What is FIRE?

What is FIRE?

Over recent years, there has been an explosion (excuse the pun) of internet bloggers retiring early and writing about the world of FIRE. It means Financial Independence Retire Early, or FI for short. The RE part is really optional. 

So, what is FI? My interpretation of Financial Independence is having enough money that you no longer need to work. When you are no longer dependent on work income to cover your basic expenses, you are financially independent.  If you are working it is because you want to, not because you have to. Your money is making you enough money to pay for your lifestyle. Sounds pretty nice right?



Level one – Lean FIRE. You have enough money just to cover your basics. Food, shelter and clothing. If you really wanted to retire on reaching this level you could, but it would not be enough for most. To calculate how much we need here then total our annual food, housing, insurance, clothing and any other ESSENTIAL expenses. Your calculation should not be based on our current expenses, but our expected expenses AFTER we reach FI. Multiply that number by 25 and this will give a good idea of how much we will need saved to cover the bare essentials for the rest of our life.

If we are close to receiving superannuation, then we can safely subtract that income from our expenses. For example, if our essential expenses are $35,000 per year, with a superannuation income of $19,000, for lean FIRE you would need $400,000: (35,000 – 19,000) x 25. If we are some distance from retirement, I don’t recommend including superannuation in our calculations due to an uncertain future. In this case we would need $875,000 (35,000 x 25). If we will have any AFTER FI income coming in we can also subtract that from our expenses. This may include rental income, work, annuities, and so on.

Although level one may not be enough for most of us to retire, it does give us a kick-ass amount of money to give us some peace of mind. At this level, we have enough to be able to make braver decisions that more closely align with our passions. Taking a pay cut to do something that brings us more joy, a mini retirement, or starting that business we always dreamed off.

Level two – FIRE. You have enough to cover your expenses for the rest of your life. A good rule of thumb is (our expected annual expenses – our expected annual income) x 25. This number is the same as how much we will need for retirement. This number is a good guide, but please do some more research or get some financial advice for your specific situation.

Level three – Fat FIRE.  You have more money than you need. I don’t recommend working at a job we hate longer than we need. Level two is enough for most. However, if we are earning income from something we enjoy, then level three is a possibility as we extend our working life. The extra money can be used to finance a business, donate, gift, or any other way that ties into our goals. This amount could be 30 x your annual expenses or more.

The growing FIRE community have proven that reaching FI is a real possibility. Some are even retiring in their 30’s and 40’s. Some of my favourites can be found here

The internet police will argue that they are not early retired because they are earning money from their blogs or doing other part time work. The key distinction though is they are doing work because they want to, not because they have to.



Freedom of choice. We may think we can make our own choices, but it is not until we become financially independent that we can truly be in control of our choices. When working a 40-hour week, our employers make the choice what we do with our time. When financially independent, we make our own choices.

By reaching financial independence we have built a large safety net below us. This safety net allows us to be bold with our actions. Don’t like your job anymore? Quit.  With the backing of a large safety net, you can drop the F bomb on your boss and still be OK.

We may like our job now but things can change. New policies, new bosses, new staff. So, even if we are completely happy in our job now, financial independence is still a very worthy goal to have. So that if our situation does change, we have the option to change direction and not have to worry about money. Now we can truly follow our passions.

Freedom to do what we want tends to bring new opportunities as well. By following our interests, we tend to find revenue generating opportunities in that field. Just because we reach FI, it doesn’t mean we won’t earn another cent again. It just means we are doing what we want and if that brings in money then great. If not, that’s OK too.

Feel like playing golf? Play golf

Feel like sleeping? Have a nap

Feel like going fishing? Go for a fish

Feel like volunteering at the local sports club? Go ahead



Everyone places a different price on financial independence. The higher the price we place on freedom of choice, the more likely we are to make the necessary sacrifices.

The formula is not a difficult one to understand. The problem is it is difficult to follow. The process requires sustained effort, commitment and discipline over a long period of time. There is no get rich quick formula here i'm afraid. Nothing but a good plan and and a disciplined approach to finances.

The formula required to reach FI is to spend less than we earn and invest the difference wisely. I told you it was simple. The wider the gap between our income and expenses, the faster we will reach FI.

I will break down each part of the 3-part formula.


Part one: Spending

Step one: Write down very clear and precise goals of what you want to achieve and when. Read here for more information on the importance of goal setting for hitting our targets.

Step two: Create a budget. If you have read my article on budgeting you will know I changed the word budget to spending plan. Apparently, a lot of people view budgeting as an exercise that is very constricting and a bit suffocating. It is seen as a process of cutting fun things out of our lives. By changing the wording to spending plan we remove the negative connotations of setting our spending targets.  Instead we are focused on prioritising the things that are most important to us and removing the things that are not as important. We will know what to prioritise based on our goal setting in step one.

The three expenses that make the biggest impact on our pocket are housing, food and transportation. If we can make cuts in any of these areas we will see a much bigger impact than cutting smaller expenses. I also recommend at looking at your recurring monthly expenses such as electricity, insurance and internet. Reductions in recurring expenses have lifelong benefit. There is a lot of competition for our money – if we can get $20 cheaper a month with someone else we shouldn't hesitate to move our money elsewhere.

Step threeAutomate your spending plan. Try to have as many of your expenses automatically paid from your bank account as possible. Rent, electricity, savings, credit cards, investments, insurance and internet can all be paid monthly without us even touching the money. Even better, have a separate bank account set up that a portion of your income goes in to. Just enough to cover these automatic expenses. If we never see the money we won’t miss it. If we don’t miss it, we won’t touch it.

