FIRE Financial Planning Explained

Many people feel trapped in a treadmill of unfulfilling work that they would rather get out of, if only they could. To reach that goal, some people adopt FIRE financial planning – which prioritizes saving and reduced consumption with the aim of reaching financial independence. This moneyland.ch guide explains the basics of the FIRE philosophy.

What does FIRE mean?

FIRE is the abbreviated form of financial independence, retire early. People who follow a FIRE financial plan aim to become financially independent as quickly as possible. Once you are no longer dependent on employment for their income, you are able to either stop working altogether, or to pursue interesting work without prioritizing income.

The FIRE movement first gained popularity in the United States in the 1990s. In German-speaking countries, FIRE financial planning is sometimes referred to as frugalism – a reference to the minimalist lifestyle that is often required.

Why do people use FIRE financial planning?

For many people who follow the FIRE financial philosophy, not having to work at a job is the primary reason. Those who use FIRE financial plans often aim to not have to work by 50, 45, or even 40 years old – long before the standard retirement age.

For others, the primary goal is simply to be financially independent and not have to depend on a job for their income, but not necessarily to stop working altogether. Many people adopt FIRE financial strategies because they want the freedom to choose which activities and employments to invest their time in.

Which kinds of FIRE financial plans are there?

FIRE financial plans can be roughly divided into several broad categories. What all of these plans have in common is that they all require you to save a large part of your income during the accumulation phase. Categories include:

• Lean FIRE: The aim of lean FIRE plans is to reach financial independence as quickly as possible by adopting a frugal lifestyle, and maintaining this same frugal lifestyle after financial independence. Lean FIRE plans prioritize cutting down on expenses.
• Fat FIRE: The aim of fat FIRE plans is to reach financial independence without having to change your lifestyle, and to be able to enjoy your current lifestyle after financial independence as well. Fat FIRE plans are best suited to high earners who are able to save a substantial part of their income without sacrificing their standard of living.
• Coast FIRE: The aim of this kind of financial plan is to save up as much capital as possible in your younger years. The plan relies on the compounding interest effect to grow these early savings until the amount required for financial independence is reached. Coast FIRE plans do not necessarily prioritize early retirement.
• Barista FIRE: The aim of this kind of FIRE plan is not to quit working, but simply to be able to work part-time or to do jobs that you enjoy. Ideally, the salary you earn should be sufficient to cover your basic expenses, while your savings provide the rest of the money you need.

How much money do I need to save in order to reach financial independence?

The four-percent rule provides a good point of reference for determining how much money you need to save up. According to this rule, you can spend an amount equal to four percent of your wealth without reducing your savings.  

For this to work, you must first save up a capital equal to 25 times your annual expenses. If, for example, you have expenses of 70,000 francs per year, then you would have to save up 1.75 million francs in order to become financially independent. But many people use more conservative conversion rates below four percent. You can find detailed information in the guide to the four-percent rule.

How should I invest my savings?

In order to grow your savings, you should prioritize investments that have the potential to deliver high returns. Diversified stock portfolios, such as exchange-traded funds (ETFs) that replicate global stock indexes, are one example. While investing in the stock market always comes with a risk of losing money, over long terms, stock investments can potentially bring much higher returns than savings accounts and fixed deposits.

If you prefer not to invest in assets that can fluctuate in value, then using lower-risk investment vehicles like savings accounts provides an alternative. However, because the returns are lower, you will normally have to save up more money in order to reach financial independence, compared to using diversified stock market investments. Additionally, the four-percent rule does not apply when you use low-yield investment solutions, as the returns are insufficient to compensate for a four-percent spending rate.

Does using FIRE financial planning make sense?

FIRE financial planning requires lifestyle choices that bring a number of limitations. Things to consider include:

• Self-denial: FIRE financial planning typically requires you to cut down on non-essential expenses in order to save up as much as you can, as quickly as you can. This frugal lifestyle normally requires you to massively cut down on consumer spending.
• Social conflicts: Maintaining a frugal lifestyle can lead to conflicts with friends and family. That could be the case, for example, if you completely forego group visits to restaurants, taking vacations together, and other activities that cost a lot of money.
• Lower pensions: The earlier you stop working, the less you will contribute to your occupational pension fund. Resultingly, your pillar 2 pension will also be smaller. If you stop working altogether after reaching financial independence, you also will no longer be able to contribute to the pillar 3a or claim the pillar 3a tax deductions. That makes it even more important to have a solid retirement plan in order to avoid financial difficulties in your old age.
• High income requirements: In order to save up the kind of capital required to reach financial independence, you will normally need to have a high income – ideally in combination with very minimal financial obligations. If you are not able to earn a high income, you will have to be prepared to reduce even your basic living expenses in order to save up a large part of your income.
• Careful planning is required: Before adopting a FIRE financial plan, you should make a plan for what you will do after you attain financial independence. Simply working towards the goal of not having to work for your income is often insufficient for long-term fulfillment.

Many people who use FIRE financial plans look at the limitations as a necessary evil – a reasonable price to pay for financial freedom. If you already live frugally, you may not have to make any lifestyle changes at all. Whether or not it is worth adapting your lifestyle to become financially independent depends on your personal views, your preferences, and on what you value in life.

But in any case, there are aspects of FIRE that can be worth adopting even if you do not opt to work towards financial independence. High consumer spending is not always necessary for a happy life, and saving a large part of your income is always advisable. You could also consider taking steps towards becoming less dependent financially without making radical lifestyle changes. Foregoing all of the things you want simply to save up money is not always the best solution, as explained in the guide to expenses that you should not skimp on.

More on this topic:
The four-percent rule explained
The 50-30-20 rule explained
FIRE calculator
Millionaire calculator