F.I.R.E - What Financial Independence & Retire Early Means

My mum loves sending me articles of how other 30-40 years old manage their finances. Recently, she shared with me an article that talked about how retired millionaires under 40 navigated the corona virus situation. But to be honest, I was not worried how they navigated the complete collapse in economies globally. I mean don't get me wrong, it is important - something I will cover in a later post. But I was more intrigued about the first part.

How on earth were they able to retire as millionaires under 40!!

Upon doing some online digging, I came to read about the concept of FIRE, again. I have heard this before. Have you? Or are you completely clueless - the way I was, the first time my colleague mentioned it to me?

FIRE - as the title explains - refers to individuals that have gained financial independence and are now able to retire early - as they have reached the point where they don't have to work for money anymore. They can now do something they love, not having to sell away their time & soul in 9-6 job if they don't want to. They can chase their dreams now and they are no longer only thinking about money.

I know we are all aware of the traditional definition of retirement. Work till 58 and then having served fully and wholly, retire. But with FIRE, the concept of retirement is less traditional and more modern.

I used to go for the infamous CAT prep classes with this super smart girl. She kept saying how she wanted to do her MBA, become a consultant with BCG, McKinsey, Bain&Co or the likes, slog and earn millions, and then retire by 40. Basically FIRE, right? So I asked her WHY? She said there's no way she could work such a demanding role forever. She wanted to teach. Teaching doesn't pay as much - but she really wanted to do it. So after 40, once she has saved her millions, she will no longer be selling her soul and working for money. At the time, I couldn't imagine how she would do that. I mean life doesn't stop at 40. Your expenses continue, you still want to travel and shop and you have your kid's education etc etc. I was skeptical.

Photo by Drew Beamer

But now, with so many online communities, blogs, forums talking about FIRE - I have begun to understand the concept. My CAT prep friend was way ahead of her time. (She did get into the top IIM)

What is financial independence? I mean - how do you know when you are able to call yourself financially independent?
1. You need to start calculating what your annual expenses is. I spoke to a friend who works in digital marketing. She is married, but has no kids. She doesn't plan to have kids. She claimed that her annual expense is close to 15 lakhs ($21k) - this includes travel. But combined as a couple, their annual expense is close to 28-30 lakhs ($42k)
2. Next you need to understand how much would be needed for the next 30 years of your life post retirement. So 30 years * 30 lakhs = 9 Cr ($1.2 m)
As a couple, they would need to have saved 9 Cr or more than a million dollars before stopping to work for money and being financially independent.

NOTE - This is not adjusted for inflation, it's only to help you understand the concept.

Umm, how but - we are talking about more than a MILLION dollars!!!
Now - it is important to realize that to save this much before 40, one really needs to save 60-70% of their salary and probably adjust daily expenses as a result.

Saving a chunk of your income is one side of the coin, living frugally is the other.

FIRE emphasizes the importance of future proofing your lifestyle. The most famous example is the Starbucks coffee which costs around 150 INR ($ 2.2). Giving up that premium coffee for the rest of your life means that your lifestyle cost has dropped (which means you also have to save lesser for after retirement) and you have more to save as well.

But exactly how much impact will this have?
You can save around 50k INR ($700) per year which translates to 16 lakhs ($21K) over 30 years!!! So instead of saving 9 Cr - you have to now save 8.84 Cr.

NOTE - This is not adjusted for inflation, it's only to help you understand the concept.

This doesn't seem big - but imagine doing the same thing with a hardly used gym membership or a unused online streaming platform subscription? The savings add up.

Every expense you do translates to number of hours spent at work. 

Living within your means - or even frugally - is one of the important factors of FIRE. You need to be mindful of daily expenses as those become habits - and it only means that you would need more even after retirement - a.k.a the Starbucks coffee.

Summary:
FIRE is a modern movement that has found a home in the millennial's mind. It is an attractive concept, where in you save more than half of your monthly salary and change lifestyle habits to live more frugally. Once you have saved close to 30 times your annual expenses, you can retire from your high pressure demanding role and do something you have always wanted to do - giving dance lessons perhaps - you may not earn much - but hey, your soul's going to be feel alive.