The FIRE movement: its features
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The last decade has seen several far-reaching economic changes. Indeed, several countries have seen their economies take off in the wake of the 2008 global financial crisis. This breakthrough made economic globalization a reality, democratizing the technology sector on a global scale. This societal metamorphosis has not come without consequences, as the cost of living has risen significantly in many countries. Moreover, workers’ hourly wages have not kept pace with the cost of living, resulting in significant social disparities.
Against this backdrop, several individuals have come out to criticize the central place of work in our daily lives, calling for collective reflection on the advent of a balanced lifestyle free of choice. This philosophy is at the root of the “FIRE” movement, which has been overgrown over the last ten years. FIRE stands for “Financial Independence, Retire Early.”
In this article, we analyze the main features of the FIRE movement. More specifically, we’ll look at its origins, basic concepts, various derivatives and main criticisms. A list of digital resources dealing with the FIRE movement will also be presented at the end of this article.
Origins of the FIRE movement
The origins of the FIRE movement are as diverse as they are varied. We can, however, pinpoint a few key events that led to its rise. The first stirrings of the FIRE movement can be seen in Vicky Robin and Joe Dominguez’sYour Money or your life. It lays the groundwork for a lifestyle based on voluntary simplicity, the quest for financial independence and early retirement. What’s more, we’re starting to think seriously about the place of work and its omnipresence in our lives. This book, published in 1992, became a bestseller and inspired many to join the movement.
This is particularly true of astrophysicist Jacob Lund Fisker, whose 2010 book Early Retirement Extreme sets out in detail the fundamentals of early retirement. This article deals with the theoretical foundations of frugalism, i.e. “saving without depriving oneself and investing to retire early as soon as possible”. He also explains the need to invest in index funds on the stock market to provide the funds needed for early retirement.
In the same vein, in 2011 Canadian engineer Peter Adeney launched the blog Mr Money Mustache which chronicles his journey to early retirement. Her journey to financial independence inspired many others, including JL Collins, author of The Simple Path to Wealth, and Paula Plant, creator of the blog Afford Anything. Afford Anything among others. At the same time, several Quebec-based blogs on financial independence and early retirement have sprung up, including Jeune Retraité, Sorcière Frugale, Retraite 101 and Se payer en premier, to name but a few.
Basic concepts
The FIRE movement rests on several theoretical foundations, which we will explore here.
The 4% rule
This rule determines the amount of money needed for early retirement by considering your annual expenses. So if you multiply your estimated annual retirement expenses by 25, you’ll get the amount you need to retire early. The 4% rate represents the safe amount of your net worth that you can withdraw annually to pay your retirement expenses. Here’s a fictitious scenario illustrating the precepts of this rule.
A) Jonathan and Valerie are both 42 years old. They currently spend $40,000 a year and have combined net assets of $400,000. They have no children and don’t plan to have any. They plan to reduce their annual expenses to $30,000 in retirement. They decide to use the 4% rule to determine the amount needed for their retirement.
Here is the calculation: $30,000 (targeted annual expenses) X 25 = $750,000
The 3.25% rule
However, this rule should be treated with caution. Indeed, the earlier you retire (before the age of 45), the more cautious you should be in your estimates. With this in mind, we recommend applying the 3.25% rule, which will give you greater latitude by multiplying your annual expenses by 30.
Here’s an example of this rule.
B) Paul is 26 years old and single. He currently spends $15,000 a year and has net assets of $100,000. He has no children and has no plans to have any. He expects to maintain the same level of annual expenses once he retires. He hopes to retire before the age of 45. He decides to compare the 4% rule with the 3.25% rule to determine how much he needs to retire.
4% rule : $15,000 (targeted annual expenses) X 25 = $375,000
3.25% rule: $15,000 (targeted annual expenses) X 30 = $450,000
Compound interest
This concept, described as the “eighth wonder of the world” by Albert Einstein, enables the accelerated accumulation of money. Compound interest applies to the stock market and allows for accelerated capital accumulation. Here’s a concrete example to illustrate the usefulness of this concept.
Example Let’s say you have an initial sum of $5,000 and aim for an annual return of 7%. Simple interest: $5000 + (7% of $5000 ) =? Answer: $5,000 + $350 = $5,350
You end up with a sum of $5,350 at a simple interest rate. Now let’s imagine that you want to invest the same amount of money every year at a similar interest rate for ten years.
Many of you will opt for the following calculation, given the similar target return: $5,350 X 10 = $53,500. This return, however attractive, is not valid, as it does not consider the compound interest and the exponential value your investment will gain over the years. In concrete terms, here’s a table showing the evolution of your nest egg, considering compound interest.
| Years | Simple interest | Compound interest |
| 1 | 5 350$ | 5 350$ |
| 2 | 10 700$ | 10 724.5$ |
| 3 | 16 050$ | 16 475.22$ |
| 4 | 21 400$ | 22 628.48$ |
| 5 | 26 750$ | 29 212.47$ |
| 6 | 32 100$ | 36 257.35$ |
| 7 | 37 450$ | 43 795.36$ |
| 8 | 42 800$ | 51 861.04$ |
| 9 | 48 150$ | 60 491.31$ |
| 10 | 53 500$ | 69 725.70$ |
Looking at this table, we can see that the amount after ten years of investment is $69,725.70 if we consider compound interest. We’re talking about a difference of over $16,000 with a simple interest rate of $53,500!
