount each year. Other experts advocating the FIRE lifestyle say this is the “the optimal withdrawal rate”. That means if you withdraw 4% from your FI number, your investment could literally last you a lifetime.

RULE #3, FIND AN IDEAL SAVINGS RATE. Why invest in stocks? Because it’s the smart way to make money from your money. How to star? Check investment apps [gulfnews.com/1.1612368117932], talk to people who are doing it, or consult registered investment professionals. The key is to avoid low-interest savings or current accounts; instead, invest your savings in instruments (mutual funds, index trackers or exchange-traded funs) or vehicles invested in stocks— which allow your capital to grow more efficiently in value over time. Most stock indices around the world typically gain an average of 7.5% every year over a long period. With that gain, and adjusted for inflation, you can safety withdraw 4% a year, without making a dent on your capital that can foot your bills in perpetuity. A good starting point: know the simple “Rule of 72” [gulfnews.com/1.1634135942535].

START TODAY. If you set your financial goals and money discipline right, it’s indeed possible to retire early. Among young people, there’s a new generation with a razor-sharp focus on carving a new path for their lives, the FIRE mantra.