Personal Finance
Components of a Financial Plan
February 12, 2025
In the previous article, we learned about financial freedom or financial independence. However, in the traditional financial planning world, financial freedom was only considered to be a goal that is to be reached towards the end of one’s career. The general opinion was that financial freedom has to be reached when a person has attained around 65 years of age.
However, the FIRE movement has changed this perception. The full form of FIRE is Financial Independence Retire Early. The FIRE movement is composed of a group of radicals who believe that it is not necessary to wait till the age of 65 to get retired. Instead, retirement can be attained at any age as long as there is enough money in the bank to create passive income that will provide for the lifestyle of the person and their family.
People who participate in the FIRE movement believe that retirement is not linked to age, rather it is linked to a number that denotes the amount of investments that one has! This is why they set aggressive and even radical goals of retiring in their mid-40s or even in their late 30s. The ideas might seem radical to many to the point of being ludicrous. However, they are catching on as millions of Americans all over the world are joining this movement.
In this article, we will have a closer look at some of the basic beliefs of the FIRE philosophy.
What Does Retirement Mean?
The word retirement has different connotations for different people. An average person believes that they will spend their time traveling and relaxing when they retire. However, this is not the case for most Americans since they barely have the money to manage their expenses.
According to the FIRE movement, retirement is defined as the stage wherein the person is able to live an idyllic life. This means that they are able to replace stressful work with meaningful work and leisure.
Most people who retire from the financial movement decide not to quit the workforce altogether. This is because most of them are young. However, they do have the money to quit their job and sustain on their savings if they want to. The decision to continue working is because of their desire for meaningful work. Many people work part-time or at causes which they care about instead of running the rat race in an office.
The key point to remember here is that retirement does not mean a perpetual party or an unlimited vacation. Instead, it means switching over to an idyllic life.
How Does the FIRE Movement Work?
The fire movement is based on a radical idea that since retirement is a number, the objective should be to reach that number as soon as possible. People who follow the FIRE movement want to aggressively fund their retirement. Hence, instead of living paycheck to paycheck, they decide to aggressively fund their retirement plans. In many cases, this means that they allocate as much as 50% to 75% of their income towards early retirement. The minimum level required to be in the FIRE philosophy is that a person has to fund their retirement with at least 50% of their income.
People who follow the FIRE movement have developed a chart wherein the years it will take to achieve financial freedom at different saving speeds have been mentioned. For instance, if a person saves 70% of their income, they will reach retirement in 10 years whereas if 50% of the income is saved, it will take close to 15 years to reach retirement. Based on their current expenses and their current incomes, people generally choose a level of savings.
Minimalism i.e. Keeping Costs Low
In general, the FIRE movement is only useful for people who have a middle-class income. It is often called the philosophy wherein people who are middle class live like poor people for a certain period of time. The FIRE philosophy is not very useful for people in the lower rungs of society. This is because a majority of their income goes towards food and keeping the lights on in the house. Hence, since the majority of their income is spent on necessary expenditures, it becomes impossible for them to save a substantial portion of their income.
This is not the case with middle-class people. As the incomes rise, people tend to spend a lot of money on discretionary expenditures. This means that they buy houses which are not necessary for survival, cars which are too big and too expensive and sometimes even choose very expensive private schools. People in this income group have the potential to survive on one-fourth of their income if they really want to. That is what the FIRE philosophy is about, keeping costs very low for a certain period of time.
Why so Many People are Attracted Towards FIRE?
Most American workers feel overworked, underpaid, and unappreciated. In studies conducted, less than 20% of the workers said that they were actually enjoying the work that they did. It is therefore no surprise that many people want to get out of the 9 to 5 race and are willing to take extreme measures to do so. However, people who follow the FIRE philosophy believe that this is not the correct motivation.
Instead, the FIRE philosophy is right for people who do not want to spend their lives chasing ephemeral materialistic pleasures but instead seek spiritual experiences.
Many people who follow the FIRE philosophy continue working at their jobs. However, they are not under pressure to do so because of financial reasons. They have an independent choice in the matter and that is what is important to the people who follow this path.