Imagine a world where you no longer have to work for money, and instead can focus on pursuing your passions, volunteer work, or travel!

Once upon a time it seemed like the only option for retirement was to work 40 hours each week for 40+ years (or win the lottery). But in the past few decades young people have been realizing that if they can stash away large chunks of their income early in life, while living frugally, that they can break the mold and experience financial freedom at a much younger age.

F.I.R.E. is an acronym for Financial Independence, Retire Early. It’s a fast growing movement where folks are seeking to live and work on their terms.

If you’re a personal finance nerd, chances are you’ve heard of the FIRE community already. Achieving financial freedom early in life can be a great way to enjoy the benefits of retirement, while also having the gusto to pursue youthful hobbies in life. If that sounds intriguing to you, read on! We’ll cover all the different types of financial independence and how you can choose your own FIRE adventure! 

What is FIRE?

As stated before, FIRE stands for Financial Independence, Retire Early.

To become financially independent, your investments need to be large enough to fund your living costs for the rest of your life. This then means that work becomes optional, and you can retire early if you like.

Many who pursue FIRE shoot to save and invest around 50% of their income every year. They do so by finding ways to live well below their means. For some, they achieve this by working extra hours and increasing their income. For others it means getting creative and finding ways to cut back on expenses. And many FIRE adherents take the both/and approach, increasing their income and trimming their expenses in order to create a massive amount of excess cash which can be invested each and every month.

There is no one correct way to do FIRE. Over the past few decades the movement has grown and evolved (and is still changing). These days, there are many different types of financial independence.

The History of FIRE:

The main principles of FIRE have been around for much longer than the acronym! Back in 1992, Vicki Robin and her co-author Joe Dominguez helped to popularize the idea of financial independence with their book, “Your Money Or Your Life.”  The book discusses how you can align your money spending habits with your values so that you can retire early and reclaim your time. 

Since then, other writers like Mr. Money Mustache and the Mad Fientist have further helped to spread the word and guide people towards financial independence. And following their lead, hundreds (maybe even thousands?) of new age FIRE bloggers and enthusiasts have started preaching the good word.

Financial independence truly is possible for people from all walks of life. You can achieve FIRE with a family, and even with a low-ish salary. It’s all about making sure that you’re socking away a good portion of whatever you make and living below your means. 

The Different Types of Financial Independence:

FIRE can look different for everyone, and there’s no one “right” way to do it. Here are a few different types of financial independence you can consider pursuing.

Traditional FIRE

Traditional FIRE is when you save and invest enough money to fully cover your current living expenses – for the rest of your life. Basically, with this strategy you want work to be optional forever, relieving yourself of any stress to earn new money.

Those pursuing Traditional FIRE typically choose to utilize the 4% rule. This means they can withdraw 4% of their investments each year and theoretically never run out of money. Although work becomes optional, many people in the community opt to work on passion projects, return to work part time, or spend their time volunteering.

traditional financial independence

When traditional FIRE is achieved, there’s little wiggle room for “splurging”. If you start spending too much in retirement you may eventually deplete your nest egg and need to return to work! Traditional FIRE is pretty much the middle of the road. You save just enough to enjoy some pleasures in retirement, without going overboard. 

Lean FIRE

This type of FIRE has a major focus on frugality. Lean FIRE is when your investment portfolio can fund all of your basic needs in life, but not much else.  It’s for the folks that can’t wait to quit their jobs and don’t mind living on less for the rest of their years.

If you’re pursuing Lean FIRE, your goal is to focus on decreasing your living expenses as much as possible. Then, you save and invest enough to cover your basic needs like food, housing and transportation. Some people even make the decision to move to a lower cost of living area to make their money stretch even further. 

Lean FIRE financial independence

While this might be one of the quickest forms of FIRE to achieve, it comes with a number of sacrifices you have to be prepared to make. Committing to Lean FIRE means decades of self restraint. It means committing to a spartan existence in perpetuity. But it could make sense for some people who don’t particularly value material goods or a lavish lifestyle.

Coast FIRE

This next type of FIRE can be ideal for the younger folks in the movement. Coast FIRE is when you sock away enough in your early working years that later on, you don’t need to prioritize saving and investing. Basically, you front load your efforts so that you can essentially “coast” off of that hard work for the rest of your life. 

For example, if you invest around $250,000 by the age of 35, your portfolio could be worth over nearly 2 million dollars by the time you reach retirement age without contributing another penny! The trick is not touching any of your investments – which means work is still necessary.

While this method of FIRE doesn’t necessarily tick the “retire early” checkbox, it can bring a ton of extra options and additional time freedom to your life. Without needing to save extra money for retirement, you could be free to switch jobs to something more fulfilling with a lower salary, spend more on the things you love now, or even work part-time instead of full time.

Coast FIRE

Coast FIRE is great because it can allow you to totally change the way you feel about working. Instead of needing to work a high stress job to make sure you’re secure later on, you can pursue work that brings you joy instead.

Barista FIRE

Next up is Barista FIRE, which is when you aim to save up enough money to retire from full-time work, but still plan to work part-time to secure benefits. That’s where it gets the name “Barista FIRE.” Coffee companies like Starbucks and Caribou Coffee have been known to extend healthcare benefits to their part-time employees working over a certain number of hours each week (typically 20 hours).

However, if coffee isn’t your thing, there are plenty of other companies who offer benefits to part-time employees!

Barista FIRE financial independence retire early

Barista FIRE is great for those who are unable to save over 50% of their income, but want the flexibility of being able to work less as they get older. Achieving Barista FIRE means more time freedom, and being less dependent on work overall. 

