Starting my steps towards FIRE

In the past year I've started to read up more on FIRE. This personal finance programme, which appears to have started in the USA, has crept in to British personal finance circles over the years.

In my round up of books I read in December I mentioned one about financial independence and promised to post more about why I had picked this book up.

I will admit that I've had some doubts about putting this post out while my country is going through a cost of living crisis as it looks incredibly tone deaf. However, I've been sitting on this post, tweaking it and editing it and rewriting chunks of it, for the past 6 months. This is simply bad timing.

But the fact that I can still post this comes from a position of privilege. It is absolutely not right that people are having to choose between heating and eating. We are one of the wealthiest countries in the 21st century and the way things are right now is an absolute disgrace.

For me at least the current situation has made me more determined to save and be careful in the coming months and years. And it is balanced with donations to charities including my local food bank, which does excellent work under very difficult circumstances. It's also going to be a very slow process as I'm nowhere near being a higher-rate taxpayer and that seems to be what most FIRE people are.

What is FIRE?

FIRE stands for "Financially Independent, Retire Early". The premise is that you save and invest enough money to build a large pot that you will be able to draw from in the future.

Eventually you will have enough invested that you will be able to draw enough from it without massively reducing the total saved, and in fact the return rate on investments should be equal to or (ideally) more than the amount you are taking out for living expenses.

How much you need to save depends on your outgoings and what you're happy to live with. If you have a small house with low bills, low council tax, and live a frugal lifestyle, then you will naturally need a much smaller pot than someone living in a bigger home with the correspondingly large bills, and who wants two foreign holidays a year.

The two parts of the term indicate the goals of those participating in FIRE. Not everyone wants to Retire Early, especially those that enjoy their job. While no one wants to be yelled at by a boss or be treated badly by customers and clients, continuing to do some work can help give a routine and schedule that staves off boredom.

But by getting yourself to the level of being Financially Independent, you are giving yourself a good safety net against the future. Maybe your company has faced bankruptcy in the past. Maybe you've had a bout of illness and you know full time work will not be possible in the future because of your health. Maybe you're suffering from burnout and stress and part-time working would help you cope.

Whatever the circumstances, Financial Independence means that you can make decisions that are right for you, with less worry about struggling to cover your outgoings.

Why am I choosing to FIRE?

A combination of reasons really. The first is that as a Millenial I have already lived through one major economic recession, and a pandemic that has significantly impacted the financial future of my generation and the ones coming after us. By focusing on steps to becoming Financially Independent I want to find a way to cushion myself against future shocks.

The second is that things like recessions and pandemics have huge impacts on women. We take time off to have babies, we are more likely to work part-time for a number of years in order to raise the children and get them to school and clubs on time, and we are more likely to take time off work when kids are sick. As a result we will often have smaller pension pots than men, and that's without even starting on the fact that many women are discriminated against by employers for having children. Part-time work is often poorly paid and insecure, and the legal protections for pregnant women and working mothers are half-arsed at best.

And lastly, my husband works a long way from home with a long commute that I wouldn't wish on anyone. I would love for us both to be able to take a part-time option in our later years.

The Personal Finance Flowchart

While browsing the FIRE subReddit I found someone linking to the UK Personal Finance flowchart, which you can follow to identify the steps towards FIRE.

One of the earliest steps is to pay off debt. However, me and my husband have been fortunate enough to not need to dip in to credit to cover costs in our house. This already sets us in a very privileged position as it means I can jump these early steps. Our only debt is our mortgage, which we're already making regular small overpayments towards.

Instead I have moved a little further on, towards steps around savings.

Step 1 - Emergency Fund

When we bought our first house one of my first savings targets was to build myself a small emergency fund that would cover my share of the bills (mortgage, council tax, food, energy, my car) for at least four months. I ended up rounding up my target a little to £3000, and after I hit that target a good 18 months ago, I let the money just sit in an easy access saver.

Ideally though a good emergency fund should cover more than just your expenses. A true safety net will cover your wages for a number of months. At the time of writing this I earn £1745.66 a month, after tax, student loan and a salary sacrifice pension.

So a proper three month cushion would actually be £5236.98. This is my new emergency fund goal. In reality the longest I have ever job hunted was 8 months (and that was while I was in work), which would be £13965.28, or to cover a whole year I would need £20947.92.

That's a lot to save up, so I will start with the 3 months and take it from there.

