FIRE UK: 5 Golden Rules to Achieve Financial Independence

Do you want to escape the daily work routine? Enjoy your time as you wish? Retire early thanks to passive income? Then the FIRE movement might be for you. “Financial Independence, Retire Early” is the core goal of the FIRE movement, aiming at achieving Financial Independence and Retiring Early.

The movement started in the 1990s in the United States, with the main objective of quickly breaking free from a work environment considered unfulfilling. The FIRE method encourages saving as much of your income as possible, adopting a frugal lifestyle in order to eventually live off your investments – in other words, generating passive income that covers all your needs. Followers of the FIRE movement do not advocate idleness, but rather aim to become masters of their own time, dedicating it to activities they find more fulfilling than salaried work. In the UK, followers of this movement are sometimes called “frugalists”, as they aim to live frugally and save as much as possible in order to retire from the workforce by their 30s or 40s.

The Golden Rules to Achieve Financial Independence

The FIRE method is fundamentally about savings education and an investment strategy. It involves earning more, spending less, and wisely investing the difference. Three key pillars form the method: austerity, savings, and investment.

#1 - Save as much as possible by cutting unnecessary expenses

The golden rule driving the entire FIRE project is to save as much as possible. This means saving at least 30% of your income, or ideally more – 50% or more is the target. The path to frugality, a simple life without unnecessary expenses, is the key. This involves a radical change in lifestyle and completely rethinking your budget and spending. Goodbye Netflix subscriptions, dining out, holidays, and entertainment.

#2 - Earn more

The other lever to maximising your savings ratio is naturally to increase your income. Being FIRE requires a substantial income. Clearly, if you're earning less than £50,000 a year and want to be FIRE by 30, it becomes much more difficult, if not impossible. You have to be realistic. In this situation, you either find a higher-paying job or extend your working period before achieving FIRE.

#3 - Invest your savings and multiply passive income

Your investment strategy is key to your FIRE success. The goal is to target investments that generate a return of at least 4%, enabling you to live off the annual interest without depleting your capital. Savings can be invested in a 100% equity allocation of ETFs to achieve the highest returns possible (around 7% per year, or 5% after inflation). Be mindful to invest in tax-efficient accounts, such as ISAs or a SIPP (Self-Invested Personal Pension). Another option is investing in rental property.

In any case, educate yourself, diversify your investments, and ensure that the passive income you generate will, in time, cover your living expenses.

#4 - The 4% Rule

This rule, also known as the safe withdrawal rate (SWR), is a key concept in the FIRE movement. It means that if you have 25 years of annual expenses saved and you withdraw 4% per year, you will never run out of money. This rule is based on a university study published in 1998, the Trinity Study, which analysed financial market returns (75% equities, 25% bonds) between 1925 and 1995.

However, some consider this rule too optimistic and recommend a withdrawal rate of 2.5%, meaning you would need to accumulate 40 times your annual expenses.

#5 - Plan for Retirement

This step is crucial because it determines, based on your profile (Lean, Fat, Coast, Barista FIRE?), and your income, your FIRE number, and thus the extent of your savings effort. Concretely, this means calculating how much money will be needed to live your early retirement without financial stress and when this goal will be achievable. You will need to calculate how much to invest each month to reach your objective.

Applying the FIRE method requires great discipline and long-term planning.

The Different FIRE Profiles

FIRE is not a one-size-fits-all approach, the movement includes different approaches, here are the main ones.

Lean FIRE

This is the strictly minimalist and frugal approach. It suits those willing to live simply by spending much less than the average person, both before and after leaving the workforce. Given the high savings rate this approach allows, followers will achieve their FIRE goal much faster than other approaches. However, it’s also the “leanest” approach and is not for everyone.

Fat FIRE

This approach aims for a luxurious lifestyle, consisting of lavish holidays, fine dining, and many material pleasures. It is the opposite of the Lean approach. It’s suited to individuals with very high incomes who are willing to save and invest aggressively in order to enjoy a very generous retirement. As such, it is the most difficult FIRE approach to achieve.

Coast FIRE

This is a hybrid approach that involves no longer needing to save for retirement, and having the freedom to either continue working and enjoy your full income, or work less. Followers of this approach do not necessarily aim to retire early, but to accumulate wealth quickly to eliminate any financial worries upon retirement. Coast FIRE focuses on saving and investing in order to free oneself from future financial concerns.

Barista FIRE

This hybrid approach applies the FIRE method of saving and investing, not to retire early but to work less later, with a part-time job or a more fulfilling one – like being a barista, for example. The Barista FIRE approach seeks to free individuals from financial constraints in choosing their later career path.