Fat FIRE

Fat FIRE is essentially the other end of the spectrum from Lean FIRE. This is for those who want to retire early and increase their lifestyle dramatically. It’s for people who want to live in abundance! They want to have their cake and eat it too.

To achieve Fat FIRE, you’ll have to save up a pretty large nest egg. You’ll want this investment portfolio to produce a hefty annual stipend, enough for you to live off – and more.

Fat FIRE

Many people who are pursuing Fat FIRE will need to work a few extra years to enjoy their desired lifestyle once they’ve retired. Others will focus on saving am even more massive percentage of their income. Either way, this is a great path for you if you want maximum comfort in retirement. 

How To Achieve FIRE: 

So now that you’ve reviewed the different types of financial independence, you might be wondering, how do I actually achieve FIRE?

Pursuing FIRE takes years of dedication and discipline, but it can be a totally worthwhile pursuit. Here are a few tips for pursuing financial independence. 

1. Increase Your Savings Rate: 

Your savings rate will likely determine how quickly you’ll be able to reach financial independence. As a general rule of thumb, we suggest people save and invest at least 15% of their income.

However, every additional percent you are able to save and invest beyond that will directly correlate to less time you’ll have to work before you’re able to retire. 

The math behind it is actually pretty simple. Mr. Money Mustache has a chart on his website that can help you see how soon you’ll be able to retire based on your current savings rate. 

2. Increase Your Income:

One way to increase your savings rate is by earning some extra cash! By upping your income and avoiding lifestyle creep you’ll be able to increase your savings rate. 

There are a few ways to go about this. You could consider asking your boss for a raise, switch jobs for higher pay, or start a side hustle. Whatever you decide to do, maximizing your income can help you to achieve FIRE more quickly. 

Just make sure that you aren’t neglecting other important areas of life for a higher paycheck. It’s easy to get carried away in pursuit of FIRE and neglect important things like your health or  relationships. At the end of the day, you’ll likely spend a good chunk of your life pursuing FIRE, and you want to be able to look back on those years fondly. 

3. Decrease Living Expenses: 

Lowering your living expenses has a double impact. Because you’re both saving more money in the here and now, and you’ll require less money overall to achieve FIRE. This means that your money will go farther in retirement.

Focusing on the big ticket items within your budget (like housing and transportation) will have the biggest impact on how much you’re able to save. Consider slashing your housing costs by doing a live-in flip, house hacking, or renting a cheaper place. 

Cutting back on transportation looks like having fewer or cheaper cars, and walking or biking more if possible. If you’re considering going car-less, be sure to check out our post on “The Pros and Cons of Living Car Free.” 

Related Post- 27 Ways to Save Money- in ALL Areas of Life!

4. Invest Early & Often: 

Just stuffing your savings under your mattress or burying gold bricks in the backyard won’t cut it when it comes to pursuing early retirement. That’s because this strategy depends on using the magic of compound interest to grow your nest egg. 

If you’re pursuing FIRE, you’re going to want to invest like crazy in low-cost, widely diversified index funds. The best way to do this is within your tax advantaged retirement account like your IRA or 401k. This will allow you to lower your taxes each year while building up that nest egg. 

5. Plan for Early Withdrawals: 

Now you may know that for tax advantaged retirement accounts you typically need to be 59 1/2 before you can withdraw your funds without penalty. Luckily, there are a few ways around these rules…. 

Utilizing strategies like the Roth Conversion Ladder or the SEP 72(t) will yield you the best results in withdrawing your funds at an earlier age. You’ll be able to have access to your funds and still cash in on that tax advantage. 

How to achieve FIRE

The Bottom Line: 

The FIRE community is great because it presents an alternative to the traditional relationship we have with work. And there are so many different types of financial independence, people can build whatever journey suits their lifestyle best.

However, pursuing FIRE does come with sacrifices in the here and now.

If you’re interested in achieving FIRE, make sure to remember to still make room to prioritize enjoying yourself today. It can be a tricky balance to strike. But the truth is that life is short and you’ll never get back the years spent socking away those funds!

If you’re looking for more information about financial independence, be sure to check out these related posts and podcasts…

**Feature pic by Ray Hennessy on Unsplash

Beer tasting notes…

While talking about the different types of financial independence we enjoyed a Smells Like Bean Spirit Double Maple by Mikerphone Brewing! And please help us to spread the word by letting friends and family know about How to Money! Hit the share button, subscribe if you’re not already a regular listener. And give us a quick review in Apple Podcasts or wherever you get your podcasts. Help us to change the conversation around personal finance and get more people doing smart things with their money!

Best friends out!

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2 comments on “What is F.I.R.E., the Different Types, and How to Achieve It

  1. When it is recommended to save 50% of your income, what is the mix in terms of cash, investments, savings, and retirement accounts that is recommended? I know that when you max out 401K and IRA, you don’t get to 50% so I was wondering where to stash the rest of the savings. Thanks! Nick

    • Hey Nick. That’s a tough question to answer without knowing more about your specific situation. Saving 50% of your income can be a great goal! But for some folks that would mean putting off too many life goals that require some of that money. If you are able to save 50% of your pay while still enjoying your life then it’s worth striving for. You never know what other goals will pop up along the way – like taking big chunks of time off to spend with family or starting your own business. Definitely make sure you keep enough cash on hand and work towards maxing your retirement accounts first. After that opening up a brokerage account (or getting into real estate investing) are the next best places to funnel your additional investment dollars.