FIRE stands for Financial Independence Retire Early. It’s a retirement method that challenges the conventional method of working until the age of 65 and instead quits their jobs in their early 40s or even in their 30s. The concept was inspired by a book titled “Your Money or Your Life” which was written by Vicki Robin and Joe Dominguez. In this video, we will discuss the F.I.R.E method in depth along with the 4% Rule & Financial Independence Ratio.

Chapters

00:00 Introduction
02:16 Setting Up Your FIRE Strategy
10:49 What's Fuelling the FIRE Movement?

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SETTING UP YOUR F.I.R.E. STRATEGY
The core tenets of a FIRE strategy are rather simple, firstly, you start by saving 50 to 70% of your income. Secondly, you show economic discipline by living frugally. And thirdly, you invest your savings wisely with the preferred instrument being a low-cost index fund.

And that’s it: Save More, Spend Less & Invest Wisely. These are the three bedrock principles of any FIRE strategy. Which starts by you asking yourself two basic questions:
How much income do you need to sustain your lifestyle in early retirement?
How soon do you want to retire?

Let's focus on the first question. Which is another way of saying how much are you allowed to spend on a monthly or yearly basis? A helpful and often used rule-of-thumb around this is the 4% RULE.

If you retire with a kitty of say, 5 crores then per the 4% rule, you can use up 4% of 5 crores each year which comes to 20 lakh rupees. Infact, another way of doing this is to reverse the rule so 4% when inverted comes to 25 times which means your retirement corpus needs to be 25 times the amount you'll withdraw the first year.

For instance, the 4% rule was built on the assumption that your invested portfolio would grow at an average of 7% per year which seems perfectly doable. Like the fact that the 4% rule was built to work reliably for 30 years however if you are retiring at the age 40 or 45 then your retirement journey is a lot longer and 4% might be a bit too high a number. Another issue with the 4% rule is that it doesn’t account for inflation which for a country like India is a much higher number as compared to more developed countries like the United States. But the good thing is that anyone can make their own version of the 4% rule and surely would add inflation in it.

The first step is to save anywhere from 50 to 70% of one’s income every month which is a lot higher than the standard 15 to 20% savings that most financial advisors put forward. The second step under the FIRE strategy is to spend wisely. Some expense management tips include.
Driving a used car rather than a new one
Use public transportation if living in the city
Avoid credit card debt and use them for rewards etc.

Another area worth considering is the importance that’s given to passive income by the FIRE community. A number of followers use something called the FI ratio or the Financial Independence Ratio. FI Ratio = Passive Income/Expenses

For example, if you earn 2 lakh rupees as passive income and your expenses are 1.5 lakh rupees then you have an FI ratio of 133%. Now generally, anything over a 100% indicates that some real good progress has been made towards one’s financial independence.The final step in the FIRE method is investment.
WHAT’S FUELLING THE F.I.R.E. MOVEMENT?

The FIRE movement is catching on because millennials and Gen-Zees. For instance, a lot of them are questioning the utility of the current system which encourages a consumerism-led template of take a home loan, buy a car, work 9 to 5 for the next 30 years to repay these loans and accumulate enough wealth to retire in our 50s or 60s. FIRE might be the solution for the moment as it gives many of them the financial breathing room to work part-time doing something they enjoy, convert a hobby into a business, spend time with their family, travel etc.

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