FIRE: The hottest thing in personal finance

By Christeen Haddadin
Certified Money Coach

FIRE, which stands for Financial Independence, Retire Early, has become a whole movement in the West. People aim to retire as early as possible to spend their time doing things they are passionate about. Doesn’t this sound like a dream?

What is FIRE and how does it work?

FIRE is to reach financial independence as early as possible; meaning, the ability to generate enough passive income to cover your expenses today. FIRE takes serious commitment and big sacrifice in your 20’s and early 30’s so you may reach financial independence in your late 30’s or early 40’s.

Building up to the FIRE needs to start as early as possible, saving 50 to 70 per cent of your income. The amount you’re saving needs to be invested to accelerate the process of building a solid asset base that will enable you to generate passive income to sustain your lifestyle.

If you don’t wish to work for money (you don’t want to exchange your time for money), you need to be in a place where your money is working for you. It would help if you have assets in stocks, bonds, real estate, or any other investment that brings in enough returns (cash inflows) to sustain your lifestyle.

People who are working towards their FIRE are actively working on building an asset base. So in their 20’s and early 30’s, you see them allocating a significant percentage of their active income, which is the income they work for, towards investing to grow their investment portfolio enough to generate the amount of cash flows they need to live off.

How to calculate your FIRE amount 

How big of an investment portfolio do you need to retire and live off of the passive income generated from the portfolio? It all depends on the lifestyle you envision after retirement. Then multiply the amount you will need yearly by 25 to arrive at your FIRE number. For example, if I estimate that I will need JD2,000 per month after retirement, then my annual needs are (JD2,000X12=JD2,4000).

Now I multiply my annual needs by 25 to arrive at my FIRE number, which would be JD600,000.

So, I need to build an asset base of JD600,00 to reach my financial independence. Once your reach your FIRE number, move your FIRE amount into low-risk low-yield investments, say 5 per cent yield. Then draw down (reduce the amount of money by using it) 4 per cent a year, which would allow your FIRE number to keep growing. 

Reprinted with permission from Family Flavours magazine