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The Fire Movement by Joanne Castendyk

What is the FIRE movement?

There is a lot of buzz in the media about the FIRE movement. What is FIRE exactly? The most common definition is Financial Independence, Retire Early.

The strictest definition of FIRE states that you must aggressively build your savings to an amount equal to 25 times your annual expenses so you can withdraw 4% from your savings each year to live on in perpetuity. To keep the numbers simple, if your expenses are $50,000 per year, you’d need to save $1,250,000. Then, if invested properly, you could withdraw 4% of that amount each year ($50,000), forever.

Now, I’m sure your thinking, “Yeah right, I’ll just save $1.25 million in a relatively short period of time and live off the interest on that account. Easier said than done!” While it’s commendable to be able to cut costs back, push savings rates high, and hit these FIRE numbers in a decade or so, this math doesn’t add up for most people. That said, there is still a lot we can do to set ourselves up for a comfortable financial future.

In his 2021 blog, “The 7 steps to financial independence,” J.D. Roth outlines the following framework which can help you assess where you are on your financial journey:

1) Dependence: The money coming in is less than the money going out. You’re increasing your credit card debt each month to make ends meet.

2) Solvency: The money coming in equals the money going out. You’re not increasing your debt, but you’re not saving money either.

3) Stability: The money coming in exceeds the money going out. You’ve paid off your credit cards and you have saved a modest emergency fund.

4) Agency: You have saved beyond your emergency fund such that you can say “No” to certain employment opportunities if they’re toxic or unhealthy. You can’t stay unemployed forever, but you could get by for a couple of months.

5) Security: Your investments have become significant, and your expenses are low. With only a part-time job, you make enough income off your investments to support a modest standard of living, forever.

6) Financial Independence: Your investments have grown to a point where withdrawing 4% per year can replace your part-time job and cover all expenses. You no longer need to be employed!

7) Financial Abundance: Your investments have grown substantially such that your 4% annual withdrawal exceeds your expenses. At this point, you can choose to live a more lavish lifestyle, or possibly, continue saving to leave a legacy for your heirs or your favorite non-profit.

Where are you on your financial journey? First and foremost, know your numbers. Can you find creative ways to spend less and save more? Are you maximizing tax-advantaged savings accounts like Roth IRAs, HSAs, 401Ks, 403bs or 457s as long-term investment vehicles? If so, do you know what funds those accounts are invested in and why? Do you utilize a high-yield savings account or brokerage account? Mindful and consistent investing over the long term is an effective strategy to build wealth.

By understanding where you are in your financial journey, you can clearly define your goals and take steps to reach those goals. Over time, you can move from Dependence to Security and greatly reduce the financial stress in your life even if you never hit ‘FIRE.’

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