If you have been involved at all in the financial space within Singapore, you would have heard of the “FIRE movement”. Recently, it regained popularity in the pandemic as people were stuck at home and started to wonder what life could be if they didn’t have to work till their 60s.
Here’s a condensed guide to the FIRE movement which will hopefully help answer your questions and get you started on your journey to early retirement.
What Is Financial Independence, Retire Early (FIRE)?
“Financial Independence, Retire Early” or FIRE is a movement where people aim to retire earlier than the traditional retirement age by employing a combination of aggressive savings, aggressive expense cutting and diligent investing.
The idea is that through a combination of aggressive savings and, or aggressive expense cutting, anyone can save enough money to retire far earlier, instead of having to wait till they are in their 60s or 70s.
Who started the FIRE movement?
The FIRE movement was introduced in the book “Your Money or Your Life“ by Vicki Robin and Joe Dominguez.
Key Mindset shift for FIRE
In the book, “Your Money or Your Life”, the authors suggests that for every dollar you earn, you are actually trading a small tiny part of your time, and thus, your life for. A big part of juxtaposing the number of hours you work in order to afford an item is to put into perspective for the reader how many hours of their lives they are trading away in order to afford something.
Shifting your mindset to compare your expenses against the your time could help you make better financial decisions. And this I think is a major mindset shift for those who buy into the FIRE movement.
Every expense is compared to the time spent at work in order to earn the purchase. Some questions to ask yourself include:
- How many hours of work do you have to put in in order to pay for the car you drive?
- How many hours of work do you have to do in order to pay for the wedding of your dreams?
- For the home that you want to be able to afford?
- For the number of kids you want to have?
For example, a social worker earns between $3,300 a month to $4,500 a month depending on the level of seniority and education.
This salary sounds medium or even high to some people. But the social work industry is notorious – similar to the law industry in this case – for long hours of grinding work.
- Assuming 20% CPF contributions, the social worker’s average takes home pay based on $3,300 is just $2640 a month.
- Assuming their weekend working hours are true, their total number of working hours a week, coupled together with time spent travelling to and from work, including work purposes can come up to about 16 hours a day, 6 days a week.
- That puts the average social worker in Singapore at about 96 hours a week, and 384 hours of work a month.
- Figuring in their take-home pay of $2640, they earn an average of $6.80 an hour. Which means anytime they spend $100, they actually gave up 14 hours of their lives for that purchase.
- For comparison, as a once part-time cisco police officer, I took home $12 an hour for normal work and $18 for overtime.
Once you juxtapose time spent against expenses, you start to have a keener appreciation for things you should or should not be buying.
Now, instead of seeing a number of dollars next to an item on the price tag, you see the number of hours of your life you will have to work to buy it in the first place.
The most obvious response for people then is that they too wish to FIRE.
They too wish to stop having to work and to start worrying about money and instead spend time doing what they love or want.
So…
How Does FIRE Work?
The goal of FIRE practitioners is to save aggressively and build a retirement fund that will allow them to retire early.
At this point, you’re probably wondering…
How much money do I need for FIRE?
While most FIRE practitioners aim to save about $1 million, your personal FIRE amount will vary with your lifestyle.
To calculate how much money you need to FIRE, you can use the 25x Rule.
What is the 25x rule?
The 25x Rule is a general savings guideline for retirement that suggests you should save 25 times your annual expenses in order to retire.
25 is not a number plucked from the skies randomly. It is based on a research paper known as the Trinity Study. This will give you enough money to live off your savings for the rest of your life, based on a withdrawal rate of 4% per year and serves as a good estimate to how much you need to retire.
It is also referred to as the FIRE formula. And the number you calculated using the 25x rule is often referred to as your “FIRE number“.
What is the 4% Rule?
The 4% Rule is a guideline for retirement savings withdrawals. The idea is to build a retirement fund that allows you to withdraw 4% of your savings each year without running out of money, even after adjusting for inflation.
Now that you have an estimate of how much you need to retire, you can estimate the amount of time it’ll take you to save for it.
FIRE practitioners aim to hit their retirement amount in a shorter time period.
The most hardcore FIRE fanatics may rely on unconventional methods, aiming to save 70-80% of their monthly/annual income while reducing their annual expenses.
How do you pursue the FIRE movement?
