The FIRE movement and how it relates to financial planning

There is a small but growing lifestyle movement that takes the delayed gratification approach and applies it,  strictly to life. The FIRE movement is all about making sacrifices now to have the life you want later. It stands for “financial independence, retire early”. It challenges the traditional path of working until your late 60’s before retiring. The steps FIRE members take can be extreme, however it shares some core principles with good financial planning.

The core of the FIRE movement principle involves extreme saving and investing to create a passive income that aims to allow members to retire far earlier than a typical person would. Over the years, several different variations of FIRE have emerged but the goal for all of them is to provide financial freedom which means members can live the lifestyle they want.

Here are five ways FIRE is similar to sound financial planning principles for expats in Europe.

1. It encourages you to review your spending now

As part of the financial planning process, we work with clients to look at their expenses as they are now and as they project them to be in the coming years. This can help you understand where your money is going and what steps you can take to reach your goals. This may include paying into your pension, adding to your savings, or creating an investment portfolio. This is an especially useful exercise when inflation is rising.

FIRE is an extreme example of this. Members are encouraged to evaluate every expense and purchase they make in terms of the number of hours they’ve worked for it. A common goal of the FIRE movement is to save 70% of their income. This will typically mean adjusting your lifestyle significantly now to secure the future you want.

While both financial planning and FIRE assess what you’re spending now and the effect it will have on your future, financial planning has a greater focus on balance. That means finding a way you can reach short-term goals and live comfortably now, while still building long-term financial independence. We always focus on the client’s goals and what is most important to them. Particularly if you are an expat in Europe, you may want to make sure you get to enjoy the time you are here. It is important to find your own comfortable balance and not being a martyr today for tomorrow…unless that is what you want.

2. It puts long-term goals at the centre of your finances

The FIRE movement is all about thinking long term and setting out your goals is part of financial planning too.

In the case of FIRE, the end goal is typically to retire as early as possible while still ensuring you have enough savings to last the rest of your life. For some members, this means they have a goal of retiring in their 30s or 40s and their financial decisions keep this in mind.

When financial planning, thinking long term is an essential part of the process. Your long-term goals may include retiring early, but other things may be important to you too. This could be supporting loved ones financially, travelling the world, or moving into your dream home. Financial planning helps you put these goals at the centre of your financial decisions.

The financial planning process is central to this. We advocate that you need to take an objectives-based approach, projecting what the target is and reverse engineering what you need to do now, to get to where you want to be.

3. It considers retirement early

When should you start thinking about retirement? When you are globally mobile living away from your home country, you may not automatically be adding to a pension, or may have pension gaps in the past. This can impact your goals.

Whether you are looking at the formal pension systems where you live, where you are from, and where you want to retire, or at a personal financial plan that goes beyond the restrictions of these systems, the sooner you engage with a retirement plan, the more likely you are to secure the retirement lifestyle that you want.

You may want to retire earlier than the official retirement age, and even if you don’t, it is prudent to make a provision should you be forced to stop work early. Building this into a plan gives you security.

One of the positive things about FIRE is that it encourages people to start thinking earlier about what they want their retirement to look like.

4. It can provide members with more freedom

Financial independence can give you the freedom to focus on what you want. Building an asset to a point where you can generate a passive income can mean you’re able to decide whether and how much you work and to spend more time on what’s important to you.

FIRE encourages financial independence through an aggressive saving and investment programme. Members will often have a significant target in mind when building up wealth, such as €5 million or 25 years of income, and will then manage these assets to take a small income that is intended to last throughout their lifetime. It is at this time that FIRE members often take financial planning advice to ensure the asset is managed in a manner that the income will be sustainable and able to keep pace with inflation.

Financial planning can also help you secure greater financial independence. A financial plan helps you reach the goals you’ve set out, but it also considers your financial resilience. This can help protect you from financial shocks and provide you with greater freedom.

By working with a professional, you can have confidence in the steps you’re taking and have someone to talk to if you want to change your lifestyle.

5. It looks at ways to make your money work harder

With such large goals, the FIRE movement has a strong focus on making your money work as hard as possible to build up wealth and then deliver a passive income. This may mean actively reviewing savings accounts to find those with the highest interest rate and will often mean investing aggressively.

Both of these things can help your wealth grow, but it’s important to review the level of risk that is right for you when investing. Financial planning can help you balance risk with potential rewards – all with your goals in mind. One of our approaches is take the level of market risk that is appropriate for you and that is required for you to achieve your goals, and no more. This means avoiding unnecessary market risk, and stress.

While investments with potentially high rewards can be enticing, they will typically come with higher levels of risk and shorter term losses that may not be appropriate. We can help you build an investment portfolio that reflects your risk profile.

Financial planning can help you achieve financial independence and retire sooner if that’s one of your goals while striking a balance to deliver an income that means you can enjoy your life now. If you’d like to talk to us, please get in touch.