You’ve heard of extreme athletes, but have you ever heard of extreme savers? Okay, granted, they might not sound as sexy, but perhaps you’ll change your mind once you realise that the pastime involves early retirement and an escape from the 9-5 grind.

These extreme savers are part of the FIRE – Financial Independence, Retire Early –movement, which is focused on a grueling saving and investment strategy that aims to allow for a retirement age long before the traditional 65. The general rule would be for FIRE Investors to invest as much as 70% of their income while they are working so that they can achieve retirement as early as possible.

Flexibility

One of the key drivers of the movement is “flexibility” – a desire for freedom from traditional employment. Many FIRE Investors aim to continue working, but on their own terms, while others want to put aside enough money to allow for a life completely free of work.

But to put aside the majority of one’s income in order to save enough to allow for early retirement requires intense discipline, sacrifice and aggressive investment – hence the “extreme saver” tag. Those who follow this lifestyle generally live as frugally as possible in order to drastically reduce expenses, work to find a variety of income streams and invest their money as wisely as possible.

First off, FIRE investors need to know their “FIRE number” – the amount of money they need to accumulate in order to allow for early retirement.

The Rule of 25%

This is a method that is often used by FIRE investors (and anyone else) to get a high-level understanding what their retirement savings goal or FIRE number is. 

The rule says you need to save 25 times your annual expenses to retire (and maintain your current lifestyle).

For example, Fire Investor A earns R60 000 a month / R720 000 a year.

Fire Investor A is happy with this annual amount as it is enough to cover her lifestyle.

The annual figure of R720 000 multiplied by 25 is R18-million.

R18-million would be Fire Investor A’s “FIRE number” – the target amount that she needs to save in order to retire and draw down the same annual income as she receives now.

For most people it would take a lifetime of working, disciplined saving and clever investing to get to the 25 x annual expenses, but FIRE savers aim to get there much earlier by extreme sacrifice and saving and/or by reducing their annual income requirements so that they can reach the 25x goal as soon as possible. (Of course the latter option would mean that you’ll have to continue living the pared-down lifestyle.)

It must be noted that the Rule of 25% is a broad guide, and its accuracy depends on a variety of factors (eg how the savings are invested, or whether lifestyle needs change) and individual circumstance.

FIRE types

As the FIRE movement has matured, so has its permutations. The traditional method of FIRE investment is known as “Trad Fire”, with a variety of other categories of extreme savers within the movement:

Fat FIRE: Fat FIRE investors want to enjoy the good life forever, and to do so they know that they need to accumulate a very generous lump sum to invest so that when they retire and apply the 25% Rule, they will be able to live off a generous passive income.  Unless you’re the beneficiary of an unexpected “liquidity event”, most Fat FIRE investors will only achieve this by reaching Trad FIRE level early on, and then continually adding to their lump sum

Lean FIRE: This is the opposite of the Fat FIRE investor, requiring the utmost dedication to cutting costs so that their annual living expenses and thus the total amount required to accumulate in order to retire (based on the 25% Rule) is minimised. This is the most frugal and extreme FIRE investing philosophy and would require a lifetime of pared-down existence.

Barista FIRE: The Barista falls between Fat and Lean Fire. Those who follow this strategy don’t necessarily want to stop working altogether – but want to build enough of a nest egg early on so that they can ultimately choose to work part time or on projects that they love but don’t necessarily pay huge salaries.

Investing

A critical element for FIRE investors is how to invest the money that they are working so hard to put aside. Stashing cash in a general savings account is not going to be any help in getting to the fabled FIRE number – but if it’s invested wisely, the money can be put to work. Typical FIRE investment strategies would include using tax-advantaged accounts (like a tax-free savings account) or low-cost index funds. Putting aside money from as early as possible also allows for investors to reap the rewards of compound interest.

