Financial independence? Sounds great! Retiring early? Count me in! This FIRE (Financial Independence Retire Early) is a financial movement that gained significant momentum in recent years, particularly among the Millenials. FIRE is a movement of extreme savings and investment, somewhere between 50%-75% of your income, with the aim of retiring 10-20 years earlier than the traditional retirement age of 60.

It sounds appealing but are you ready for it?

I have some mixed feelings about the FIRE movement.

On the flip side:

1. The basic math behind FIRE is ridiculously simple: spend less than you earn, and save aggressively, and invest the difference in some passively-managed index funds. But it’s not realistic to think that everyone can save enough, especially those in the middle-income group. The median income in Malaysia was recorded at RM5,873 in 2019 by DOSM. It focuses on frugality with too much sacrifice required with probably a miserable lifestyle.

2. The simple math for financial independence relies on linear projections. As you know, life, as well as investment returns, aren’t linear. What if your goals, values, and desires change?

3. There is increasing debate around the safe withdrawal rate which most experts agreed on 4% was a “safe” rate. The 4% rule says that you won’t run out of money if you limit your annual withdrawal rate at 4% of your retirement savings over 30 years. But a 40-year-old retiree could easily be retired for more than the 30 years in the calculation. There is a high probability that you will outlive your money.

4. There is no guarantee that it works as a long-term strategy as some FIRE pioneers are relatively young and are not actually retired. Will it hold up after a couple of prolonged bear markets or when we have to withdraw more from the investments because of an emergency? It’s too early to tell whether it’s a viable retirement strategy.

On the positive side:

Even though FIRE did not resonate with me completely, the thing that I like the most about FIRE is getting the younger people to start thinking about retirement. Another thing that impressed me is the focus and determination that they have toward reaching their retirement dreams.

Contrary to the traditional view of retirement, FIRE doesn’t mean that you have to quit your job and sitting on the beach or play golf all day. It’s less about retiring early and more about pursuing financial independence to embrace your dreams and ambitions. It’s about the freedom to choose to work or not.

Sounds great right? So are you ready?

These are the few steps to begin with for a smooth path to FIRE:

1. Figuring Out Your Why

You need to know why you wanted to achieve financial independence and retire early.

Do you want to quit your job so that you can start your own business? Do you want to spend more time with your loved ones? Do you want to travel whenever you want?

When you think about what matters in your life, you will be able to find out what things are not important to you. And that’s where you are going to save the money by spending money only on those things that are important to you.

This helps you to speed up the journey to FIRE!

 2. How Much Money Do You Need

Do you know how much you really need for the rest of your life?

This is the big question!

Using simple math from FIRE, there is a 4% rule in retirement, meaning that you can withdraw 4% annually from your portfolio to live your dream life.

Assuming that you have only one goal in life, that means if you need to spend RM60,000 annually in retirement, you will need RM1.5 million, without returns and inflation-adjusted.

However, if you find your life is not linear and there are more things to pursue in life, then you need to talk to a licensed financial planner to plan it out early to speed up the journey to FIRE.

Talk to a Licensed Financial Planner

3. Find Out Where You Are Now

Yes great, you know your FIRE number!

Now, you need to figure out where you are at, financially.

Firstly, you need to calculate your net worth.

The formula is Net Worth = Assets – Liabilities (total assets minus total liabilities)

Assets include those cash savings in banks, investment accounts, retirement savings, and more

Liabilities are those loans such as car, house, student loan, personal loan, credit card balance etc.

Make sure your net worth is growing over time as this is an important indicator in the financial strength of how many months/years that you can live on before your money is depleted completely.

Want to learn how to calculate and track your net worth from a professional?

Learn from the Pro here


4. Bridging The Gap

Finances and retirement are highly personal. I would just highlight a few strategies for you to consider:

1. Start Saving Money

This is the first important step to achieve FIRE.

That’s right, start saving, and save more, at least half of your income.

Personally, I love saving money. From the habit of saving money, I learnt about what are important and valuable things that I would spend my money on, and what are not.

The best way to know how much money you are currently saving is to calculate your saving ratio, which is simply dividing your savings by your income.

If you make RM100,000 per year and you save RM20,000, that means your saving ratio is 20%.

So how much are you saving up currently? What’s your saving ratio?

Too low? Then you need a budget.

2. Do A Budgeting

There are many benefits in budgeting such as controlling your unnecessary spending, stay focus on things that are important to you, get out of debt, keeps you on track of your goals etc.

Most importantly, you get to save more money and save faster.

If you have done a budget before, you would know that the easiest way to save more is to cut back on these big 3 expenses:

·         Food

·         Housing

·         Transportation

If you can cut back on these 3 big items which is averagely about 60-75% of income, surely you can speed up the journey to FIRE.

How can you do that?

Downsizing, less eat-out, take public transports or cycling, cost-sharing with other people are a few suggestions for you to ponder on.

No pain, no gain?

Yes, you need to make that big and hard decision if you want to save more and make that quantum leap all the way to FIRE.

3. Boost Up Your Income

If that’s so much that you can cut back on those expenses, then there is no other way around the income that you must boost up. You must find creative ways to earn extra cash.

You probably get the most money from your career. Ask for a pay raise whenever possible. So you must be good at what you do. Equip yourself, keep learning new things, and make yourself more skillful and more resourceful.

Maybe you can do some part-time works at nights and weekends.

Whatever you do, the extra income will help you to take a step back from the employment and embark on the journey to FIRE!

4. Start Investing

Investing is a key step and a game-changer. If you are serious about FIRE, there are no ifs, ands, or buts about it.

Maybe investing 50% sounds like too much for you, then you can start by investing 20% of your income into retirement savings. The key is to cultivate the habit of regular saving and investing every month. By doing so, you let the time and compound interest to work for you.

If you don’t have any investing experience and knowledge, you can either read up more on investing or talk to a licensed financial planner to come up with a plan and show you exactly what it will take to speed up the FIRE journey for you.

Knowing is not enough, we must apply.

Willing is not enough, we must do. – Goethe

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