The FIRE is Growing

If your goal is financial independence, you will spend your entire life chasing.

If you ask 100 people what financial independence means to them, you will get 100 different answers. If you ask a single person what financial independence means to them at ten different points in time throughout their life, you will get ten different responses. So how is it possible to achieve this utopian concept that we call financial independence?

FIRE: Financial Independence, Retire Early        

FIRE is a recent financial movement that promotes frugality, saving, and investment with the goal of financial security. The movement requires significant short-term sacrifice in exchange for long-term reward. As different offshoots of the movement, people have created different rules of thumb to define financial independence. Some say you need to save 25 multiples of your annual expenses to be able to retire. Others follow the four percent rule.

4% Rule: Required Retirement Savings = Expected Annual Retirement Expenses / 4%        

To reach the goal of financial independence and early retirement, FIRE advocates use a variety of tactics such as frequent job changes or part-time “side hustles” to maximize annual income. Some choose to cut insurance coverage to minimize costs. And a common theme with the movement is limiting expenses to an extreme such that you can save upwards of 75 percent of your annual income.

The concepts behind the FIRE movement have been around since the 1990’s so we now have data to evaluate how it is working.

So people are not retiring sooner.

Credit card debt has skyrocketed over the past 20 years, so FIRE has not increased financial literacy.

It is taking longer for Americans to buy homes, so FIRE has not resulted in greater prosperity for young Americans.

There are two ways to look at this data. Either not enough Americans have subscribed to the ideas behind FIRE, or the very movement in and of itself does not work. I tend to believe both are true, and the root of the failure is the very concept of financial independence.

Prospect Theory

Financial independence is a moving target. To understand how the human brain works when chasing a moving target, shopping is a useful analogy. When I graduated from college and was furnishing my new apartment, the biggest purchase I made was a new couch. After researching various options and saving a little money, I chose a couch that cost $1,000. Leading up to the purchase, I saw this couch as the pinnacle of couches and never thought I would need anything more. But that is not how buying stuff works. Two weeks after making the purchase, I went to a friend’s house who had just purchased a $5,000 couch. After just five minutes of sitting on my friend’s couch, my reference point of the perfect couch shifted. The $5,000 couch became the new goal, and I now looked at my $1,000 couch as a placeholder.

Saving money works the same way. Imagine you set a goal to save $100k in five years. The progression of building towards the $100k feels good, but reaching the $100k prompts your mind to ask, “What’s next?” The goal quickly moves to $500k and you start back at square one. Saving towards an arbitrary amount that allows you to retire has the same effect. All too often people will reach their target, decide they need more to support their desired lifestyle, and prolong their retirement.

Daniel Kahneman and Amos Tversky developed the prospect theory to explain this human tendency. The famed psychologists discovered that we use reference points to evaluate the benefits of various alternatives. The problem is that those reference points move over time, making it much more challenging to realize the benefits of a decision or goal.

Prospect Theory: When people are presented with alternatives, each with their own probability of gains and losses, they will assess the potential benefits of each outcome, relative to a reference point – for example, how much money they currently have.

Financial Independence

So what is the solution to find financial independence if our brains are hardwired to always want more? We need to change how we think about financial independence and recognize that it is a state of mind that everyone has and not a target to chase after. This means that it does not matter how you define financial independence, the goal should be to gain awareness of what financial independence looks like for you.

Whether you have a $1M, $100k, or $25k salary, the key to financial independence is gaining perspective of what your income allows you to do and building a “rough draft” of what your future might look like. As an example, let’s say my income is $100k and my budget breaks down to the following categories:

My job is to (1) identify how I prioritize each of these budget categories and then (2) allocate my $100k of income across the four categories. These two exercises provide immediate perspective of what I can and cannot do with my income. Gaining this short-term awareness is the first step to what I am broadly defining as financial independence. The next step is to repeat this exercise for future years to build out a forecast that evolves over time. While this step is more time consuming, it is critical because it gives perspective of where I currently stand compared to where I expect to be in the future. The accuracy and precision of my future estimates is not the important part. What matters is that I have a roadmap to benchmark against which gives me short-term confidence in my financial decision-making. Putting together a rough draft of a long-term plan opens up the door for immediate financial independence, regardless of salary.

Now imagine my salary is only $25k, but I expect it to grow significantly as I progress in my career. While my current income would primarily be allocated to essential expenses, would it be wise to follow the advice of FIRE and eliminate all of my discretionary expenses in the name of faster progression towards retirement? This might be manageable for a small, highly disciplined number of people, but for most this approach is unsustainable. We can envision this approach working for a couple years, but at some point, I am going to decide that it is time to start enjoying my life. At that point in time, all retirement saving is abandoned. Financial independence is not a theoretical happiness that can be achieved through an unsustainable lifestyle. Instead, it is mapping out retirement savings over my entire career and gaining an understanding of (1) when I will have the ability to retire and (2) how much income I will have available each year of retirement. If I build a plan like this early in life, it is amazing to see how much I can accomplish even with this limited salary because time is on my side. Financial independence is not earned by increasing my income from $25k to $200k, it is discovered by gaining perspective of the bigger picture.

Goals

All of this is not to say that setting financial goals and working towards target dates is bad. Goals are powerful tools to help reach a desired future, but financial goals are not a ticket to financial independence. More importantly, financial goals should not dictate how we measure success. Allowing our financial goals to define how we perceive ourselves will lead to a life of chasing and consistent discontentment with our current standing.

I would like to caveat this discussion with the acknowledgement that everyone is wired differently when it comes to goals. For some, goals are incredibly motivating and provide a boost of energy to get something done. For others, they are energy draining. Understand what works for you and develop an awareness of the human tendency to always want more.

In Summary

Financial independence is not a certain dollar amount, vacation destination, or retirement date. Financial independence is gaining perspective of what opportunities you have afforded yourself with the income and savings that you currently have. Defining your expectations for the future is the critical ingredient that makes this possible.

If you are looking to put together a rough draft of a financial roadmap but are not sure where to start, send me a message on LinkedIn. I would be happy to pass along the tools that I use.

Disclaimer: The content within this article is for informational purposes only and should not be construed as investment or tax advice.

?

Sources:

“Highlights From the Profile of Home Buyers and Sellers.” National Association for Realtors, November 2024.

“Household Debt and Credit Report.” Federal Reserve Bank of New York Research and Statistics Group. Center for Microeconomic Data, 2024.

“Reference Point.” Dan Pilat and Dr. Sekoul Krastev. The Decision Lab, 2025.

“What is the Average Retirement Age in the U.S.” Josh Garber. Nerdwallet, November 2024.