For multi-millionaire and best-selling author Ramit Sethi, the moment he realised he didn't have to work anymore was pivotal. At 42, Sethi's investments were generating far more income than his expenses. In a recent YouTube video, the host of Netflix's How To Get Rich explained how the FIRE (Financial Independence Retire Early) movement combines long-established financial concepts developed by experts.
Sethi believes that financial independence is achieved when you reach the "crossover point," where your investments produce enough income to cover expenses. This idea of "money making money" was first introduced by Vicky Robin and Joe Dominguez in their influential book Your Money or Your Life. Once you hit this point, Sethi says you have the freedom to work—or not—because your investments can sustain your lifestyle. Together, these concepts form the foundation of the FIRE movement, which can be divided into two main branches: Lean FIRE and Fat FIRE.
Lean FIRE vs. Fat FIRE
Lean FIRE is for those content with living on a modest $30,000-$50,000 per year, adopting a minimalist lifestyle and rejecting materialism. On the other hand, Fat FIRE appeals to individuals who aim for a more luxurious lifestyle sustained by their investment returns. Both paths ultimately lead to financial independence, but spending and lifestyle differ drastically.
The Flaws in the FIRE Movement
While the FIRE movement has helped boost Americans' savings rates, Sethi highlights some inherent flaws. One major issue is the obsessive focus on reaching a specific financial goal by a certain year. According to Sethi, many members of the FIRE community display signs of stress and depression, wrongly believing that hitting a "magic number" will instantly bring happiness. However, money alone doesn't equate to happiness, and Sethi emphasises that living a rich life means more than just accumulating wealth—it's about doing what you love without financial stress.
The Danger of Ultra-Frugality
Another significant problem with FIRE is the extreme frugality embraced by some members. Sethi recalls a couple within the FIRE community who amassed a $4 million fortune by their early 50s but struggled to enjoy their money. The issue? They never learned how to spend wisely during their accumulation phase. Many in the community lack this essential skill, which should ideally be developed in your 20s. If you don't learn how to spend money early on, Sethi warns, it can become increasingly difficult to break out of a rigid mindset that views accumulation as the only valid financial goal.
The Stigma Around Spending
Additionally, the FIRE community often glorifies how little members can spend, which can foster toxic habits. Sethi points out that some people in FIRE forums stress over making even the most minor purchases despite having millions saved. The fear of judgment from others within the community creates an unhealthy relationship with money. Sethi calls this the "demonisation of spending," which can lead to an overly cautious approach to finances. Fortunately, more members are opening up about their spending struggles.
Speeding Up the Path to FIRE
For those working towards FIRE, Sethi offers some advice on accelerating their timeline. He encourages investors to evaluate whether the crossover point—where investment returns cover all expenses—fits into their vision of a rich life. Some may aim for returns far exceeding this point to feel genuinely comfortable.
Saving More, Spending Less
Many FIRE followers save much of their income by embracing a frugal lifestyle. Sethi explains that with an annual household income of $80,000 and monthly expenses of $6,000, it would take 38 years to reach the crossover point if you save and invest 10% of your income. However, cutting your expenses by 50% could reduce that timeline to just 12 years. While surviving on $36,000 annually might seem impossible, members of the Lean FIRE community have managed to do so through smart budgeting and lifestyle adjustments. Still, living on such a tight budget is challenging, especially considering the average U.S. household spends over $72,000 annually.
Increasing Income for Faster Results
Another strategy to speed up the FIRE journey is increasing your income. Sethi estimates that a 30% increase in salary, combined with investing the extra cash, could shorten the timeline to 22 years. While two decades may still feel like a long time, it would result in investment returns that can cover $72,000 in annual expenses. For those looking to reach FIRE even faster, Sethi suggests a combination of increasing income and cutting expenses. A 30% boost in salary coupled with a 30% reduction in spending could allow you to hit the crossover point in under a decade.
Sethi's Balanced Approach to FIRE
While Sethi aligns with some aspects of Fat FIRE, he doesn't view early retirement as his ultimate goal. Instead, he values the ability to spend lavishly on the things that matter most to him while continuing to work and grow his income. Sethi embraces the concept of aggressive investing and building wealth but believes financial independence is more than just achieving a number.
Living a Rich Life Beyond FIRE
For Sethi, a rich life is about having the freedom to pursue your passions without worrying about money. He emphasises the importance of having clear financial goals and understanding the lifestyle you want. Retirement isn't necessarily his end goal, but he has set aside money, established financial rules, and knows what he values in life.
The FIRE movement has empowered many to take control of their finances and pursue early financial independence. However, as Sethi highlights, it's essential to approach FIRE with a balanced perspective. Obsessing over hitting a specific number, embracing extreme frugality, and developing an unhealthy relationship with spending can detract from the ultimate goal of living a rich, fulfilling life.
Sethi's approach encourages a broader view of financial independence: it's about saving and investing wisely but also about enjoying life along the way. Whether you choose Lean FIRE or Fat FIRE, finding a strategy that aligns with your values and goals is critical. With the right mindset, achieving FIRE is not just about reaching a financial milestone—it's about gaining the freedom to live on your terms.