In order to reach your FIRE number, you’ll need to work on these:
3 Key aspects of FIRE
- Reduce Spending and Increase Saving Rate
- Increase Income
- Invest for more
1) Reduce Spending and Increase Saving Rate
In order to accelerate their retirement plan, FIRE practitioners will first look to reduce their expenses and increase their savings rate.
There are two main ways to reduce your spending:
- Cut out unnecessary expenses
If you want to save money, you need to be ruthless when it comes to cutting out unnecessary expenses.
Review your monthly budget and see where you can make cuts. Are there any subscriptions or services that you don’t use? Could you downsize your home or car? Are there any restaurants or shops that you could avoid altogether?
A basic checklist we use in our Early Retirement Masterclass to help students start gaining control over their finances goes as such.
And this is just to get started.
- Live a simpler, more frugal lifestyle
The second way to reduce your spending is by living a simpler, more frugal lifestyle. This doesn’t mean you have to live like a hermit, but it does mean being mindful of your spending and making small compromises where necessary.
For example, instead of eating out every night, try cooking at home a few times a week. Or rather than buying brand new clothes, shop at thrift stores or online marketplaces like Carousell.
The key is to find what works for you and stick to it. If you can reduce your monthly spending by even $100, that will go a long way towards achieving FIRE.
What I did to reduce my spending
The plan here is simple. Cost cut where possible in a manner that makes sense. Funnel that money into other areas, either savings, investments, or even building a business.
I applied this personally and the cost savings have been substantial. (Figures were accurate in 2019 when I wrote this, cost of living will go up over time.)
I typically enjoy a breakfast of about 6 eggs ($3) and an iced coffee ($1.50). In total, this would usually cost me about $4.50 if I were to dine out.
In a month, this is about $4.50 x 30days = $135.
I decided this was way above what I should be spending. A tray of 30 eggs at the local super markets cost about $5.35. This settles the egg portion of my breakfast for 5 days. For a month, my expenses for eggs would be $5.35 x 6 = $32.10.
Coffee was swapped whatever was available in the office’s pantry.
Total savings? $135 – $32.10 = $102.90 per month.
I’ll put the true value at about $80-$90 because there were days where I broke the routine. Well, I’m not a robot and needed a break occasionally. But $90 a month still puts me at ~$1080 of extra savings a year.
All of this savings from just breakfast. I haven’t even begun delving into savings from phone bills, or working as a freelancer over the weekends.
Already, my savings for the year stands at $2,040. A fifth of the $10,000 required to start investing typically. That may seem small. But over a period of 10 years, that is an extra $20,400! All from making a few tweak to my breakfast routine.
Warning; An important thing to note while cost-cutting -> studies indicate that abrupt shifts in behavioural patterns causing outsized painful adjustments compared to cognitively recognised benefits tend to result in failure of beneficial diets, new habits/routines the most.
In other words, do not cost cut in a way that is too abrupt for yourself.
Take it slow.
I used to have $8 lunches. Now my lunches and dinners rarely cost above $5. I still have the occasional extravagant meal now and then, but those happened anyway, so now I’m net cash on food.
It took me time and effort to slowly curtail my habitual spending and to find new eating places.
You can do the same. And it will help you as well if you slowly cut away unnecessary expenses from your life bit by bit as opposed to ripping them up wholesale, roots and all.
Baby steps.
2) Increase Income
Another way to speed up the time to retirement is to increase your income.
The most direct way to boost your income is to find ways to earn more money. This may involve asking for a raise at work, finding another job that pays more, taking on side gigs or in some extreme cases; taking on a second job.
- Negotiating for a pay raise
If you aim for a salary increase, you can do no better than learning some top negotiation tactics. I would personally recommend you quantify your total worth to the company so you have grounds to ask for a raise or can get a better paying job elsewhere.
A useful book to read for application in all parts of life, and most important in salary negotiations is “Never Split the Difference” by Chriss Voss. It details some of the best strategies to negotiate for a salary raise, including the Ackerman Model.
Besides that, staying engaged, up to date, and at the edge and flow of your industry is how you get paid more each year. Being the first to know about something helps a lot in convincing your boss to pay you more.
- Find a new job
If you’re looking for a new job, you should also research the average salary range for your position so you know what to expect when negotiating paychecks or interviewing with prospective employers.
