FIRE UK: 5 Golden Rules to Achieve Financial Independence

Do you want to escape the daily work grind? Spend your time how you choose? 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 to have you achieving Financial Independence and Retiring Early.

The movement started in the United States in 1990s, 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 and 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; they instead 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 getting a savings education and having a solid 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. Being frugal and living a simple life without unnecessary expenses is the key to FIRE. This involves a radical change in lifestyle and completely rethinking your budget and spending. Goodbye Netflix subscriptions, dining out, holidays, entertainment, etc.

#2 - Earn more

The other lever to being able to maximise your savings is naturally to increase your income. Being FIRE requires a substantial income. Clearly, if you want to be FIRE by 30, it become much more difficult if you're earning less than £50,000 a year, 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, do your research and diversify your investments. Your aim is to 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 the Trinity Study, a university study published in 1998 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 to withdraw the same amount.

#5 - Plan for Retirement

This step is crucial. Based on your profile (Lean, Fat, Coast, Barista FIRE?), and your income, this step will determine your FIRE number, and thus the extent of your savings effort. Concretely, this means calculating how much money you'll need to enjoy your early retirement without any financial stress, and the timeframe this will be achievable in. You will need to calculate how much to invest each month to reach your objective.

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

Also worth reading: Top 5 Mistakes to Avoid for Financial Independence

The Different FIRE Profiles

FIRE is not a one-size-fits-all approach; there are various different approaches to tailor for all. Here are the 4 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 of this approach, followers will achieve their FIRE goal much faster than other people following other approaches. However, it’s also the “leanest” approach and is certainly not for everyone.

Fat FIRE

People following this approach are aiming for a luxurious lifestyle, consisting of lavish holidays, fine dining and numerous material pleasures. It's the opposite of the Lean approach above. It’s suited to individuals earning very high incomes who are willing to save and invest aggressively so they can 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 to work less. Followers of this approach do not necessarily aim to retire early, but to accumulate wealth quickly to eliminate any financial worries when they do retire. Coast FIRE focuses on saving and investing so as to be free from future financial concerns.

Barista FIRE

This is also a hybrid FIRE approach which uses 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 when choosing their later career path.