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Chapter 1: What does FIRE stand for and what is its significance?
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Welcome to the Australian Finance Podcast, a podcast for people who want to learn more about their personal finances and get the most from their money. This series is hosted by Kate Campbell from HowToMoney and Owen Rascovitch from Rask Finance.
The Australian Finance Podcast is provided for educational purposes only. The information is general in nature and does not take into account your needs, goals or objectives. What that means is the information does not apply to you specifically. So consider getting the advice of a licensed and trusted professional before acting on the information.
Kate, welcome to this episode of the Australian Finance Podcast. Hi, Owen. Today we are talking about... FIRE, so the Financially Independent Retire Early Movement. Movement. Okay, so we've got FIRE, we've got movement. What is it, Kate?
So it's pretty much blown up in the last few years, but it's the concept of becoming financially independent so that you can choose to retire early, and early in Australia means pretty much earlier than 67 or so, if you want to. And so it's about building wealth outside of superannuation. So you can quit your job if you so choose and do whatever the hell you want. Cool. I like it. Hellfire.
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Chapter 2: How has the FIRE movement gained popularity in recent years?
So we've got FIRE, stands for Financially Independent Retire Early. We have another one, FIOR. Is that how you say it? Yeah. So another one I saw because FIRE does get a bit of a rap because people are like, oh, well, I don't want to retire early. Yeah. I think it's, so FIRE, FIOR, Financial Independence Optional Retirement.
But I mean, the concept of financial independence, you've got the option to retire early if you so choose. Yeah. So back before the FIRE movement, back in my day, all of three years ago, before this was an actual thing that people wrote in their blogs, it was just called financial independence. Yeah.
People were just going around, setting goals, becoming financially independent and not really talking about it. Yeah, that's it. But now they do. And that's a wonderful thing. I mean, there are worse things in the world to blog and to write about. So this is a good thing, I guess. Yeah. And I think it does.
It's a really interesting goal because having this one goal becomes a lot and a lot of mini goals because you start learning about your budget. You start learning about investing. You start learning how to control your spending a little bit and cut back in areas that aren't important to you. And you learn more. a lot about yourself and your attitude towards money. Yep.
You learn about your philosophy of life. So I feel like it's an umbrella goal because working towards achieving financial independence has like a hundred mini steps along the way. Yeah, it's not just this one big picture. It's one big thing that you need to achieve. It's all these little things, these little sacrifices that go into it.
But basically, to just bring it home for some listeners, FIRE, and you've written here, is all about increasing your savings rate, so the amount of money that you save from your after-tax income, so the amount of money that you take home, consuming less, pursuing happiness, and having the financial freedom and flexibility to choose if, how, and when you work. Sounds pretty good.
Yeah, I wrote that, but I think it sums up my thoughts on the matter. Yeah, fair enough.
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Chapter 3: What are the common misconceptions about the FIRE movement?
And you've also got another note here that says fire is not necessarily about frugality, so not about being a tight ass necessarily and not spending your money or being a miser is another way to put it more diplomatically. But it's not necessarily about being frugal and retiring to do nothing. There's so much that goes in between those two extremes, which we'll get to in just a moment.
And I think that's probably one of the biggest misconceptions that has made it a hot topic because you're just imagining people retiring at 40 and sitting at home and watching Netflix all day. Yeah. I've used that example. Using someone else's account. Yeah. The friend's Netflix.
But really most people that have the sort of aptitude and dedication to achieve financial independence earlier than traditional retirement age are not the kind of people that are going to sit and watch Netflix all day. No, they're not. And that's probably a fair, I guess, generalization.
The people that I know that pursue this type of thing are not necessarily the people that just sit at home all day. Most people think they're quick to palm it off as you have no pleasure in your life whatsoever just because you save a lot of money. That's definitely not the case. Definitely not the case, at least as far as my exposure to it has been. That's not what I found.
But anyway, so let's just, we've got some kind of action points here we want to cover off on because these are kind of like the big picture questions that people have about the fire movement. So Kate, I guess I'll throw it over to you first and I'll say, why has fire or just the idea of financial independence really taken off these past few years?