According to this old report, employees see about 12-15% pay increments when switching jobs. However, most would ask for at least 25% pay increment during their application. Remember, it’s better aim for the moon and fall among the stars.
- Get a Side Gig
Most side gigs nowadays involve work as a food delivery rider or as a Grab driver. If done well, these tend to bring home about $600 to $1000 extra home a month.
I have friends who do so on weekends and nights after work and bring home an extra $2,000 to $4,000 a month, though this is mentally and physically taxing. It’s also not sustainable in the long run except for the most disciplined among us.
If you have a skillset, for example, copywriting, coding, development, legalese, website building, applications development, you can farm out your skills to 3rd parties for extra income – just make sure your fulltime job does not prevent or specifically prohibit you from doing so.
Other ways to increase your income include:
- Side note: Take Advantage of Tax Breaks, Deductions and any compulsory savings or pension plans
Many people forget about the various tax breaks and deductions available to them each year. These can be used legitimately reduce taxable income.
Likewise, you should take advantage of any compulsory savings or pension plans provided by your employer or country. For example, if you’re in Singapore, you should learn to maximise your CPF.
We’ll not cover this topic in this guide. However, you can read our guide on the CPF Special Account, CPF Investment and other related articles here if you’re planning to FIRE in Singapore.
3) Invest and grow your money faster
Once they have successfully implement the above, FIRE practitioners would usually transition into investing in order to make their money work harder for them.
If you have followed through with the above examples, you will by now have noted that this is not a simple process.
The process is one that works and is one that brings you significant cash savings – assuming you had the ability to go through with it.
Most FIRE proponents do a combination of two things at this point with the cash pile that they have accumulated.
- Dump their cash into a low-risk, capital guaranteed, interest yielding account (like our CPF system), or;
- Start investing their now much more sizable cash pile and aim to grow it exponentially larger within a period of 10 years, with the ultimate aim of passive income via dividends sustaining them once they are off full-time employment.
My thoughts on investing for FIRE
Whether you do the first or the second is up to personal preference. There are drawbacks to the CPF system which I am personally unable to accept,
- Inflexibility: You have no control over your money. It is not accessible in the case of emergencies such as an operation or going for a Masters in the field of your choice.
- Long wait time: You need to wait till you’re 65 before you can see that money come to you bit by bit, a month at a time.
- Returns are Capped: Your returns are a maximum of 4-5% a year. It doesn’t go up unless the government says so. And if the government says so, it might go down as well. If inflation rises above 4%, your CPF Special Account won’t be able to account for that.
- Currency Risk: The Malaysian Ringgit was once worth $0.50 Singapore dollar. Today, it’s 1 Malaysian Ringgit to $0.33 Singapore dollar. If the same happens to Singapore’s currency, your money locked away in the CPF Special Account prevents you from shifting your cash into an asset that can retain its value far better. Something like gold, or even another currency.
- I recently took a trip to Malaysia hoping to capitalise on the fact that our money was now worth more. While prices in general have gone up slightly across the board, their imported products like graphics cards or laptops just jumped in price to reflect the degraded value of the ringgit. Can you imagine the vegetable uncle charging you $7 instead of $3 because the Singapore dollar lost value? That could destroy your retirement.
You might be of a different mind. You might believe in the Singapore government. You might believe that things will never go badly for us. And if that is the case, good for you.
You have a 4% guaranteed a year system inherently built by the Singapore government. There is nothing wrong or inherently mistaken about that. It is simply a matter of personal preference. So put your money where you feel it is best served to grow. And play it safer.
I, on the other hand, prefer not to take the risk of losing control of my money. I prefer investing my money because I retain maximum control over my holdings. I decide how to flow my funds in the case of an emergency and how I can protect myself from the Singapore dollar devaluing (unlikely but possible certainly).
In the unlikely event that I need cash urgently, and it is somehow beyond my emergency funds or not covered by my insurance, I can liquidate the holdings with which I have the least confidence in order to cross the hurdle.
There are fundamentally great resources for investing freely available on the web. I suggest you read them and take a look at your available options.
How to achieve consistent investing results to FIRE?
Four things are required for any amount of consistent investing results.
- A methodology that works.
- Consistently following and improving the methodology that is based on sound logical theory, not feelings.