But how is this possible, you may ask? It’s simple: the interest rate on your assets grows exponentially each year. More specifically, if we take year 2 of your investment, we can calculate an interest rate of 7% on your initial investment of $5,000, now worth $5,350, and on the new investment of $5,000.
Initial amount with interest year 1: $5,350 X 0.07 (7%) = $374.5 Amount year 2 = $5,000 X 0.07 (7%) = $350 Total = $5,350 + $375.5 + $5,000 + $350 = $10,724.5
This strategy is at the heart of the FIRE movement’s financial approach, enabling them to make substantial gains over the long term. Let’s take a look at the means used by members of the FIRE movement to achieve financial independence.
Resources
Massive savings, passive investment and optimized spending: these are fundamental values for anyone aiming for financial independence.
Massive savings
While the savings rate recommended by financial experts is generally between 15% and 20%, the rate favoured by the FIRE movement is much higher (over 50%). These massive savings are then transposed into various financial vehicles for passive enrichment. By passive enrichment, we mean investment methods that allow you to accumulate money in your sleep.
Passive investment
Here’s a brief overview of the main sources of passive income:
A) Stock market investment
It’s the ultimate source of passive income for members of the FIRE community. The accumulated sum is deposited in a stock market account, which is invested in various financial products. The aim of this exercise is to maintain this nest egg in the stock market for several years, to benefit from the substantial gains created by compound interest. Here’s an overview of the main financial vehicles favored by individuals in the FIRE movement:
- Exchange-traded funds (ETFs)These are multi-sector funds that track international stock indices such as the SP500, TSX and Nikkei. These funds have light management fees, which means faster capital accumulation.
- Mutual funds These are funds similar to ETFs but with slightly higher management fees.
- Dividend stocks: These are stocks traded on the stock market that distribute a company’s profits (dividends) to each of its investors.
- CryptocurrenciesBuy Bitcoin, Ethereum, Solana, Polkadot, Cardano or cryptocurrency ETFs.
B) Real estate investment
This is another source of passive income prioritized by the FIRE movement. There are several ways to generate passive income from real estate. It should be noted that most of the desired passive real estate returns will be achieved after an initial phase that requires active involvement (renovations, planning, organization). Here is an exhaustive list of real estate investments recommended by members of the FIRE movement:
- Acquisition and management of a multiplex: Use of leverage and tenant rent collection
- Acquisition and management of a rooming house for students: Use of leverage and collection of student rents
- Acquisition and management of a commercial or semi-commercial property: Use of leverage and collection of rents from retailers
- Acquiring and managing a rental chalet: Short-term rentals are currently in demand. This trend was confirmed during the pandemic.
- Subletting unused space: Unused parking spaces, garages and basements are all in demand right now.
- Investing in real estate stock market investments: REITs (Real Estate Investment Trusts) are very popular on the stock market. They track a passive market index of the best-performing real estate securities.
C) Creation of innovative customized content on demand
This technique will also require active involvement in the initial phase but could yield an attractive passive return if demand is there. Here are a few ideas from the FIRE movement to help you generate passive income:
- Creating a specialized Youtube channel: You could earn passive revenue for each new view if your content becomes popular.
- Creation of a specialized course catering for a wide range of customers: this could cover language learning, Photoshop use or computer coding, for example.
- Writing: Publication of a paid ebook or digital blog.
- Creation of a digital business: Creation and management of an e-commerce, “dropshipping” which allows you to outsource your stocks without managing deliveries.
Optimizing expenses
It’s essential for anyone aspiring to financial independence to optimize their day-to-day expenses. Here are a few practical tips from the FIRE movement to help you achieve this goal:
Online shopping rewards
Many digital portals, such as Rakuten and Great Canadian Rebates, offer attractive cashback on online purchases. These accessible interfaces act as intermediaries between retailers and consumers. This method gives consumers interesting feedback on their purchases. Retailers, too, are not left out in the cold as they gain greater exposure, enabling them to expand their customer base.
Loyalty programs
Several loyalty programs are available to Canadian consumers. These programs are often affiliated with different credit cards to facilitate the accumulation of rewards. Here are the five types of loyalty programs:
- Air: This category includes programs linked to airlines. By accumulating points, you can obtain discounts on flights. The best-known airline loyalty program in Canada is Aeroplan, affiliated with Air Canada. British Airways (Avios – British Airways Executive Club) and Westjet (Westjet Rewards) also allow the accumulation of airline points.
