FIRE: how hot is this financial trend and how does it work?

To earn a comfortable retirement savings pot as soon as possible and retire (much) earlier is the dream of more and more people. In that sense, real movements have started, the most well-known of which is probably FIRE, which stands for: Financial Independence, Retire Early. What should you definitely remember and how can Keytrade Bank help you to achieve these fiery financial ambitions?

What is FIRE?

The roots of the FIRE movement lie in the United States, but it has since easily reached the rest of the world. The idea is to become financially independent as soon as possible, so you can retire earlier and decide how you spend your time.

FIRE is about building as much wealth as possible. On the one hand, by making substantial savings in your daily life, and on the other, by generating as much extra income as possible from other income. This can be done actively, for example through a fun side job, but passively too. In the latter case, this could be rental income or return on investments.

Basically, the less of your monthly salary that goes towards your daily living expenses, the faster you’ll reach your end goal. Of course, how you get to what you consider enough depends on you.

How does FIRE work?

Financial independence, Retire Early requires a combination of three things: saving, investing and perseverance. You build wealth by reducing your expenses and investing your income.

How much can and do you want to save?

Saving is one of the cornerstones of FIRE. For many FIRE champions, trying to reach the highest possible monthly savings rate has become a sport. The standard bar is 50% of your monthly income.

For example, if you earn €2,500 net per month, then €1,250 goes straight into savings or investment. But 60% or even 70% is also possible.

Do this little thought exercise for yourself: how many ways can you think of to save €1,000 in one year? We’ll give you a little head-start with some ideas:

• Are you practically a daily customer at the local coffee shop? Just add up the cost of about 300 coffees a year.
• Do you go out to dinner twice every month? Then – drinks included – you’ll soon reach €1,200.
• Switching from premium brand to own brand: making savings on more expensive brands in the supermarket means the savings potential in your shopping trolley will be huge. Make it a challenge to make your supermarket visits as economical as possible. On an annual basis, doing so will easily put at least €1,000 extra in your pocket.

And this is just the beginning. Draw up a list of your monthly income and expenses. This will give you a clear view of what your biggest budget eaters are. For example, what are your monthly outgoings on:

• Fuel
• Energy
• Subscriptions (streaming services, internet, magazine, gym, etc.)
• Holiday budget
• Impulse purchases (clothing, interior accessories, etc.)
• And many more...

Increase your passive income

Passive income is non-work-related income. Examples include income from stocks, mutual funds, real estate, etc. Obviously, such income can be a huge catalyst for your FIRE plans.

An important factor in many such investments is the interest-on-interest or return-on-return effect. If you decide not to cash in on these (i.e. withdrawing dividends), you will also earn interest or a return on the past interest/return. And then do that year after year, so your total pot grows exponentially.

Keep going (as long as possible)

Perseverance is crucial to increasing your chances of FIRE success. As with all sustainable habits, it’s important to find a way to keep your efforts up for as long as possible. We don't recommend a financial crash diet. Here are some tips to achieve your goals in a realistic way:

• The earlier, the better: the longer you play out the interest-on-interest effect, the higher your returns. So time is your greatest ally.
• Keep it liveable: identify for yourself what’s important for your quality of life and therefore what you can’t live without, and eliminate the “nice-to-haves”. Today, there are even different forms of FIRE, depending on their impact on everyday life, such as Lean FIRE, Fat FIRE, Barista FIRE, Coast FIRE, etc.
• Inform yourself about the potential risks: whatever form of investment you choose, make sure you’re fully aware of the potential risks before you start. It’s better to take the time to make the right choice than to rush in. Consistency is key!

Stopping work: how much do you need?

In the FIRE movement, 4 is the magic number. In principle, you should be able to withdraw 4% of your accumulated assets later each year without getting into any financial problems.

For example, if you expect to need €35,000 a year during your retirement to live your life as you wish, then according to this theory, a capital of €875,000 is your desired end goal. This includes housing costs, insurance, taxes, travel, weekly purchases, etc.

Bear in mind that life can suddenly become more expensive. On the one hand, take inflation into account, but also any changes in your personal life. For example, the cost of medical treatment, a possible move to a retirement home, etc. It is therefore a good idea to critically review your FIRE ambitions every 5 to 10 years.

FIRE and smart investing go hand in hand

As mentioned above, investing is one of the best ways to see your passive income grow year after year. At Keytrade Bank, we have several investment paths, where you can choose for yourself:

• How much return are you aiming for and how much risk are you willing to take to reach it?
• From guided investments in diversified funds and asset management to targeted investments in trackers, warrants and turbos, Keytrade Bank offers attractive investment options for both more cautious and more ambitious investors.

Our Keytrade Bank app also allows you to track your return quickly and easily. A step closer to a FIRE future every day? Take the first important step now!