I think it's especially because people have started writing about it online. It's no longer this secret thing people do in the background. Some people are actually willing to share their stories either along the journey or actually have achieved fire.
And so newspaper outlets are picking up the stories because the headlines of I retired on a million dollars at 30 years old are pretty extreme and they get clicks. And often they only tell sort of part of the story because you see obviously newspapers are going to pick and tell which facts they choose.
So sometimes if you've just read one newspaper article about it in The Age or whatever it is in Australia, you might have not the full picture of what it could mean. And you might have sort of rubbed you the wrong way because it's just an example of someone who's cut every single thing off.
pleasurable from their life and they just saved money and not spent anything and you might think that's completely not for you but if you actually dive a bit deeper you can find there's so many people that are willing to talk about it online now whether podcasts in the US there's quite a few now
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Chapter 4: How can someone determine how much they need to reach FIRE?
it's really interesting the mix of different people online that you can get ideas from and for anything from increasing your income starting a side hustle reducing your expenses if someone's written about it mmm good point yeah interesting with the toilet paper example I like it I have read that one
Okay, so it's not necessarily this big movement about just cutting every cost out of your life and just saying, see you later, happiness. And the reason why it's getting such traction is because blogs and websites have made it very simple and cheap for people to come up and tell their story and how they've done it. And people are giving you the numbers online, their full financial picture.
Yeah, that's it. So in the past, you would have to pick up a book because someone would have had to have gone to a publisher to get that book published and then it'd be on the bookshelves. But now you can start a blog for like 10 bucks. And a lot of them are anonymous. So they're happy to share a lot more details that they wouldn't necessarily tell you in real life. That's it.
There's a couple that blog under the name Dividends Down Under, DDU. They pretty much share everything down to what air conditioner they bought, why they bought it. Those types of things. And those are really, I guess, neat ways to just understand your own budget and relate to that, even if you don't know their names, for example.
And someone's circumstances might be completely different to yours, but there's lots of interesting things you can pick up from reading different people's stories. And you might not know anyone in real life you could talk to about this, but going and finding these blogs online actually sort of opens up a different world to you. Yeah, that's it.
And it also takes away the legwork of you having to think about all the different things that you might have to think about, right? Is it worth having private health insurance? Has someone written about this that I can, you know, who's done the research and I can rely on that.
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Chapter 5: What steps can individuals take to start their FIRE journey?
It's all free, what have you. Okay, so here's the big question. I guess people are sitting back thinking, yeah i've got some debt it sucks i barely make it you know to the next week or like i'm saving a little bit i'm investing a little bit how much do i actually need to reach fire that's my question to you yeah well i'm thinking you're the math genius around here
A common rule is the 4% rule, and it might be a place to start if you're trying to work out what works for you. So you want to be able to safely withdraw 4% of your net worth. Let's just talk about a million dollars because I can do the math more easily there. So you've got a million dollars and you can safely withdraw 4% from your diversified portfolio.
So you've got exposure to Australian and international equities. You've got exposure to fixed interest products like bonds. So it's diversified. So the whole portfolio is not made of art or anything strange. Or property, just not all property.
yeah because you can't just sell four percent of your house off each year yeah um so a diversified liquid portfolio that you can safely through either dividends or just selling some of the capital take out four percent each year and live on it yeah so definitely so the four percent rule effectively let's just say we have a million dollar portfolio it we expect to get a seven percent return
So $70,000 for those of you playing along at home. And we can assume that inflation, that thing that pushes up the prices of everything each year is around about 2% to 3%. If we say it's 3%, 7% minus 3% equals 4%. And so we would have to effectively working that backwards, we would have to get a 7% return to withdraw 4% effectively. Yeah.
so seven percent return to a draw four percent so you're not needed in crazy exotic returns it can just be it might just be a balanced portfolio but it's that point where you can so a million dollars liquid and you might withdraw 40 000 each year to live on yep and then that's a starting point to work on well how much do you actually need to live on each year yeah and then you've got to think about how much do you actually spend at the moment each year to live a comfortable life
And I think that's the very first thing if you want interested in financial independence and just in terms of sorting out your finances full stop. How much do you physically spend in a year? Yeah. So financial planners would always use some rules of thumb. And one of the ones that they would say is you need a multiple of your ending salary to retire comfortably.
