Is FIRE Impractical For Ordinary Folks?

Last week, I had a blog ping-pong with Hank Coleman from Q&A Money where we debated about the merits of FIRE (Financial Independence Retire Early). A tangential conversation followed with Douglas Bonebarth of Bone Fide Wealth on Twitter where we briefly touched on whether FIRE is really practical for ordinary people (see below).

So the question is: Is FIRE practical for ordinary folks?

This got me thinking and I want to explore this topic further. To answer this, I need to first define FIRE.

The mathematical premise of FIRE

Mr. Money Moustache (MMM) publishes a post back in 2012 outlining the simple mathematics behind FIRE. Go and read it if you want to know more.

At a high level, there are 2 themes.

  1. FIRE happens when your passive income exceeds expenses.
  2. Passive income is generated by investing residual income wisely (residual income is your total income minus total expenses)

Quantitatively he outlined the 4% Rule, which states that as a rule of thumb, you can withdrawal up to 4% of your investment portfolio value every year. By following this rule, the long-term average return of the portfolio should equal or exceed the 4%, giving you an income perpetually (aka forever).

The merits of the 4% Rule is outside the scope of this discussion but let’s assume it’s accurate for the time being.

Combining the above together, it means that as long as the cash generated from your 4% withdrawal covers your annual expense then you can achieve FIRE.

Put it another way, for every $100 saved and invested, you’ll have $4 less expense to worry about, forever.

Implementing the FIRE mathematics

Based on the maths above, the key to achieving FIRE is to increase your residual income. This can be done in 2 ways:

  1. Increasing your revenue (total income)
    and/or
  2. Decreasing your expenses (total expenditure)

Residual income can then be saved, accumulated and invested, leading to the generation of passive income. If your expense is well-controlled then one day, your passive income will exceed that and you are in turn FIREd.

This is where some of the perceived impracticality comes in. People have great trouble reducing their expenses for a variety of reasons (e.g. high cost of living, high essentially maintenance requirements, large family etc). Equally many people find increasing take-home total income incredibly difficult. They are all very valid reasons for finding FIRE impractical. However, I would implore you not to make them the excuses for not gunning for FIRE. I’d like to inject some new thinking into the debate.

A new way of thinking

Have you ever wondered why there are so few Steve Jobs in this world?

Have you ever tried to understand why the top 0.1% is where they are?

The truth is that achieving FIRE, especially early in your life (e.g. in your 30s) is a fundamentally radical approach.

Radicalism comes with extremes. It means that you have to go to extraordinary length in order to achieve your goal. This by definition will place you at the tail end of the spectrum, leaving you feeling quite lonely.

What does that mean in reality?

It means you need to make some tough decisions. We face decisions constantly as free men and women. It is our responsibility to make them optimally.

Given that residual income is critical towards passive income and FIRE, it is no surprise that many in the community have extremely high saving rates (north of 50%). The common criticisms I get after divulging this number are:

  • They must be earning very high incomes.
  • Cutting expenses to the barebone is simply unrealistic for me.

In fact, these are the wrong questions to ask if you are serious about FIRE. I was faced with the same skepticism 3 years ago when I first discovered this community and I asked myself: how could I increase my income and reduce my expenses?

The FIRE journey really is a constant test of your problem-solving skills and willpower. You will need a growth mindset in order for it to work. Rather than thinking stagnantly and shifting the responsibility onto another party, FIRE is the opposite as it focuses on you and your sh*t alone.

How badly do you want to FIRE?

So the question people should be asking about FIRE isn’t whether it’s practical or not, but instead, what are you willing to do in order to achieve FIRE?

Let’s assume that you earn a median wage of around $57,000, which translates to over $3,000 of net income per month. Let’s then assume that you save 50% of that, which means your annual expenditure will be $18,000 and you will save another $18,000. At that rate, it will take you 15 years at 7% annual growth rate to amass sufficient asset in order to generate $18,000 in perpetuity according to the 4% Rule. It will take you 15 years to FIRE.

15 years may seem like a long time now but if you started working at the age of 23 like me then you will hit that FIRE mark when you are 38, which is 29 years earlier than the official retirement age in the UK (67).

Now realistically inflation will eat into your purchasing power and you will probably need another 5 years to increase the nest egg. However, that still means you will retire more than 20 years earlier than the majority of your peers.

I showed the above logic to some of my colleagues and friends. Instantly I was met with a barrage of questions. The most common being:

  • How could I live on $18k per year?
  • How could I save 50% of my income?

I never said achieving FIRE was easy. In fact, it is one of the most radical life improvement you can embark on. It is such a rarity that by definition not many people have started let alone accomplished it.

However if you really want to FIRE then you will make the necessary sacrifices.

Here are some examples of actions you can to boost your residual income:

Here are some more extreme actions you could consider:

  • Relocate to a cheaper city/country
  • Delay having children or not having one at all
  • Severe relationship with your other half if s/he isn’t on board with your FIRE goals

I’m not saying that you should pursue any/all of these activities. These are simply actions you could take towards achieving FIRE.

For example, taking public transport in London as part of my commute would add an additional $150 per month (that’s $1,800 per year or $72 of perpetual passive income). Consequently, I choose to cycle or run instead. Not only does get me fit, it also resulted in an additional $50 per month saving in gym subscription. So I suddenly have an additional $2,400 to invest per year! This does mean that I have to cycle or run close to 100km per week on average, day after day, which isn’t an easy feat.

The real question, therefore, isn’t whether FIRE is practical or not but what you are willing to do (or not do) in order to attain the benefits of FIRE.

Wrap up

FIRE is an extremely rare and radical concept understood by few people and practiced by even fewer. It sometimes requires big alteration in lifestyle and life choices in order for it to be accomplished. Practicality comes into play to a much lesser degree than your willingness to embark on the journey.

The saying “if there’s a will, there’s a way” is never truer in the quest for FIRE.