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On top of all the finance terms the FIRE (financial independence / retire early) community has invented it's own set of terms and definitions for you to learn. In this article I am going to break down all the different FIRE terms from Lean FIRE to Fat FIRE and all the way to Coast FIRE and beyond.
FIRE Terms explained.
What even is FIRE? How do I know if I have fired?
Lets start with the very top line. Financial independence or FIRE. The Donegan definition "You are financially independent if your assets produce more income that you need to live." Simple neat definition.
You own stocks and share or properties (assets) that produce you an income. This income is greater than your living expenses. Therefor you never have to work again if you don't want to.
Most people aim to do this so they can retire. By retirement you should have pensions and assets that will support you to live comfortably. FIRE just added "let's do this a little bit earlier than most people.
Financial independence is easily explained but more challenging to achieve. It is possible for most people who live in the developed world to achieve financial independence. Financial independence is a good goal for everyone, whether you retire early or not. You need some resources to look after yourself after your working years
As the financial independence community has grown more and more people have entered the space and started to look at FI differently. They started to add more terms so that FI became less binary.
After all Katie would be screaming "It's not binary!" at the people who say you are either FI or not. So let's get into the terms and explain them one by one. After the article I would encourage you to think about which one, or a variation of one to pursue for yourself.
Just remember that there might be a definition for each of these terms but the number amount that it refers to is different for all of us. One person's Fat FIRE is another person's Lean FIRE
Lean FIRE - definition
What is lean FIRE? For a moment I want you to imagine three different levels of expenditure for you. They are:
The first level of covering your base expenses is Lean FIRE. You have saved and invested enough to be able to cover your basics expenses but you don't have much left over for the nice to haves!
For Katie and I when we were working this stuff out we had a number for each level. We thought if we had £20,000 a year we could cover the base costs, £30,000 a year would be a pretty good life and at the time £40,000 felt like loads!
If we had £20,000 a year we would be lean FIRE. We could stop work and exist but we couldn't afford meals out or holidays. Lean FIRE to us meant assets to cover £20,000 a year expenses.
What might lean FIRE mean to you? What level of annual income would enable you to be lean FIRE?
Lean FIRE is incredibly powerful because it frees you from the need to have to work. You get more freedom, opportunities and options at this level. It is an incredible goal and achievement.
Then you are only working for the luxuries!
Financial independence - definition
The mid level in the above example is considered financial independence. It is the vanilla version of FIRE. You have saved and invested enough to give you the life style you want in retirement. Doesn't matter whether you retire at 50, 60 or 70, you have got life sorted at a level you are happy with.
This is the version Katie and I shot for. We wanted enough assets to be able to live comfortably in retirement. How do you know how much you need to retire? Read this article for the maths behind retirement.
Fat FIRE is where you have more than enough to do anything you could image. If Lean FIRE is covering your bases then Fat FIRE is the ability to go on the holidays you want, stay in five star hotels, eat out or go on the Disney Galactic Star Cruiser.
Fat FIRE is very subjective because for one person who has lived on £20k a year for their entire life if they were to get £40k a year then they would feel so wealthy. However for other people they couldn't make ends meet with £40k a year.
One particularly friendly commentor on our YouTube Channel told us we were crazy if we thought anyone could live on £40k a year. It is amazing we get abuse from some people for spending too much and from other people that they could NEVER live on the amount we do.
This one is subjective and what Lean FIRE, FIRE & Fat FIRE mean numerically to all of us is different. The nice things about these terms is that they can mean what ever you want them to mean in number terms.
Fat FIRE is where you don't particularly have to worry about money & spending and you can do what ever you want to do! Katie and I aren't there yet but we are doing alright! We still have to think about where we stay and how much we are spending each day on accommodation, food and entertainment.
Coast FIRE is where you save up enough money that it will grow and compound over the coming years to get to you to Financial independence. Then you take your foot of the gas and work part time to cover your expenses until your investments grow enough to retire on.
The most extreme example of this would be if you put some money aside for your new born baby and left it to compound over time as they looked after them selves. If you put £5,000 in a simple index fund that returned 10% on average over the years when your baby was born they would be a millionaire without adding a penny more by age 56.
