The FIRE movement in the Netherlands
Do you want to have the choice to work or not, because you are not dependent on the money you earn with your job? This sounds too good to be true for many. But by being smart with your money now, this can become a reality for you. This is where the FIRE movement comes in.
Financial freedom is something that many people long for and secretly dream of. But if you want to make these dreams come true, it is important to take steps. How do you achieve a life in which you never have to worry about money? It seems almost impossible to become independent of a job. Yet there is a movement that strives for this: the FIRE movement. FIRE stands for Financially Independent & Retire Early.
FIRE lifestyle: what is it?
FIRE is the abbreviation of Financially Independent & Retire Early. This movement stands for a lifestyle in which you only work because you want to. It is optional and therefore a free choice.
In a nutshell, you become FIRE by having no debt, spending less than you earn and putting the positive balance that is created to work for you. To make this possible, you need an income. Not everyone has this, but for many people, more is feasible than they might think.
Do you feel like you have to give up everything if you want to become FIRE? For FIRE supporters, it doesn’t feel that way at all. “To fire” is an English verb that means “to fire” in Dutch. In the context of stopping work earlier, it is no coincidence that the abbreviation FIRE was chosen. FIRE supporters release themselves from the obligation to work. It also stands for fire, a passion and drive that supporters of the FIRE movement have within themselves to live more freely.
The FIRE method has come over from America and is increasingly being used in the Netherlands to help achieve the goal of becoming financially independent.
This is how FIRE works
The FIRE method has a number of basic rules. By following these, you strive for financial independence. To achieve your goal, you must divide your income and expenses in such a way that you can save and/or invest as large a percentage as possible. Ultimately, you want to be able to live off the realized return on investments.
The principle of FIRE is very simple: spend less for a greater difference between your income and expenses. The money you have left over, you invest to then generate a stream of passive income. The more you can put aside, the faster you will reach your goal of financial independence.
You do need enough motivation, determination and backbone to achieve this goal. The FIRE movement has the 4% rule as a rule of thumb. This rule comes from various studies. If you can withdraw 4 percent from your investments annually, you should be able to live on this at some point.
Step-by-step plan FIRE: how to get started
How do you become FIRE? There are several ways to do this. Generally, there are 8 steps:
- Insight into income and expenditure
- To spare
- Calculate the savings percentage
- Investing
- Grow income
- Passive income
- Evaluate
- Early retirement
1. Mapping income and expenditure
By mapping your current income and expenses, you have a clear starting point. Open Excel and fill in all your income and expenses below each other. This way you can see at a glance which cash flows are coming in and out.
Then you will keep a cash book, so that you know exactly where your money goes. You do not only process your fixed costs in the household budget, but also the variable expenses. These are all the expenses that you currently make to live. Variable expenses are not always necessary. So you can save on these to increase your savings percentage.
2. Save
You can save more by earning more, but also by reducing your expenses. By saving, you increase your monthly savings amount, which allows you to save and invest more so that you reach your goal sooner. An additional advantage is that you structurally reduce your monthly expenses, so that you ultimately need less capital to consider yourself financially independent.
Are all your monthly expenses listed? Then you can start cutting. By cutting your expenses you will save. For example, do you regularly get a cup of coffee or a takeaway meal? This is an excellent expense item to cut back on. It may seem like you only spend a little on this per week, but multiplied by a factor of 52, the amount can add up considerably on an annual basis.
3. Calculate savings percentage
Instead of looking at the relative amount you can save, you look at the savings percentage. In order to be FIRE as quickly as possible, you want the highest possible savings percentage. You can then invest more money and therefore be financially independent faster. You can easily calculate the savings percentage if you know what your net income is and how much money you need to live on. Subtract the money you can live on from the net income to calculate the savings percentage.
It is not always easy to increase your net income in the short term. We will come back to this later. However, you can already start reducing your expenses today. Your income and expenses are already listed. Take a critical look at them to see which expenses you can save on immediately.
4. Start investing
The interest on savings is currently lower than inflation. You also cannot live off the return on your savings. In short: money in the bank yields little to nothing in interest, while the price level continues to rise. In order to live off your return, you almost have to start investing.
FIRE supporters often choose to invest in ETFs . ETF stands for ‘Exchange Trading Fund’, a basket containing all kinds of shares. This makes it easy for inexperienced investors to invest in a certain index. In the Netherlands, the ETF is also known as an index fund. There are numerous ETFs to choose from, some also pay out dividends . So you can decide for yourself what exactly you invest in. There are, among other things, ETFs in specific sectors, such as technology, or index funds that consist only of sustainable shares.
5. Grow income
Cutting back on expenses is one way to increase your savings percentage. By bringing in more income, you can also achieve this. This is often a bit more difficult, but certainly not impossible. FIRE followers often keep a close eye on the figures and percentages. Also those of passive income. By creating a passive income stream, you can achieve an extra income without having to put in too much effort. This will increase your savings percentage.