Universal principles

Although following a FIRE investment strategy may seem like an incredibly unrealistic lifestyle to maintain – if you earn a modest salary or if you have a family to support, for example – the movement encompasses general principles that are useful for anyone. These include:

1. The importance of retirement planning: whether you aim to retire at 50 or 70, it’s critical to understand how much you need to save for retirement so that you can continue to support the lifestyle you desire once you stop working. Without a plan, you’re relying on luck.
2. Living within your means: FIRE investors live well below their means so that they can put aside as much money as quickly as possible. For everyone else, a more realistic goal is to spend only as much as you earn, and to manage any debt wisely.  
3. Investing for growth: A savings account won’t cut it – in order to put your money to work you need to invest your money in products that suit your risk profile and life stage.

The post FIRE investors first appeared on Moneybetter.

“Money isn’t everything, but everything needs money”, as the saying goes. These words could not be more appropriate but reveal that the relationship between most people and their money is very fragile.

Money-related matters cause anxiety, and the fear of running out of this commodity is real. When, on rare occasions, individuals are not worried about their money or paying the bills, many adopt a “head in the sand” approach. They abdicate their financial responsibilities to their bank or financial advisor or ignore them, hoping the wolf at the door will magically vanish. 

It’s never too late to “money better”

Fortunately, it’s never too late to “Money Better”. By this, we mean making your money work as hard for you as you do to earn it—and to feel good while doing it, giving you financial wellness. Let’s not be mistaken; by practising “Money Better”, we are not advocating for a simple DIY approach to handling your finances; we want you to feel better about your financial assets.

DMA believes there’s a middle ground between DIY and advisor-led investing, an approach that provides a guided architecture or set of guardrails that nudge your investing behaviour in the right direction. Bringing you closer to your money.

“Not all of us are expert carpenters or handymen,” says Richard North, CEO of DMA, “that’s why we turn to functional solutions like IKEA, which help you assemble a piece of furniture with easy-to-follow instructions, giving you a sense of ownership and pride in what you created. Building wealth should feel the same way.”

The two main reasons people invest are out of fear or greed, but this need not be the case once you embark on a journey to take control of your money.

Education about saving and investing is key to building a better relationship with your money. Take the time to learn more, even just a little daily. The compound effect of your knowledge, much like the compound effect of long-term investing, might surprise you. Above all, be kind to yourself and move at your own pace.

Saving and Investing should be positive

Saving should be a positive experience and investment even more so. Think of all the products around us. Then imagine that you could have actual ownership in a company like Coca-Cola, to name but one of the thousands, and you will realise how exciting the investing world truly is.

The opportunities available to you are endless. Once the investment bug bites, you will not only have greater peace of mind regarding a brighter future for yourself and your loved ones. You will also experience how contagious and thrilling investing in the stock market, but ultimately you can be.

Now is the time to rekindle your relationship with your money, and the great news is that it’s never too late to “Money Better”. Being better with money starts with feeling better about money.

Embrace your money; after all, you work hard to earn it. You’ll be all the better for it.

(Full disclosure: This blog is paid for by DMA, whose approach to investing and money wellness is referenced in this article.) 

The post Money Better For Financial Wellness | Moneybetter first appeared on Moneybetter.

Few people have become wealthy without investing. Whether you are in the game already or starting out, it’s a plan to understand the back story of how you are making those five key investment decisions:

1. Why invest?
2. What to invest in?
3. When is it good?
4. Where is best?
5. How long to hold on?

Checking how you personally answer those questions may determine whether you become a Buffett or a bean counter. As the great Warren Buffett himself said, “The best investment you can make is an investment in yourself. The more you learn, the more you’ll earn”.

You can get a general picture of yourself as an investor simply by asking vital-statistic questions and then a few uncomfortable ones; or by getting help from a professional or good investment software.

An investment guru or financial profiling software will convert information about you into an ‘investor risk profile’, laden with terms like risk tolerance, impulse control, emotional behaviour, and biases.

Yes, I saw you rolling your eyes there. But these aspects of your character affect the way you make investment decisions and are worth understanding as they will help you chart your investment roadmap.

Let us delve a little deeper.

Understanding yourself will help you make better investment decisions

1. The story of you

Where you are at in life, in age, stage, and earning, contributes to your ‘risk ability’ score – your current ability even to consider taking a financial risk.