So they might say 20 times your salary, right? Which is quite an overwhelming figure for many. But the way you could think about it with the FIRE movement, it's not a percentage or not a multiple of your salary, but a multiple of your yearly spending, right? So it should be a lot lower, that figure.
And it's one that you have more control over, how much you spend as opposed to how much you earn, right? So how much you spend, you might make $80,000. So 20 times that, 1.6 million, but you might only spend 40,000, right? And so if you're going 20 times that, it's considerably less. So that's, I guess, the essence of the FIRE movement in terms of...
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Chapter 6: What are the financial habits that support achieving FIRE?
What are your, you know, what are your expectations? How many people are you providing for? That's it. As soon as you factor a second person or children into it, it completely changes. Absolutely. We've already talked about education and those types of expenses. Just that is below the lid on everything.
We know from, I'm going to bugger this up, but the Australian Superannuation Financial Authority or something, it's ASFA. I don't know what the acronym stands for, but ASFA tells us that in 2019, 2020, a couple to live comfortably in retirement wants about $60,000. So it's about $1,200 a week.
so if you do the the figures there you're looking you know if you do I say 20 times that for that's in terms of yearly living expenses it's considerable amount of money one thing though is that the big hurdle for most people is house do they pay it off yeah do they start building their nest egg outside of the house sooner
And if your house is the better part of a million dollars, then you're going to have to change the numbers because you can't just withdraw 4% of your house each year. Unless you wanted to do some convoluted reverse mortgage, which goes up as opposed to down every time. We shouldn't even mention that. We shouldn't even put that in the idea.
Jen for most people but yeah yeah you're right and so what and this is where it's really good we've put a heap you've put a heap of show notes in different blogs go and explore the different blogs find the flavor that is that it works for you so you might find that some of the bloggers have pursued dividends like dividends down under as well as then saving up for a house or some have pursued a house or an investment property before they've pursued a share portfolio for example
yeah and some are big advocates of renting and some want to buy the house further down the journey yeah so that's why it's great to have a look at lots and lots of people's different experiences and find something that maybe is a bit relevant to you yeah for sure okay kate so we've got we know what we kind of need to get to to retire or we have a rough idea we know what it is we know why it's so popular how do people get on the fire trail
yeah so mentioned before working out what you spend in a year and what you need to exist so like the two ends of the spectrum what you need to have a comfortable life and what you need to have the minimum to exist and then sort of working back from there and developing a budget that's going to allow you to put money aside each year to reach your financial goals so if you wanted to
be so you're 20 now you want to be financially dependent by 45 say how much and you think you might need a million dollars or two million dollars how much are you going to have to put aside each year over the next 25 years to reach that goal and you can use the money smart compound interest calculator sort of to have a look and play around with that
And then also factoring in that your income is hopefully going to increase over your 20s and 30s and sort of working about what your goal is and trying to work backwards from there. Yeah. One thing that's important, which.
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Chapter 7: How do lifestyle choices impact the pursuit of financial independence?
effectively saying what's your outlook yeah and so if you think about that the this is this is what um psychologists and scientists have found through rigorous study nothing there has uh bmw has jet ski has uh anything of that sort in that you know there's none of that it's all about how you are as a person i guess your personality those types of things your outlook
yeah and i read once um i think it was a book to do with financial independence but uh it was had an exercise and they said write down the 10 things that are the most important to you and you want to spend the most time doing and then it said write down the things you do spend the most time doing and you spend the most money on and sort of compare those two lists and where you actually want your priorities to be and it might be your spending time with your family
where you're actually spending most of your time and money and can you align where you currently spend your time and where you want to spend your time and where you currently spend your money and where you want to spend your money more in line that's a really interesting thing and it reminded me of this other concept which is negative visualization so it's how to put things in context what's most important for you
And again, I'll quote or just reference Mr. Money Mustache for this idea here. But he says, you know, we become accustomed to spending on things and we get this rush of, you know, this really good feel good factor when we spend money on something. It's like an adrenaline rush. How good is that? But it wears off pretty quick. But what you find is that.
