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FIRE: Financial Independence/Retire Early

FIRE: Financial Independence/Retire Early

. 2 min read

There is something in society that we don't question. A behaviour that all the adults had when we were growing up, that we normalised so quickly that we didn't get to stop and think: "Why is everyone working?". So often people complain that they hate what they do, and yet there they are, doing it anyway.

When you think about it, it's quite bizarre.

You see, from a child's perspective, going to work is a choice, if you don't like it, stop; we don't understand that there is a mortgage to pay, and mouths to feed. If we asked our parents "why do you go to work?" food and shelter would surely be a fair reply. The problem is, the reasons don't end there, as one grows up we realise the list is a lot longer. Slowly it becomes evident, truly to them there is no choice. They are trapped, caged by their self-prescribed fiscal responsibilities.

However, when one reverses these choices (i.e. sell the car, down-size the house, and cancel the subscriptions) the chains confining us to a wage are a lot weaker and the notion of retiring early or achieving financial freedom becomes a lot more achievable.

Many people have written about this in excellent blogs such as earlyretirementextreme & mrmoneymustache. Since discovering this lifestyle, I have shared my spending habits and how my methods on reducing them in pursuit of early retirement/financial independence.

Related: Self-Critique of Four Years of Student Finance, New Zealand Study Abroad Expenses Log

In a nutshell: the less money you spend, the more of it you can save until the interest you receive is so much you can live off of it; that is the shockingly simple secret to early retirement.

The Maths


The best measure I have found for measuring ones progress to early retirement (and when explaining the mathematics of it) is through calculating your savings rate, the percentage of your income being saved.

Let me show you how simple the maths is.

When discussing early retirement, common personal financial metrics become a lot less critical; this is because, over the shorter time frame, the effect of your savings rate dominates things like compound interest. Hence, what it comes down to is a straightforward ratio:

spending rate/savings rate = years of work required for 1 year of freedom

If, like most of the UK, you save on average 8.52% of your after-tax income we can use the above ratio to calculate that the average household would have to work for over ten years in order to take just one year out of work! (Though, over this time scale, pensions and interest rates gain significance.)
On the other hand, if someone were to save 80% of their income, in just one year of work they have saved enough to retire (or, for example, deal with health problems, or start a business) for four years! There is a hidden effect happening here that emphasises the value of increasing your savings rate; the lower the amount you spend, the less money you need to save!

Related: Early Retirement: Why You should Focus on Expenses

I haven't even started on the best part. Have you noticed how none of this requires a specific income? It's all relative! People assume you have to be millionaires earning six figures to make this work. Well, as I've just shown you, saving money is much more effective than earning more money.