Step four: It is very hard to keep spending down when we are in debt. Not all debt is created equal though. Housing debt is generally OK as it is an appreciating asset. I am referring to bad debt such as car and credit card loans. Note: Student loan debt does not necessarily need to be paid off urgently due to its low interest rate.  Debt payments can be made using the debt snowball or debt avalanche method explained here.

Step five: Once out of debt, I recommend building up some emergency savings. The benefits of which are explained here. Once we have no debt payments it is amazing how much more quickly we can save.

Step six: Invest wisely. I will explain more on that shortly.

Step seven: The hardest step of all – stick to the plan. We are humans and we are emotional. We make bad decisions. We splurge. We stray from the plan. All that is ok occasionally. If we go off course it doesn’t mean our plan is doomed. This is where so many throw in the towel. We all go off course at times, but only the most successful get back on track.

Part two: Income

How much we earn. Unlike spending cuts, there is no cap on earning more. There are only so many ways we can cut spending before it becomes painful and uncomfortable. And that is not the point of cutting spending. With earning however, we can always earn more. It may require a lot of extra hours at the office, extra reading at the library, extra study at university, starting a side business and so on.  

Earning more income is more difficult than cutting expenses, but the results can be much greater.  This is not an either/or scenario either. We should be focused on BOTH increasing our income and looking at ways we can decrease our expenses whilst maintaining our level of happiness.

Part three: Invest wisely

The more we can widen the gap between income and expenses, the more we can save and invest. To reach stage two (FIRE) of financial independence we need to save at the rates in the excel attachment below:


* Just enter your own data in the purple cells and check out the results on the grid. Flick me an email if you need any help understanding the chart. 

My personal philosophy, I don’t recommend chasing 10% returns after inflation. It is a risky strategy. 10% can be achieved for a short period, but to consistently achieve this level of returns will be very difficult and by taking on extra risk we are opening ourselves up to large losses. I think 6% is a nice, conservative return to aim for. If we save 10% of our income, it would take us 46 years to reach FI. That is longer than many of our working careers. Ramp up your savings to 30% of income (spending 70%), then you have almost halved the time to reach FI – 26 years.

How badly we want to achieve FI should determine how much our target savings rate will be.

Step one: Choose your investments. This entirely depends on your goals, your risk profile and the length of time you plan to be invested. Not many people (even the experts) are able to consistently beat the return of the market through individual stock picking. If we can’t beat the market why not bet ON the market? The least risky, most cost effective, and generally most profitable strategy is to invest in index funds that track the market index.

Saving just 1% in investment costs can save us hundreds of thousands of dollars over 30-year periods.  Low cost index funds can provide these returns AND keep the extra money from cost savings in your pocket. Fund managers will try and convince us they can beat the market by showing us their performance from the last 3 years or so. That’s all well and good, but why don’t we see 20 or 30-year returns? Because last year’s hot picker is now this year’s bottom dweller. When they pick bad stocks that fall off the sharemarket, the returns from that stock get removed from that fund managers portfolio like it never existed. They get to claim all their wins while ignoring the failures.

The longer we plan to stay invested, the more I recommend stocks or property funds. I am 37 years old and am 80% in stocks and that sits with me fine, because I am in this for the long haul. I don’t plan to access the money for at least another 15 years. If I were only investing for 5 years, I would probably not be in stocks at all, or maybe only 10%. The decision is a very individual one to what sits most comfortably with you.

I have a beginners series on investing coming soon where you can find much more information.

Step two: Automate your investing. Based on your goals, your spending plan, and your income, decide on an amount that you can afford to invest.  With that amount, much like your spending plan, it is best to set the transfer of your money to your investment as an automatic transfer. Again, this is so we aren’t tempted to touch the money. Much like Kiwisaver, we will grow not to miss the money at all.

Step three: Just like step 7 of the spending plan – stick with it. Again, this is the hardest part. By automating our investing (step 2), we will make it easier. Try to focus on your goals and why you are doing this. I also recommend not checking the balance of your investment portfolio too often. There will be some wild ups and downs. That is natural. But if we are looking at the amounts decreasing every day we will be tempted to sell at a low price. The best way to wealth is buy and hold for the long term. If we try and outguess the market we will lose more often than not.

Many people in the know predicted a collapse after the Brexit decision out of the UK. This collapse never eventuated, but many people sold in anticipation of a collapse. Since then the NZ market has gone on to record highs.



Financial independence brings us options, flexibility and control. Pursuing financial independence is not a get rich quick scheme. It doesn’t require winning lotto or a huge inheritance. It requires commitment, consistency and focus. Spending less and earning more are complementary strategies that will speed up the process. The larger the gap between spending and earning, the quicker you can reach FI. How quickly you want to get there depends on you. 

Most of us know we need to save money. This is nothing new. But by thinking about our FI number it brings us clarity. Clarity of exactly how much we need and how long it will take. We can’t get there investing our money in low interest savings accounts. We need to remove the barriers we have to investing. It is not too risky. It is not too hard. Returns matter immensely and savings and bonds won’t provide good returns on their own. 

The safety net offered by reaching FI is extremely freeing. To freedom to do what we want, when we want is a great motivator and will make it well worthwhile. The key is to have a passion that you can replace your pursuit to FI for. So many people get lost in the quest for FI that once they finally reach FI they don’t know what to do. They feel a bit empty. Along the way, they lose their passions because they are so focused on this one goal. Don’t get so lost in the quest that you lose your passion for other things in life. The whole point of FI should be to allow you to do the things that you love the most.



The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here


Do you have any comments? What are your thoughts on financial independence? Do you think it is a worthy goal?