Dubai: A penny-pinching crusade has been trending in some parts of the world these past years and many have been in a rush to implement head-on this extreme form of saving – coined as the ‘FIRE movement’. But what is it all about?
F.I.R.E. stands for “Financial Independence, Retire Early”. The goal is to save and invest very aggressively – somewhere between 50-75 per cent of your income – so you can retire sometime in your 30s or 40s. The roots of the movement stems from a book called “Your Money or Your Life”, written in 1992.
Since decades there always have been a group of people – albeit in a small minority – who have consistently supported a lifestyle wherein they devote themselves to extreme forms of money saving to quickly achieve financial independence and retire much earlier in their career.
However, in more recent years, a growing number of millennials have embraced the FIRE movement with the aim of retiring well before the traditional retirement age of 65.
How the penny-pinching system works
Proponents of the extreme-saving lifestyle often begin by remaining for several years in the traditional workforce in order to save up to 70 per cent of their yearly income.
Once their savings reach approximately 30 times their yearly expenses, often roughly $1 million (Dh3.7 million), they may quit their day jobs or completely retire from any form of employment altogether.
These habits, taken on by an extremely thrifty group of people, essentially involves punishingly budgeting their personal day-to-day finances and targeting savings of at least three-fourth of their annual income, which they invest for the long term.
Once these frugal savers amass typically 30 years’ worth of living expenses, they keep it invested in low-cost avenues or funds, withdrawing no more than 3-4 per cent every year post-retirement in the hope they will never extinguish their savings pot.
Why frugality has become popular now
Why this technique has become popular again and is a concept that is being revisited more frequently now is due to the success quite a number of people are having with it.
The logical reasoning matter experts cite is behind this concept succeeding is that by keeping a lid on day-to-day living costs such habits become deep-seated by retirement and a second nature by default, enabling one’s savings to last much longer than those with a costlier lifestyle.
Another reason behind this success is that many following this overly-cautious spending lifestyle have been able to quit their jobs in their 30s or 40s, while sharing their experiences publicly on blogs and social media platforms on how they have been able to achieve the freedom of a greater work or life balance as a result of adopting this lifestyle.
In order to be able to set aside that much money toward investing, there are primarily two key objectives: keep their expenses extremely low and raise their income. The general idea is – higher your income, lower your expenses are, then faster you can reach financial independence.
Key downside of this frugal lifestyle
One major downside that skeptics reveal is that you need to have a large enough income to use this to your maximum advantage.
Many proponents of the movement agree that no matter how much you cut down your lifestyle, it’s going to take a larger-than-average income to have the ability to save enough to retire before you turn 50.
Keep in mind, you’re going to need a much larger nest egg to retire early because inflation’s going to chip away at your savings over time and you’ll be giving up years of earning income.
FIRE now accommodates varied styles
Within the FIRE movement, there are several styles or variants that accommodate those able and willing to abide by them.
While one variant are for individuals with a more traditional lifestyle who saves more than the average retirement investor, there is another variant that refers to stringent adherence to minimalist living and extreme savings, necessitating a far more restricted lifestyle.
There is one, termed ‘Barista FIRE’, which refers to followers who have quit their traditional nine-to-five job but still employ some form of part-time work to cover current expenses that would otherwise erode their retirement fund.
Another one called ‘Coast FIRE’ applies to followers with a part-time job, but these proponents do have enough saved to fund their retirement and current living expenses
FIRE movement: What is your verdict?
Whether your goal is to retire at age 65 or 35, you need a plan. You need to know how much money you’ll need to have saved in order to retire when you want – and how much you’ll need to save toward retirement each month to get there.
• The concept of this financial independence movement is reducing expenses as much as possible. It's not just about saving excess cash, it's about looking at each facet of your financial life to see where you are perhaps overspending or making unnecessary purchases, and changing your spending lifestyle.
• For instance, cutting back on takeout coffees, getting rid of barely used subscriptions, has two advantages. While it means that you have more money to save toward FIRE, it also means, the amount of money you need to amass to become financially independent reduces because the lifestyle expenses you need to cover are lower.
• However, the reality is debt is holding back millions of younger workers from investing for retirement. After you become debt-free and before you start investing for retirement, it’s time to build up an emergency fund. If you haven’t got one already, save an emergency fund to help you through any financial difficulties so you don’t need to resort to taking out credit.
• The FIRE concept still does seem intimidating for a majority of people, especially if you are fairly new to saving. So set yourself small savings goals and gradually increase these as you get more comfortable, as getting these small wins will keep you motivated and on track to achieve your main goal.
• Also, another underlying risk is that when stock markets fall – as they have during the coronavirus pandemic – and/or interest rate environments are low, the FIRE plan will fall short. Moreover, a stringent lifestyle such as this does lead to your happiness quotient taking a hit, with health risks increasing when viewed in a broader sense.