- Hotel: These programs are attached to major hotel chains such as Marriott Bonvoy, Hilton and Best Western. Points earned earn discounts on hotel stays. It should also be noted that in some cases, points collected can be exchanged for air points.
- Stores: There are also different programs attached to big-box stores (Hudson’s Bay, Simon’s and Canadian Tire), food chains(Metro, PC Optimum and Inspire SAQ), restaurant-affiliated establishments(Starbucks, Second Cup and Tim Horton) and gas stations(Petro-Canada).
- Travel-Points: These types of rewards offer discounts not only on flights but also on all kinds of travel expenses, such as accommodation and car rental. The best-known travel points program in Canada is Air Miles. The American Express, Membership Rewards program also allows you to earn points for travel. Finally, several banks allow travel points to be accumulated through affiliated credit cards. These include CIBC (Aventura), TD (Rewards), BMO (Rewards), NBC (National Bank Points), Scotia (Scotia Bonus Points), HSBC (HSBC Rewards) and RBC (RBC Rewards).
- Cash back: Finally, it’s also possible to accumulate cash back. The Air Miles program allows you to earn cash back quickly. Other programs include Desjardins Bank’s Bonidollars loyalty program and MBNA Bank’s rewards program.
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Payment of recurring expenses
Achieving financial independence also means optimizing returns on recurring expenditures. It’s worth noting that you can now pay your rent, various property taxes and amounts owed to the government by credit card. This operation is made possible by digital platforms that allow you to pay for your day-to-day expenses using a credit card for a fee of 1% to 3% on the transaction. The primary digital interfaces are Plastiq, Paysimply and Paytm. Using credit cards for these expenses will help you earn rewards faster.
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The possibilities: 50 shades of FIRE… or almost
The FIRE movement has several variants. Here’s a brief overview of the six primary alignments of this movement.
1. FIRE
This is the basic Fire movement. We’re talking here about individuals and couples who estimate their annual retirement expenses at between $20,000 and $70,000. The amount required for early retirement is calculated by multiplying the estimated annual expenses by 25. The result will be the amount needed for an early retirement. Thus, an individual estimating annual retirement expenses at $50,000 will need to save $1,250,000 (50,000 X 25).
Most importantly, reaching this financial milestone is achieved by increasing revenues, optimizing expenses and taking advantage of compound interest on investments. However, this achievement does not mean retirement for all. Indeed, many people continue to work after achieving financial independence. However, they do so on their terms and for interest rather than capital gain. It’s work by choice, not by social diktat or obligation.
2. Fat FIRE
This other shade of FIRE applies to all individuals and couples who estimate their annual retirement expenses at over $70,000. While a philosophy of frugality and thrift generally marks the FIRE movement, this is not true for “Fat Fire.” The mentality behind this movement is to have a considerable amount of savings to consume without depriving oneself and to have infinite freedom of choice when carrying out one’s daily activities. Funnily enough, there is also an “Obese FIRE,” which includes annual expenses over $100,000.
3. Lean FIRE
This is a movement that advocates a minimalist lifestyle with no extra spending. The annual expenses targeted for retirement are less than $20,000. Individuals in this movement seek a simple life, rich in meaning, with no unnecessary material attachments.
4. Barista FIRE
This sub-category of the FIRE movement is centred around a hybrid strategy of paying annual expenses. Annual expenses are partly covered by the individual’s savings (and subsequent compound interest) and by the income generated by a part-time job. For example, a person wanting $50,000 a year could withdraw $25,000 from personal savings and work part-time, earning a net income of $25,000.
5. Coast FIRE
This strategy is derived from the “Barista FIRE” and advocates massive savings at an early age. These massive savings will mean you won’t have to save for the rest of your life, and you’ll live solely on the compound interest generated by your savings. Calculating the amount needed to achieve Coast FIRE is a little complex. Here’s a calculator to help you visualize how much you’ll need to reach your Coast FIRE goal.
6. FIWOOT
This acronym stands for “Financial independence, working on your own terms.” As the name suggests, it’s all about achieving financial independence as quickly as possible, and then working in a rewarding job without worrying about the material benefits it brings. The creator of this term, Mark Seed, decided to quit his long-time job to devote himself to writing his blog and start his own business, a dream he’d had for a long time. Since then, he has only accepted contracts that genuinely interest him.
Bottom line
All in all, this article is intended as a brief overview of the FIRE movement, exploring its origins, basic concepts, components and aims. If you’d like to learn more about this movement, here’s a list of resources to help you delve deeper into the concepts explored in this article. Enjoy your reading!
Find out more
Peter Adeney: https://www.mrmoneymustache.com/
Paula Plant: https://affordanything.com/
Vicki Robin: https://yourmoneyoryourlife.com/
Jakub Lund Fisker: http://earlyretirementextreme.com/
Mark Seed: https://www.myownadvisor.ca/
Jean-Sébastien Pilotte http://www.jeuneretraite.ca/
Retirement 101: http://retraite101.com/
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