- Understanding that investing is a decade long game and that consistency over time is what leads to greater investment performance.
- The right temperament
#1 – A methodology that works, in this case, would be what has displayed consistent track records.
It doesn’t matter what it is as long as you, YOU, the person right now reading this article, is able to believe it, understand it, learn it, and stick to it.
A methodology that works would be one that is based on sound logic, sound theory, and enjoys a long and consistent track record of working. Value investing is the most popular one thus far, and Warren Buffett (Berkshire Hathaway) arguably the most famous and well recognised.
#2 – A consistent following and improving of the methodology that is based on sound logical theory, not feelings.
Knowing a method is not enough. You must implement it. Use it. Feel it. Physically sink your money in and put it where your mouth is. You cannot learn something from textbooks alone all the time and investing is but one concept.
A key concept upon implementation then is that you learn you are human, and that you make mistakes. It is important here to be aware of why they came about. A person low on introspection and low on self-locus of control would hardly be able to understand why he/she was wrong and will thus continue to be wrong many more times, in many different ways – until they give up because they have lost too much money, or they right the flaw in their investment approach.
Thus, constant improvement is necessary. And an approach based in rigour and logic, absent of emotion absolutely critical, without which disaster strikes. Repeatedly.
#3 – Understanding that investing is a decade long game and that consistency over time is what leads to greater investment performance.
Humans are short-lived creatures. We think of what we want for lunch, dinner. Tomorrow’s breakfast. Maybe even the trip to Japan or Europe or Americas next year. But we hardly even more fully, more broadly, and in greater detail of where we want our lives to be in the next ten years.
This fatal flaw comes back to haunt those who are unable to think long term in the markets. Short term thinkers will never understand long term value. Short term buyers of stocks will keep losers too long and sell winners too fast. In every possible statistic, and in every possible scenario, it is the short term thinker who is constantly befuddled by the waves of the market and the ups and downs of market volatility.
More, consistent performance in the market, due to the nature of the returns can only be seen in years. Not months. Not weeks. Not days.
Investment is a long term commitment to buying good quality cheaply, and holding it long and well, only selling when the price is right or if that quality is no longer there.
Few people understand this. Fewer understand that consistency is needed to stay the course over decades of market ups and downs.
From the Asian Currency Crisis to the Sars crisis to Brexit to the Trade War. There will be many seemingly calamitous events happening globally that will yank money from short term thinkers who panic and sell off their stocks at bargain prices while simultaneously delivering bargain buys to long term thinkers.
Thus, it is important for you to understand that investing is a decades-long game.
#4 – The right temperament is necessary for all things, including and especially investing.
Investing is a painful activity. And that seems to be a constant truth of life. In the old days, those who were unwilling to abandon safe shelter to seek food eventually died of hunger.
Now too, this is pervaded even in modern society.
FIRE proponents who do not invest their money and sit on cash piles will eventually see their buying power eroded. To survive, to move forward, FIRE proponent or not, you must embrace some amount of risk in order to even keep ahead. This is fact – whether you like it or not.
Thus, your temperament, must either be cultivated, learned, or at the least inculcated in you by the readings you have, the education you seek, and the people who you surround yourself with.
Learn and/or find the right temperament to invest. Or don’t invest at all.
Critique of the FIRE Movement
You will notice that the mechanisms which allow FIRE proponents to actually retire depend largely on Earning Power.
This is a basic critique of the FIRE movement -> it is not accessible or practical as a method of retiring for people who do not possess strong earning power.
Without Earning Power, you can’t really save too much money. You can really only save so much based on a $2,000 salary.
Earning Power also inherently dictates how much you can actually make on the side with your skill sets. The better you are, the more you make. And it is unlikely you can make more on the side doing something you’re doing full-time (hint: change your job if that’s the case. you are not maximising your earning power).
To some degree, you can simply drive Grab or deliver food, but those too in and of themselves do not deliver above-average earnings per hour for your time -> they simply improve total take-home cash.
What Can People Without High Income Do?
Maybe the case is that you are stuck. You don’t earn a large salary in the $5,000-$15,000 range, but you do earn enough to get by.
Saving and earning more money is one thing. But without growth for the cash you have saved, inflation will eventually kill whatever you have scrabbled together.
There are 3 main ways to grow the cash pile once you have accumulated it or started on the path of FIRE, even without a high income.
