The Financial Independence Retire Early (FIRE) movement in India encourages individuals to save aggressively, which can be a positive step towards achieving financial security. In today's landscape, early retirement has anyways become realisation for many individuals. Early retirement offers numerous advantages, including the ability to live a stress-free retirement with the family.
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To understand, FIRE is a lifestyle movement emphasising frugality and extreme savings and investment to allow people to retire far earlier than traditional retirement plans permit. Essentially, the conventional retirement age is 65. However, followers of the FIRE movement aim to retire much earlier than that by saving up to 70 percent of their annual income. It's all about achieving financial independence by saving up a big enough nest egg to support living expenses without needing to work.
But how much do investors need to save up to reach this goal?
According to the FIRE movement, investors should aim to save at least up to 25 times their annual spending. This is what they call the FIRE number, said Avinash Ramachandran, Chief Operating Officer at Assurekit Technologies.
"Let's say Mr X spends Rs 5 lakh each year. By the FIRE movement's calculations, his FIRE number would be Rs 1.25 crore. To see where he stands in terms of reaching this goal, he can use an early retirement calculator table and plug in the average annual spending. This will give him an idea of how much he needs to save up to reach the FIRE number and achieve financial independence," Ramachandran told CNBC-TV18.
Notably, this (25 times their annual spending) is the bare minimum and it is recommended to save more to account for inflation and increased expenses.
What should consumers know?
Investors contemplating embracing the FIRE movement should understand that it's not an easy journey.
"Achieving this requires stringent discipline and hard work, especially in practising a frugal lifestyle and setting aside a substantial portion of the income," Ramachandran said.
"This challenge becomes particularly prominent at the onset of the career. Investing in low-cost index funds (for example) demands a long-term perspective and resilience to withstand market fluctuations. Nevertheless, if you are ready to face these challenges, it could pave the way to financial independence," he added.
However, it's equally vital to acknowledge the risks associated with the FIRE movement. If an investor's savings fall short or the investment decisions aren't astute, they may struggle to accumulate sufficient funds to maintain the desired retirement lifestyle. Unforeseen expenses or market downturns can dramatically affect the retirement savings too.
Therefore, Ramachandran thinks that meticulous planning and constant vigilance in financial decisions are key to success in this journey. The biggest advantage one can have in this journey is time — the earlier one starts, the easier it is to achieve FIRE.
Additionally, inflation and market risks are becoming increasingly pressing issues and it's crucial for individuals to complement their savings with a comprehensive approach to financial protection.
"This includes establishing an emergency fund, diversifying investments, securing adequate insurance coverage and matching assets with liabilities to ensure proper hedging. By actively addressing challenges such as market volatility, inflation, longevity and regularly reviewing financial plans, individuals can mitigate risks and make the most of the FIRE movement. Adopting a holistic approach to financial protection enables those pursuing FIRE to navigate uncertainties more effectively and ultimately achieve a financially secure and fulfilling lifestyle," said Sunil Padasala, AIA, Chief Innovation & Strategy Officer at Assurekit.
In order to achieve financial independence, it's important to break the journey down into simple checkpoints or steps.
Let's take a closer look at the key steps to achieve financial freedom:
Assess current financial situation
The road to financial freedom begins with evaluating the current financial status. This will help determine where an investor wants to be and how to get there.
"Even if the bank balance is low, don't worry; financial freedom is about starting and taking action. It's also essential to evaluate debts, which is one of the true pillars of financial freedom. To calculate the financial health, use a net worth calculator and budgeting sheet to analyse income and spends," Ramachandran said.
Establish goals
Those who are looking to achieve financial freedom should set clear and flexible goals that they can work towards.
"Whether they are aiming for short-term, medium-term, or long-term financial objectives, it's important to have a plan in place. Apart from saving and investing, it's also important to have an emergency fund to protect from unexpected financial shocks. Ideally, emergency fund should be able to cover at least six months of the salary," Ramachandran told CNBC-TV18.com.
But it's not just about saving for emergencies — individuals can also invest in salary protection plans that provide financial security in case of job loss or disability.
"This allows individuals to plan their career better, ensuring that the goal milestones are met. By being disciplined with saving and investing habits, they can pave the way towards financial freedom and build a strong foundation towards early retirement," he added.
Get rid of debt
Achieving financial independence is impossible if investors have bad debt. Therefore, individuals must pay off their debts wisely or consult a trained financial professional.
Individuals may have essential loans like a home or car loan, which are paid off with EMIs. In this case, they'll have to find the right balance between paying off the loan and investing in the right assets that can lead towards financial freedom in India.
Ramachandran suggests that people avoid buying things on a loan and take full advantage of any tax exemptions the loans (especially home loans) can provide. Debt means borrowing money from the future self, which is the opposite of what is meant by achieving financial independence.
Pay yourself first
To achieve financial freedom in India, ‘pay yourself first’ is key — the phrase means building wealth for the future self before indulging in the present self. It's essential to inculcate good financial habits and invest in reliable investments that generate passive income and good long-term returns.
"Some options include mutual funds, P2P lending, asset leasing, stocks, gold, real estate, and NPS. Some options are riskier than others, and in general high reward investments are also high risk, so it's advisable to research before investing," Ramchandran said.
Track spending habits
Being frugal is a sacrifice one must make to achieve financial freedom, but it doesn't mean skipping meals or avoiding health insurance. Instead, track spending and ensure that you are not overspending.
"Individuals can work towards curbing unnecessary splurging by making adjustments. One adjustment that a lot of the FIRE community recommends is to cut expenditure on outside food as much as possible. Even simple savings like mixing (one’s) own coffee instead of ordering from an outlet can go a long way in controlling expenses. One psychological trick to motivate is to find out how much is the amount one can save from a particular action," Ramachadran said.
Have multiple income sources
Generating multiple sources of passive income is crucial for early financial freedom. This will pay the future self, and it's essential to have a diversified investment portfolio that can generate passive income.
An idea that has also gained popularity is to reach the FIRE number and then switch to a (lower-paying) job that one may enjoy doing, and still generate income to cover expenses, without going through the brutal grind that can accompany higher-paying jobs.