6. Earn more with passive income
It will take some time and energy to generate a passive income stream, but once everything is up and running, you don’t have to do much more. The income is not tied to your physical presence or time. For example, you can create a course or content for YouTube to generate passive income, sell training courses or set up an e-commerce site with referral links. There are many ways to generate income without having to be physically present.
Once the income stream is running, your savings percentage will automatically increase if you stop spending. Your goal of going FIRE will therefore gain momentum.
7. Evaluate progress
The FIRE method is a process that takes a number of years. It is therefore essential to regularly evaluate your progress. If you have been working on it for a while, it is wise to take a critical look at things that could be improved and what is going very well. Take another look at the overview of income and expenditure from step 1. Which expenses have you already been able to save on? And where can you still make a profit?
8. Enjoy your early retirement
The final step is what you are doing it all for. By adapting your lifestyle to the FIRE rules, you can live off the return on your investments. You can look back on a successful adventure now that you are putting the 4% rule into practice. Can you now sit back and relax or are you secretly looking for a new goal?
How much money do you need to be FIRE?
To determine what you are working towards, you must of course know how much money you need to live on annually. If you want to stop working to enjoy the good things in life every day, you must have your financial affairs in order. The FIRE method helps you set up a financial plan , so that you do not have to think about the income that comes in every month. You divide your income in such a way that your money eventually starts working for you without you having to do anything yourself. The saying goes ‘with money, you can make money’ for a reason.
Your assets must be large enough to live off the returns for the rest of your life. As a rule of thumb, the FIRE municipality says that you should build up assets of 25 times your annual expenses. If you spend €35,000 annually, you should build up €875,000. For example, if your expenses are around €45,000, the amount increases to €1,125,000.
Many people assume that you can only become financially independent if you earn a lot of money. It can make it easier to become financially independent faster, but experience shows that people who earn a lot spend their money just as easily. Usually, the spending pattern increases just as fast as the income increases.
By applying the FIRE method you are aware of your personal spending pattern and you always have insight and control. This can really make a difference.
FIRE calculation
To calculate the amount when you are FIRE, multiply your annual expenses by 25. This is the amount you are aiming for. This assumes a minimum return of 4% on your investments. If this percentage is lower, you need a larger amount to live on.
The exact amount is different for everyone, because it depends on the age at which you want to be FIRE, the moment you actively start working towards this and how long you expect to be able to live off your assets once you are FIRE. What it comes down to is the ratio between your income and your expenses. Do you want to know how much money you need to be FIRE? Then you have to know how much you spend on an annual basis, and then rake in this amount x 25.
Low expenses make you FIRE a lot faster. Suppose you spend €30,000 per year, then you need a total of €750,000 to be financially independent. The moment you reduce your annual expenses to €20,000, you ‘only’ need €500,000. Of course, your expenses can decrease over time because you have paid off your mortgage, for example.
Misconceptions about the FIRE movement
FIRE may be gaining popularity, but there are still some misconceptions about the topic. It is important to know that financial independence does not mean you are rich. This term is used to indicate a person who no longer has to work for his or her money. You do this by investing your money and living off the passive income stream that you generate. How quickly the money flows in is irrelevant. By also living frugally, you can be FIRE faster.
Not wanting to work
Also, many people have the idea that people who are FIRE hate working. This is not true. FIRE supporters do not hate working, but they are convinced that they can spend their time better than at an office job that adds little value. Working is fine, but only if you only have to work when you want to and when you see the point of it. This way you keep the freedom to organize your life the way you want.
Do you think that people who are FIRE have no ambition and get bored? Definitely not! The lifestyle is about being aware of the things you like to do. You are just no longer dependent on money to manage your time, which gives you more freedom of choice.
Very often people say that living with less money must be a drag in the long run. This may be true, but it just depends on what you are used to. Do you not mind giving up some luxury in order to gain freedom and time in return? Then this will not bother you quickly. You will get something nice in return for your sacrifice. In addition, it has been scientifically proven that expensive things only make you happy for a short while. People get much more satisfaction from a meaningful life.
Another argument that is often cited by people who are suspicious of FIRE is that you can never know exactly how much money you need to become FIRE. This statement is partly true. However, it is easy to make a good estimate by weighing the returns against your personal expenses. Of course, things can happen in the world that make everything look different, but on the whole you can calculate when you can be FIRE. In addition, in the Netherlands you receive AOW and some pension when you stop working. You can spread the investments you make, in order to limit the risk of ending up without money.
You strive for financial freedom with the FIRE lifestyle. You do not do this by keeping a close eye on your income and expenses on your smartphone all day long. But by being consciously involved with money, you know what you want to spend it on.
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