- An increase in salary via a promotion, renegotiation, or job change.
- Starting a business.
- Investing
If you’ve read till this section, you’d probably have a basic idea of FIRE.
But you may still be wondering…
Is FIRE right for you?
The FIRE movement is growing in popularity as people become increasingly aware of the importance of financial independence.
However, FIRE is a process that is inherently built with great friction. It can be physically painful to take on extra work to make more money, save money on things you love – like bubble tea or short getaway holidays. It is also painful to have to cut expenses or downgrade your lifestyle like going from a BMW to a 2nd hand Toyota.
Hence, before you decide to join the FIRE community, it’s important to ask yourself if it’s right for you.
FIRE can be a great option for those who are disciplined and able to live frugally. However, for those who are used to a more comfortable lifestyle, it may be difficult to adjust to a more modest budget. In addition, those who are not good at saving money or investing may find it difficult to achieve financial independence.
Ultimately, you have to find the balance between enjoying your current lifestyle versus being able to retire earlier. Whether or not FIRE is right for you depends on your individual circumstances and financial goals.
But wait, there’s more.
Not everyone likes the idea of introducing extreme lifestyle changes. Hence, over the years various types of FIRE emerged and flourished, giving aspiring FIRE folks more options.
Here’s a quick overview:
Types of FIRE variation
i) Lean FIRE
Lean FIRE involves having your retirement fund or investments cover only your basic necessities. This is the plain vanilla form of FIRE.
Those who practice Lean FIRE usually live on a tight, fixed budget.
This makes it easier to achieve, but leaves you with very little flexibility or choice. It is also generally less secure as you may start struggling financially if find yourself in a situation where you need to increase your expenses (eg. getting into an accident).
ii) Fat FIRE
Fat FIRE is the opposite of Lean FIRE where practitioners aim to have a large enough passive income to cover a more comfortable lifestyle. This is suitable for those who wish to retire early, but don’t want to have to scrimp or deprive themselves from the pleasures of life in retirement.
Fat FIRE may involve a FIRE number of $2.5M or more and is usually favoured by people with higher income brackets.
iii) Barista FIRE
Barista FIRE is a variation of FIRE where you continue to work in a part time or low stress job after you have reach your FIRE number for additional income and health insurance to offset your annual expenses.
iv) Coast FIRE
Coast FIRE involves hitting a Coast FIRE number in a retirement investment account that would then continue to grow and compound in subsequent years. With Coast FIRE, practitioners aim to aggressively build up a retirement fund in the early years and stop contributing to their retirement fund once they reach the Coast FIRE number.
You’ll still need to work to cover the monthly expenses until you reach the traditional retirement age. However, you no longer need to worry about building a retirement fund as it would ideally compound and grow on its own while you ‘coast’. This means you do not need to earn as much once you hit your Coast FIRE number, giving you the freedom to change jobs, shift to part-time or freelance work.
Final Thoughts on FIRE
Ultimately, I feel FIRE as a concept was an inevitability.
We do not work in a society that allows us to be fed based on the work of our choosing. Most of the time, we will be lucky to even be able to do something boring for a living.
To stay sane, we must have something to look forward to. It used to be Fridays, hence the prevalence of TGIF. Or the holidays. Or the year-end festivals. Endless amounts of people will tell you to find meaning in your work. To find joy in it.
I propose differently.
Work is simply a job. You do it to sustain yourself. And you do owe it to your employer to do it well while you are fairly compensated for it.
But don’t work for the sake of living.
Work for the sake of finding what drives you.
Work so that you can find what gives you hope. And excitement. And dream. Work so that you are afforded the time to find what you love.
Work so that you can then FIRE and live a life of meaning. Whether that means a lifetime of charity or a lifetime of reading books, that’s up to you.
Work so you can find your ikigai.
Without finding your ikigai, being successful at FIRE would merely upgrade you from a life Financially Insecure Meaninglessness to a life of Financially Secure Meaninglessness.
So what if you FIRE then?
- What are you going to do? Travel the world indefinitely? Then what?
- What makes you so inexorably excited about life that you can’t wait to wake up in the morning?
- What makes you so excited that you would hate to sleep at night?
Find the answer to these questions. And the motivation and inspiration to FIRE successfully – if that is even what you want after still – will come naturally to you.