The questions you or your advisor would ask are as follows: 

• How old are you?
• Are you financially secure?
• Is your income a random event?
• Do you have assets and investments?
• Do you own a pallet bed and a dog?
• Is your debt a small cloud overhead or a nuclear eruption?
• Why do you want to invest – to buy a real bed, a house, for your retirement, to grow wealth, or to hold value in existing investments?

• These answers make up your risk ability, contributing 70% to your risk profile. Your risk ability serves as a clue as to how important these matters are and will aid in determining how much money you must invest. Setting your investment objective, how much cash flow you will need, and how long you plan to hold onto the investment before cashing it in.

2. You are unique!

Here are the types of questions you need to ask yourself about your character when it comes to investing.

• Are you a flat-out risk-taker, reasonably sensible, or that unique blend?
• Under what circumstances will you take a risk?
• Do you act on impulse, or stand back and watch and wait while your crazy friends leap at those ‘never to be repeated opportunities?
• How do you react to good or bad news?
• How do you respond in a crisis?

Let’s look at the following scenario as an example of situational response. You are going on holiday somewhere beautiful and new. You are driving to your destination and pass a sign to ‘AFRICA’S HIGHEST ZIPLINE!!!’.

Do you swerve left and fly down there without a second thought, blow half your holiday budget and go zipping? Do you slow down and give your passengers the ‘should we’ evil eye? Do you stop at the next lay-bye and contemplate all the pros and cons? Or do you pretend you didn’t see that sign and accelerate towards your holiday? 

Test yourself for different risk situations (walking on coals, swimming with sharks etc.) to get a feeling for what constitutes safe and allowable risk versus unacceptable risk.

Ultimately, this will help compile your risk rating, which, together with your impulsivity rating, makes up your ‘risk willingness’ score. This score contributes the other 30% to your overall investor risk profile.

3. Me, biased?

We love to consider ourselves unbiased, but we collect prejudices like kids collect game cards.

Four of the many prejudices can derail intelligent planning.

1. An anchoring bias shows up if you fixate on one aspect of an investment, like a hefty dividend, and you don’t read the rest of the stats on it.
   1. A self-control bias may pop up when you need instant gratification and consider selling an investment to buy a small island in the Indian Ocean.
   1. A regret aversion bias is when you do nothing to prevent being involved in a bad action replay of a historical event, like a sudden significant drop in a share price.
   1. And loss aversion bias is when you rush to take a risk to avoid a loss rather than to make a gain.

These biases are all rather subtle, but one needs to know them and try and avoid them.

4. Life will interfere

The state of the world at large or home and how you perceive it can also taint your investment decisions.

It is a good idea to be mood-aware because so many large and small dramas are lining up to make you grumpy. The big dramas like war, political skullduggery, illness, death, divorce, or losing your job can seriously taint your positivity.

A negative frame of mind can cause you to make irrational, impulsive investment decisions. 

On the other hand, there will be those happy days when the war ends; a tyrant is toppled, you win a substantial contract, or you meet the love of your life – and then, who cares?

You may wish to toss some money to the wind, fly to the moon, sell your conservative shares and invest the lot in crypto—a little irrational and impulsive.  

An investment advisor may suggest you avoid making any decisions on both these days and wait for a less exciting day. When the sun rises and sets without the state of your world being re-ordered.

5. What a day!

And never mind those crises of life, there is also the daily state of mind to factor into one’s investment calendar.

There will always be sunny-personality days and stormy ones, and these are increasingly anxiety-laden days.

After all, we live through a series of relationships, including partners, workers, generation XY and Z, in-laws, wasps and stinging nettles.  

Understanding yourself is critical when you are investing money as a beginner.

Though it seems counter-intuitive, a positive state of mind has been associated with reasonably risky investment behaviour. There is the hope of adding more emotional rewards to the day.

On the other hand, a thunderous or anxiety-ridden mood is construed as heightening perceptions of danger and motivating one to avoid risk. This may be a good thing; at least you don’t worsen your day.

But again. You may want to make investment decisions on milder days when your mood is calm, and you can think more neutrally.

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