Step 2 - Short-term savings

The next thing to cover are short-term savings. These are goals for things that will come up in the next few years, and are unique to each person and family.

Savings Goal #1 - Maternity leave

My main short-term savings goal is maternity leave. I knew I would want to start a family eventually, so since getting married I have saved at least £200 per month in a regular savings account to help cover the cost of my maternity leave.

I have discussed how I worked out my savings goal in my "How much will maternity leave cost you?" post, but in short - first I looked up my company's maternity leave policy and calculated how much I would get from the organisation and from Statutory Maternity Pay. Then I compared this to my wages, identified how much I would be missing, and started saving up to cover that gap.

I've been saving this money in a fixed term regular saver with Halifax. Fixed term savings accounts give you a little more interest than easy access savers (although not by much) but if you withdraw the money before the end of the term you pay a small penalty (often forfeiting some of the interest). I knew I wouldn't need to touch this money for a while so I was happy to accept that, but if you know you'll need it in 6 months time you may want to work out if it's worth it.

Savings Goal #2 - A house moving fund

Me and my husband currently live in our first home, and while it's a lovely little terrace that we've invested a lot of time and effort in to fixing up, I just don't think of it as our forever home. We have three bedrooms, a kitchen and a living room, but there's no separate dining room, and the bathroom is quite small. 

We're not sure exactly when we'll move, but I worked out that we would need around £10,000 to cover all the potential costs, including stamp duty, solicitors fees, a moving company, and a bit on top for any hidden extras or emergency works that need doing. That's £5000 each for me and my husband, so I'm slowly putting small amounts away each month.

We're also spending some money on getting bits done around the house so we don't need to rush to get it into a saleable state when the time comes. In the past few years this has included replacing the internal doors, painting a feature wall in the kitchen, and getting new lampshades for the main lights in each room. Apart from the doors none of this required savings, but just featured us buying new bits after we'd covered our bills each month. We also had our garden patio done but this was less to do with moving and more to do with creating a nice outdoor space, which will hopefully have the added benefit of helping the house sell in the future.

Savings Goal #3 - New car

My short-term Savings Goal #3 is...a new car! Until very recently this was Savings Goal #2 but a recent change in fortunes means that this is now less of a focus.

My previous car was my beloved VW Polo that used to belong to my grandparents, and which is old but still has wonderfully low mileage. I love this car, but after it broke down four times in the past 12 months (including one incident where it had to be brought home on the back of a flatbed truck) I realised that replacing it was less of a want and more of an urgent need.

I've now purchased a Kia Venga. With a 2010 plate and less than 70k miles on the clock, it will hopefully last the next five or six years. Sadly I've had to buy at the height of a national second hand car shortage, so I can't say I got a brilliant deal. But needs must and ultimately I am very privileged to be in a position where replacing the Polo was even an option.

I was contributing £100 a month plus some of my side hustle money towards this goal. Now that I've actually replaced the car this fund is completely drained and I need to start from scratch. But other things now need to be the priority so while I'm aiming for £100 a month, I'm accepting that for the next 12 months at least the side hustle earnings will have to go to other priorities and this will just have to tick along quietly in the background.

Investing for long-term goals

Once you have saved up for your short term goals you can start looking at your long-term goals and how to finance them. This could involve setting up and paying into a private pension, or paying more into your workplace pension. Others may choose to invest in a stocks & shares ISA or look at other investments such as cryptocurrency.

If you have children then you may also want to plan some savings for them too. You may want to cover the cost of their driving lessons when they turn 18, or help financially support them when they're at university. Maybe you're already worried about your whether your newborn will be able to afford a deposit on their first home. Saving just £20 a month for the next 18 years will give a little pot of £4320 (and that's without calculating interest) which could be very helpful for your kids in the future.

Whatever your goals or family size you may find it helpful to get advice from an independent financial advisor (IFA). You could ask family and friends if they've used one they would recommend, or ask on a local Facebook group for personal recommendations for someone local.

And whether you get professional advice or decide to strike out on your own make sure you do your research. There are plenty of books on personal finance, and a lot of blogs of people charting their FIRE journey. You can also check out the FIREUK subReddit or the UKPersonalFinance subReddit for advice and helpful links.

In a future post I'll look at my FIRE number and how I'm using a fairly simple Google Sheets spreadsheet to calculate how much I'll need.