Key lessons from the Financial Independence Retire Early movement everyone can benefit from

The FIRE movement, which stands for Financial Independence Retire Early, is a lifestyle movement that emphasises saving and investing early in life in order to achieve financial independence and early retirement.

The basic principles of the FIRE movement include:

• I. Saving aggressively
• II. Investing in low-cost index funds
• III. Reducing expenses
• IV. Increasing income streams

Ultimately, the main goal of FIRE is to be able to not rely on your nine-to-five day job in order to support your lifestyle. The sooner you are able to become non-reliant on your job, the better. This frees up your time to pursue your passions and hobbies while you are still young and able-bodied without any financial stress.

FIRE differs from more conventional ideas of retirement where the focus is on being able to sustain your spending in your twilight years with less of an urgency to achieve financial independence as soon as possible. The typical goal post with conventional retirement is to be financially sufficient by the age of 65, unlike FIRE movement's goal of 35 to 40 years old.

Who is FIRE designed for?

The FIRE movement has gained popularity in recent years, particularly among millennials and Gen Z's who value flexibility and freedom in their careers and personal lives. However, this doesn't mean that the FIRE movement is the ultimate guiding principle for those seeking to better their personal financial standing.

The FIRE movement is best suited for high-income earners with little to no financial obligations. This movement calls for one to save 50 per cent to 70 per cent of their earned income. This is no small feat, especially if you are just entering the workforce and have a low to medium starting salary.

Let's look at some figures.

The median household income in Singapore was found to be $10,099 in 2022. This translates to about $3,287 per member of the household. Saving half after CPF deductions, as per FIRE recommendation, would leave you with just $1,314.80 to cover all of your monthly expenses.

If an individual has regular insurance payments, student loans, or a mortgage to keep up with, it is unlikely that they would be able to make all of these payments on top of their regular daily spending on such a low budget.

Individuals need to consider if their level of income can feasibly sustain such high levels of savings. Successfully achieving FIRE also requires an almost obsessive focus on keeping your expenses well below your means. It is not worth sacrificing necessities or your mental health just to save 50 per cent to 70 per cent of your income every month. If you find that trying to achieve FIRE becomes emotionally draining, then perhaps it is advisable to reconsider your financial plan.

Key takeaways from the FIRE movement

Even if a strict FIRE approach is not the most appropriate for your personal financial situation, there are still many good takeaways that you can adopt in your own financial planning.

1. Live below your means

The core principle of the FIRE movement is to live below your means. This is an important habit to instil regardless of your income level or financial goals. You can do so via two key ways.

Clear debt

Financing your lifestyle through debt is not sustainable and eventually the high-interest payments will only set you back further in achieving any of your financial goals.

Cultivating the discipline to only spend money that you already have is the first step to improving your financial situation. So be sure to clear all debt with a good debt consolidation plan as much as possible before anything else.

Set a monthly budget

Setting yourself a monthly budget allows you to take stock of what you spend your money on each month, so not only will you be able to see exactly what non-essential spending you can cut out, you can also give yourself the grace to spend on things and experiences that truly enrich your life without guilt as long as they are within your budget.

Any amount of money that you are able to save each month through budgeting should be maximised in a high-interest savings account. Make sure to take advantage of the current high interest rate environment. With compound interest, every little bit of interest earned each month can grow exponentially, helping you increase your nest egg faster with little to no extra work on your part.

2. Regularly invest in low risk assets

On top of saving any excess money you have every month, you will also need to invest your savings in order to grow them more quickly. This can help you achieve your financial goals such as buying a house or paying for your child's university tuition with greater ease.

If you do not have a large nest egg, the last thing you want to do is risk all your hard-earned money in some get-rich-quick scheme. Instead, you should opt for steady and sound investments over fast investments that you do not have solid knowledge about.

There are multiple ways you can go about investing in low-risk assets.

Dollar-cost averaging

Firstly, you can consider dollar-cost averaging into an index fund every month. Stock markets historically trend up, with the S&P 500 giving an annualised average return of around 11.88 per cent from 1957 to 2021. By buying in every month, even if it's just a small amount, it gives you some exposure to equity markets and allows your money to work hard for you in the background.

With the plethora of low-cost brokerages out there, you can start your investing journey right away.

Endowment insurance plans

Secondly, if you prefer a more hands-off approach, you can opt for an endowment insurance plan. Endowment insurance is a combination of savings and life insurance, typically offered as term plans with a fixed maturity period and lump-sum payout.

These plans are marketed as a type of "compulsory savings" since policyholders are required to pay premiums. As your premiums are invested into the markets on your behalf, you have the risk of not getting back your initial invested amount if markets go south. Make sure to look out for endowment plans with a guaranteed value to limit your risk of losing money.

Conclusion

While FIRE may not be a one-size-fits-all financial plan, there is no doubt that everyone can benefit from the core principles of the movement. Start improving your financial position today by adding some of these good habits to your financial planning.

ALSO READ: I started planning for my retirement at 25: Here's how I did it

This article was first published in ValueChampion.