Building your FIRE Engine

Most people who’ve seen a personal finance blog will have come across the term FIRE, for Financial Independence / Retire Early. There are lots of different interpretations of what it actually entails, but it’s a good umbrella term to get you started.
As for the FIRE “engine”? It’s a mental model for how you’re going to get to financial independence / retire early. Constantly thinking about saving pennies, and interest rates is an exhausting and anxiety-inducing habit, especially for a process that will take years. The engine is something you build over time, and it keeps on going with little external input (just a bit of steering and tinkering to make sure it keeps running and doesn’t drive you into a tree).

Setting up the FIRE engine

As I’ve explained before, the maths behind FIRE isn’t complicated, it just seems like it takes a lot of willpower to implement. But does it have to?
The unsurprising answer is no! It’s an evolutionary trait that we don’t want to make life harder for ourselves than it has to be. That’s why curling up in front of Netflix often wins out over exercise or poring over credit card bills. So, don’t work against what’s hardwired into you.
My philosophy is trying to put up a small amount of work up front, so I can be lazy the rest of the time. The way to do it is to automate savings, investments and most expenses. How does it work? First off, my employer pays my salary every months. Actually, even before that point, they divert some of the pre-tax money to my pension account, plus a healthy amount from their own coffers. The salary I receive after taxes etc is paid 50/50 into two bank accounts, something my employer offered when I started. I’m pretty sure I’m one of the only people who uses the feature.
One account is my current (checking) account, from which I pay all bills, credit cards and general spending. As I’ve never been a huge spender, that 50% is generally enough to cover monthly outgoings, and I keep extra in the account as a buffer against unexpected expenses.
The other account is with a different bank entirely, and I don’t keep a working bank card for it. Of this money, half (a quarter of my take-home) gets drawn automatically by Fidelity to buy simple index funds in a tax-sheltered account. The rest stays in the account for now, and is building up my emergency fund.

Putting it into practice

To paraphrase the Looney Tunes, “That’s (pretty much) all, folks!”. This is my FIRE Engine 1.0. There has been work in the background to get to this stage, but if I had to set it up all over again now from scratch, it would likely take:
  • 0 minutes to enroll in a pension (automatic in the UK)
  • 10 minutes on the phone to employer to split salary
  • 30 minutes to set up Stocks and Shares ISA.
  • 10 minutes to set up monthly investment plan (once above account is open)
Fifty minutes! If you left it at that, and didn’t log into any of your accounts for thirty years, leaning on a couple of assumptions generally accepted by most of the personal finance community (7% long-term annual returns, 3% inflation & 3% withdrawal rate), you would end up with a nest egg that could cover all your monthly expenses, potentially indefinitely!
Now, I realise that thirty years is a pretty long timeline, and while that would still mean being able to retire “kinda early” for me (I’m in my mid twenties), it’s not what most people have in mind when they think of FIRE. However, as I wrote earlier, this is only the FIRE Engine 1.0. It’s built, and it will get you there eventually, but not necessarily fast. Now it’s time to tweak the engine!

Tweaking the Engine for Financial Independence

I agree that a thirty year timeline seems too long, so I’m looking to make some alterations to the engine to give it a bit more oomph! Personally, the money I’m not spending or investing is currently building up an emergency fund (read: airbags and seatbelts) to protect against any major issues i.e. job loss or illness. Having enough money in a readily accessible account (not invested) to be able to cover three to six months’ expenses minimum is a wise move. I would even consider pushing that up to six to twelve months in the future, but beyond that I’d get uncomfortable having that much cash sat in the bank twiddling it’s thumbs. So, once you have a reasonable cushion to protect yourself from anything nasty that might fly your way, you can start to push up your investment rate. And the higher your investment rate, the shorter the journey time to financial independence! For example, pushing up to a 50% investment rate would take ten years off that journey, and see you financially independent in twenty years.
Many people find once they start and progress through their careers, the have been able to push their rates higher still. Every penny you don’t spend each month is not just another penny invested, it also means your investment pot doesn’t have to worry about covering it after reaching financial independence.

Wrap up

That’s probably a lot of information for one post, so my apologies if it got a bit dense. I’ll elaborate on certain topics in the future, but if there’s anything you’d like to see covered, or that doesn’t make sense, please let me know! For more info on my personal FIRE engine, see the current state of my FIRE Engine.