If you want to be financially independent, you’re going to ask yourself: how much money do I need for FIRE?
Logical, right? I mean, how would you know you’re there if you don’t have a target?
First things first
You need to know how much you plan to live on, per year, based on today’s money.
For example: I worked out that my partner and I would live a pretty decent lifestyle on £20,000 a year after tax. That’s with still paying a mortgage at the current rate: we could in theory pay it off or move to a cheaper location.
My numbers changed a few times as our lifestyle changed and adapted. If you’re going to try FIRE out yourself, don’t be afraid to revisit this number a few times over the coming months.
I’d like to tell you that there’s some voodoo-witchcraft to easily calculate this amount. There isn’t. You just have to add up all your anticipated costs, based on what you actually use.
Obviously, it’s an estimate. I have no idea what goods and services I’ll be using for the rest of my life. It’s just a best guess and I haven’t read about any other ways of doing it.
An example
| Item | Estimated monthly cost | Estimated annual cost |
| Mortgage/ rent | £500 | £6,000 |
| House insurance | – | £150 |
| Council Tax | £100 | £1,200 |
| Gas and electricity | £100 | £1,200 |
| Water rates | £100 | £1,200 |
| Food | £150 | £1,800 |
| Going out | £75 | £900 |
| Holidays | – | £2,000 |
| Clothing | £50 | £600 |
| Subtotal | £15,050 | |
| 10% buffer | £1,505 | |
| Total | £16,555 |
That’s actually the hardest bit done.
You’ll notice that I haven’t included hobbies, cars or anything on there. They should be there, this should be as detailed and thorough as you can get it. You might also want to add on phone lines, internet, TV or whatever you use.
I also added a 10% buffer, but this is just a spending budget for stuff that I don’t know about yet. I mean, I don’t plan to become financial independent to sit around all day doing nothing, who knows what new interests I’ll have?
Effectively this is a budget for the future… today.
Got it. Is that all the maths done with? Is that how much money I need for FIRE?
Sorry, no. There’s another key bit of maths you need to do. However, you don’t need to do it on your own – that’s what calculators and computers are for.
The 4% Rule
It’s common in FIRE to make a prediction based on something called “the 4% rule”. It’s a theory that a US financial advisor called Bill Bengen used to work out how much of an invested pension you could safely withdraw from a stocks and bonds portfolio without losing money.
Bengen has since said that this ‘rule’ was based on the worst possible case for the stock market and you could probably withdraw a lot more. You might also see FIRE blogs, books and so on saying it isn’t conservative enough… but you have to take a little risk somewhere, so I’m choosing to stick to it.
Cool story, bro. So what?
If we work with the idea that a big pile of cash is invested in the stock market for us to live on, we can use the 4% rule to work out how big that pile needs to be.
Finally!
Lazy way: just multiply that total by 25. That’s it, you’re done! In our example, that gives a FIRE figure of £413,875.
Why 25? Because 4% goes into 100% 25 times. Seriously, that’s it. I can show you the maths, but do you really care?
Wait, what? I need over half a million quid! Are you serious?!
Absolutely.
I could depress you more and point out that this FIRE number you’ve just calculated is based on today’s numbers. The actual number will be higher, due to inflation and how money is made. However, don’t worry too much about it. The 4% rule assumes that you increase the drawing by inflation, i.e. only the first draw down from your magical stack of FIRE cash is going to be 4%. The next year will be higher.
What it means is that just hoarding banknotes under the mattress isn’t going to cut it. You need to make the kind of compound interest returns that generate this fat stack for you. At the time of writing, I’d be doing well to get an interest rate of 0.5% on my savings, which is basically useless.
That’s where investing comes in, and why you need a plan. You can see my FIRE campaign plan here.
So, now you can answer that first question: how much money do I need for FIRE?
Scared? Intimidated? Don’t worry. It’s definitely achievable, it just means that if you want to try out FIRE, you can’t just leave things to chance. You need a plan.
What about me?
How much money do I need for FIRE?
I reckon that my FIRE number is about £500,000 if I still have to pay a mortgage. Now, if I don’t have to pay a mortgage, it’s a lot lower.
My partner and I are also talking about buying a boat and bimbling around the coast of hot places. That would dramatically reduce this. I’ve worked it out to around half of that value, with pensions in reserve in case we change our minds.
BUT that’s a strategy decision, and that’s another story…