Now that really is coasting your way to millionaire.
Coast FIRE is where you save up a sum of money that will grow to what you want to retire by the age you want to retire. Then you stop investing, live life and just coast until it grows to the amount you need.
If you put £10k in an account when your child was born and left it to grow till they reached traditional retirement age in the UK which is 68 years old they would be worth £6,526,834!
You let compounding do the work as you coast to FIRE. All you need to do is look after your expenses each year, not work harder to continue to save.
You might even take a part time job or doing something more relaxing as you coast your way to financial independence. Some of you reading this might already be at coast point for normal retirement age.
Slow FIRE is where you aren't in a rush to get to financial independence. Many people are so desperate to quit jobs and get on with the next phase of their life. Some people hate what they do and they will rush to get to FI at all costs.
Maybe that isn't you, maybe you love your job, maybe you enjoy making money, maybe you are happy already and so you take a slightly slower path to FI by not saving as much. You live a more lavish lifestyle along the way and enjoy the journey.
Or you take a lower paying job, do something you love a little more and just take your time.
When a lot of people find out about FIRE they become extreme in their behaviours, they stop all spending, they avoid going to friends weddings as they cost too much (WTAF!) and they do crazy things. Read this article: The biggest mistake people make when they find out about financial independence.
Slow FIRE enthusiasts would say "chill out, enjoy the journey and if you don't save 27% of your income this year you are going to be fine!"
This is a new addition to the FIRE terminology and the basic concept is that you earn and invest enough to cover most of your expenses and then you take a part time, low stress job like being a barista to cover the other income you need.
For example, if you want to live of £40,000 a year then using the 25 times rule you would need to save and invest £1,000,000. If you have never heard of the 25 times rule then read: How much does it take to retire.
This can seem daunting for a lot of people that haven't learnt about the power of compounding yet.
Another way to look at this is if you were to get a job as a barista in retirement and make £10,000 a year you can reduce your target by £250,000. (25*£10,000 = £250,000)
£750,000 invested gives you £30k a year to live on and then you top this up by £10k from your barista job to hit your target of £40k a year.
Insert any job you want instead of barista to make up the extra income. Barista is just a catchy title for the FIRE term.
The basic summary is that you don't get all the way to full FI but use a part time job to cover some income you need each year.
This is the ultimate coast FIRE. You take £10,000 and invest it for your new born child and leave it to grow whilst they work and take care of their own needs. You have guaranteed they will be a millionaire in retirement if they leave it alone and don't blow it on a car.
The Donegans came up with this one and we don't know anyone that has actually done it. Maybe you do? Maybe you are going to try it? If you do please tell us as we would love to write about it and chart it on the blog!
The maths is sound and we are left wondering why people don't invest money for their kids, educate them about it and set them up for a comfortable retirement! Use the Power of compounding to look after yourself and your kids!
This is Wife - Financially independent. Your wife has made the money and you don't need to work any more.
There is no wrong way to do FIRE
The one thing I want you to get is that there is no wrong way to do this. We all do it differently. The key is to understand the FIRE terms and your options and then to make a conscious choice of what you want to do.
Whether you decide to do an all out sprint to FIRE and save every penny or take it slowly and coast isn't important. Do what is right for you.
Katie and I decided to do the standard FI thing and just head straight for the main number. Our target was £1M invested which gave us £40k a year to live off (inflation adjusted) for the rest of our lives. We saved over 50% of our salaries and invested relentlessly until our money grew to that magical number.
We hit Financial independence in 2019 and have been enjoying a bit more freedom, travelling the world and writing articles like this ever since.
Just one thing. Watch out for the biggest mistake people make when they find out about financial independence.
If you hear of any other terms you want us to explain please leave a comment telling us or send us a message on the contact form.
Thanks for reading and join up to the mailing list if you want to find out about future events, courses, articles and videos we produce.
Have fun along the way and good luck on your financial journey!
Alan and Katie
If you want to learn more about the maths behind financial independence read these articles next.