You often hear people in the investing community talk about their FIRE number. The mysterious number that will set them free for life. But what precisely is FIRE?

The FIRE (Financial Independence, Retire Early) movement is a lifestyle movement with the goal of gaining financial independence and retiring early. FIRE followers believe that retirement is no longer dependent on age, but only requires a measurable amount of liquid assets to enable early retirement.

Those seeking to attain FIRE intentionally maximise their savings rate by finding ways to increase income and/or decrease expenses, along with aggressive investments that increase their wealth and/or income. The objective is to accumulate assets until the resulting passive income provides enough money for living expenses throughout one’s retirement years.

For those in the FIRE movement, “financial independence” doesn’t necessarily mean sitting on a tropical beach or non-stop shopping trips. It means reaching the point where you don’t have to work a full-time 9-5 job if you don’t want to. You can scale back to a part-time job or simply stop working altogether. The choice really is yours – just imagine that freedom.

Personally, I know I will most likely never fully retire, because I love teaching and it doesn’t feel like work. So I’ve replaced the R and E in FIRE with “Recreational Employment” – work only on what you love.

The Magic Formula

To determine your FIRE number, you only need the monthly expenses that you expect to pay during retirement:

1. You need to build up a net worth of 300 times your estimated monthly spending to achieve financial independence
2. You should only withdraw a maximum of 4% from your savings each year

The rule of 300

Calculate your estimated monthly expenses in retirement using today’s values. If your bond is going to be fully paid by the time you retire, exclude that from your FIRE number, but remember to include medical aid. Many individuals who receive a medical aid benefit from their employer, forget that they would need to pay for medical aid once they leave their employer. Multiply your monthly expenses by 300. That’s how much you need in today’s money to retire. 

The 4% rule

In the first year of retirement, you should only withdraw 4% of your portfolio. You may only increase this number by inflation annually and your money will last on average 30+ years, market dependent.

If the bulk of your savings are in Reg 28 retirement funds, the mandatory retirement age continues to be relevant. But that doesn’t make retiring at 45 impossible – a two-stage FIRE plan can overcome this hurdle.

FIRE movement principles

Save as much of your income as possible

• I personally started with 10% of my income and I’m currently saving 55% of my income

Live exceptionally frugally

• Make the necessary lifestyle changes now and don’t adjust your lifestyle with every salary increase
• Buy a used car and keep it for as long as possible instead of opting for a new car every five years
• Ride a bike or use other low-cost transportation to further cut travel expenses
• Learn how to do household repairs instead of buying a new appliance or paying a handyman. YouTube has a wealth of DIY resources
• Cut back on recurring expenses such as a cell phone contract, DStv, internet and other services where possible
• Take advantage of free entertainment options

Pay off all your debt, including your home loan

• You cannot achieve FIRE with debt, so you need to pay off all debt as soon as possible
• Once my mortgage is paid off, I will invest 70% of my income and live on only 30%
• Credit cards are evil if you don’t use them like cash. Pay the full balance every month and only collect the reward points and benefits

Increase your income through side hustles and investing it aggressively

• Invest 80% of your side hustle income and spoil yourself with the remaining 20%
• Treat any windfalls like bonuses or monetary gifts in the same manner

You must have a 3 – 6 month emergency fund, so you never disturb your investments

• Emergencies don’t ask for permission before they happen
• Never disturb the compounding effect taking place in your investment accounts

Invest in low-cost investment vehicles like ETFs, blue-chip and dividend-paying equities

• The key is to get into a regular habit of saving and investing every single month. When you do that, time, and compound interest work for you instead of against you
• Always reinvest your dividends
• Invest in assets such as commercial real estate or rental property that can generate predictable income

Can FIRE really be achieved?

I’ve always been an avid saver and I knew I wanted to retire a bit earlier than normal. When I started working and saving, I didn’t know of ‘FIRE’ and the fancy formula. By the time I got hold of the formula and did more online research, I was amazed at the broad spectrum of people from all walks of life working towards FIRE. It wasn’t directors and presidents of companies, but everyday people yearning for freedom. Some needed very little, but everyone needed to work equally hard because the  “multiply by 300” formula is universal and levels the playing field in terms of sacrifices.

But how much sacrifice FIRE requires you and your family to make, really depends on your goals, your disposable income, and what you’re prepared to give up or cut back on to get your savings rate as high as possible.

If this approach interests you, give it a go. Us FIRE followers do have fun and splurge on what’s important to us, but our savings goals remain firmly intact.

Rochelle Warries is a qualified chartered accountant with 16 years of experience and a seasoned stock market investor. Her passion is helping novice investors build healthy investment portfolios through financial education.

She is founder of Soul Financial, a website offering financial education and coaching. You can find her on Twitter: @soulfairy3