The things that you most value in life, and when you get to this kind of happiness factor, the things you most value in life, they tend to be the things you take for granted. So once you buy something, you tend to take it for granted after that adrenaline rushes over. But he uses an example of eyesight. So he says, imagine, close your eyes and imagine for a moment that you're blind.
It's going to take time before you get back to feeling happy. But once you do, you'll be content with that. But chances are for most people listening to this, you can open your eyes and ta-da, you've got your eyesight back and how wonderful it is. And we don't appreciate something until we really think about it. Yeah, and it's gone. Exactly. Exactly.
And so that's another thing that kind of feeds into this fire movement is once you stop spending on those things, you realize maybe that they're not the important thing. If you want to, you could, but you don't have to, right? So it's kind of like just, I guess, appreciating what you already have and spending less time on what you don't have.
yeah and it's also knowing why you want to do it if you just set the if you just start putting heaps of money aside for no strong reason you're not gonna last very long and the budgets just gonna collapse you need to know your motivations you need to know what the idea of financial independence looks like for you maybe you do a vision board or you have a spreadsheet whatever it looks like for you to sort of get that idea into your head
And then you want to understand your motivators behind it because it's not just like you're locking the money away for years for no reason. You're pretty much buying back your time and buying back your independence. So you are putting the money to something that's important to you. It's just further down the track. You're not getting an immediate item.
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Chapter 8: What is the importance of maintaining balance while pursuing FIRE?
Yep, absolutely. Well said. Okay, so I guess this leads us into our next point, Kate, which is, do you think everyday Australians can achieve FIRE? I think yes.
I think it definitely will really vary between different people because depending on which career path you've chosen, your family, your goals, you might just be happy to live quite frugally or you might want to go on a holiday each year and enjoy sort of a more, I don't know, they call it fat fire, but a more sort of
luxurious approach to it all and so it will all vary time so it might take you until 50 or 60 to be financially dependent or there's some people that I've seen online that get there by 30 and so it's possible it's just really varied so I definitely don't
look at people online and think oh i'm already 40 and i haven't even started there's no way i can be financially independent you don't have to worry about the retire early part but being financially dependent independent even if it's not by not until 60 it's really good oh yeah it's still a wonderful achievement and i guess one thing i've used this quote a few times on the podcast but it's the chains of habit are too light to be felt until they're too heavy to be broken and
And what that means is once you get your mind over the hurdles to start saving, to start investing, to live this way, they become habits and those habits become effectively what you do day in, day out. And before you know it, you're actually saving and you don't have the struggles that everyone else has, the financial, the mental, all those struggles that everyone else has.
But the point here is even though we say that the chains of habit are too light to be felt until they're too heavy to be broken, I do disagree with that statement because they can be broken. I've seen people who go on a one way, seemingly on a one way street to spending, to consumer debt, to everything. And then they realize that isn't for them and they take steps to get out of it.
So you absolutely can. It doesn't matter how old you are. Obviously, if you're 40, you're not going to retire by 30. But, you know, you can do it. You absolutely can do it.
Yeah, and I know there's an Australian individual that blogs under late start of fire and they're in their 40s and they talk a lot about feeling like they were way behind because they read all these sites and they're about people retiring in their 40s and 30s and they were just sort of looking at it going, I haven't even started.
And it's a really interesting journey to read about and how they got sort of, they started taking steps to change their future. And I guess this is the thing too. We talk about this a lot in investing and in that context, but it also applies outside of that. There's absolutely no pleasure in this world whatsoever from having envy. Charlie Munger says that there's absolutely no pleasure from it.
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