FIRE 101 – Financial Independence Retire Early in the UK.

You’ve heard about Financial Independence Retire Early (FIRE) perhaps in the US, and want to get started. But what about doing FIRE in the UK? You have come to the right place! Let me help you get started. We are going to look at the basics of FIRE in the UK and see how you can examine your current position and get you on the road to freedom.

Financial independence Retire Early in the UKFIRE in the UKFIRE UK
Money – we all work for it, but how can you make it work for you?

Where do I begin with FIRE in the UK?

I’m going to break down the FIRE process in the order you should approach it, but please read to the end as it’s all important and interlinked:

  1. FIRE number and savings rate
  2. Financial Review
  3. Budget
  4. Savings rate
  5. Debt
  6. Emergency Fund
  7. Investment

Some things are common to FIRE around the world, but others are specific to FIRE in the UK. I’ve put my UK hat on to get you started.

FIRE Number and Savings rate

There are two critical numbers in FIRE. Your FIRE number and savings rate.

The FIRE number is, very simply, 25x your annual expenses. The FIRE number is calculated to be enough money to last you for the rest of your life by withdrawing 4% annually.

The savings rate is the percentage of your take-home income that you save.

Savings Rate = (Income – Expenses) / Income

The more you save, the quicker you will reach that FIRE number. The table below is from the man himself Mr Money Mustache and shows the time working vs saving rate. 

Financial independence retire early in the ukFIRE UK

So the goal of FIRE is a simple one: to get a higher savings rate. All you need to do is reduce your expenses and increase your income. It’s that simple. These principals are the same for FIRE in the UK and in the US.

Financial Review

My first port of call is looking at your finances in general. You need to understand what areas are holding you back so you can focus on fixing those issues. To do that, you need to know your total liabilities. These are things like:

  • Credit cards
  • Loans
  • Overdrafts
  • Mortgages
  • service charges
  • Rents
  • Phone contracts (outstanding payments)
  • Bills (arrears)
  • Insurance (outstanding payments)

Put these in a spreadsheet and find out the monthly payments, and total left outstanding to pay.

Add it up, and you will have a figure of how much you have agreed to pay back to someone.

Do the same for any assets you may own like a house, car, pension or shares.

Now calculate your networth. That is:

Networth = Total Assets – Total liabilities.

Hopefully it’s a positive number, but not to worry if its not. We are about to change that.

Budget

The next step is to create a budget. Most people use a spreadsheet or an app to do this. If you can get an app which links to your bank accounts, this will allow you to track and categorise your spending automatically. Emma is one of my favourite apps which I’ve been using for over a year now. The great thing about budgeting apps is they have all the categories already in place so you won’t forget anything. Using a spreadsheet is also great as you can customise it to suit you.

What use is a budget if you don’t track what you spend against it? Tracking spending is an important step that most beginners forget to do, and then wonder why they are still broke. The money apps come into their own by doing this automatically. You can get real-time data on whether you are going to blow your budget and then change course.

The budget will give you an idea of how much money (theoretically) you will have spare at the end of the month. The tracking will let you know what you actually have! They will never be the same, trust me.

Don’t be alarmed if you have very little leftover or even have none left over. You won’t be alone here, and the next step will help.

Reduce Costs

Sounds easier said than done, right? Well, it can be easy. To reduce costs, you need to be methodical. Because you’ve now tracked all your liabilities (step 1) you now know what you are paying and when this task is now infinitely simpler.

 Go through each of liabilities, one by one, and see if you can reduce the cost. Money-Saving Expert is a great resource for this, so I won’t dwell on it. I’ve provided some resources to help you get started. What you can do is find ways to cut regular fixed outgoings like gas and electric bills? Switch providers! Can you get a cheaper mobile contract? Do you need to be subscribing to things you don’t use anymore? Are you paying insurance for something useless? Bank account fee – switch to a free account. Switch car insurance.

If you do this for all your costs, you will soon find a lot of money spare per month.

Start shopping at Aldi. Cook at home. Sell your car.

All this can take time and cause angst, but trust me, it’s worth it. 

Debt

Now you’ve reduced your costs by several hundred pounds a month; you can go and spend that on clothes! NO! That’s not what you should do. If you have debt, you have already done that—time to stop. The next stage of FIRE in the UK is paying off that debt.

You bought a pair of shoes last year for £100. You are still carrying the debt on the credit card. It’s all mixed up with other debt, but the interest rate is 20%. Those shoes now cost you £120. If you leave it another year, they will now cost you £145. That’s because the interest is on top of interest. That’s called compound interest. The shoes are still the same, but they cost you more for no reason whatsoever.

You need to treat this as an emergency.

Use that money to start paying down the debt. I go into more detail in my guide to paying down debt which who you can read here.

Tackle the highest interest debt first. That frees up that monthly payment, and you pay onto the other debt. Repeat until gone.

This stage could take years. Treating your debt as an emergency will accelerate you out of the situation and save you vast sums. Debt is not something you should pay off as slowly as possible or on minimum payments. You should put every spare penny into getting rid of it.

Don’t be disheartened. It’s hardest at the start, but you’ll find it accelerates and you will finish sooner than you think. I thought it would take me two years to pay off £38k of debt, but it took me seven months once I put my mind to it.

Emergency Fund

As the name suggests, an emergency fund is a fund of cash which you hold ‘just in case’ something goes wrong. The benefits are two-fold:

  1. You can afford those mishaps like the car breaking down or needing to repair the plumbing without using a credit card;
  2. If you lose your job, your life won’t collapse like a house of cards.

The conventional wisdom is that you save 3-6 months of your expenses. That’s expenses, not income.

You should know by now what your monthly expenses are having been tracking them religiously through the debt pay-down stage.

Now the task is to save that up and put it in an easily accessible savings account. If saving three months of expenses seems daunting now, when you get there, it won’t be. You will have no debt payments going out, and you will be more frugal by the time you get there. Don’t worry about it.

Investing

Investing is a huge topic and a cornerstone of FIRE. It’s far too wide a topic to talk about in detail here so I’ll outline the basics. Now you have no debt, an emergency fund and low expenses you are now in a great position to start investing heavily.

Compound interest

The most important factor in investing is compound interest. This is where you make a return, and then make a return on top of that return.

Example:

£10000 at 7% per annum

Year 1 = £10,700. Gain £700.

Year 2 = £11,449. Gain £749

Year 3 = £12,250. Gain £801.

Can you see what’s happening here? The gains are increasing year on year as the gains from previous years mount up. That’s what we call compounding. It works the same way for debts, but with investing it is making you more money ever year.

The rule of 72

To find out how long it will take to double your money all you need to do is to divide 72 by the rate of annual increase.

In the example above: 72 / 7% = 10.2.

So in 10.2 years, you will have doubled your money by doing literally nothing except not spend it!

Actually investing – how do you start?

Financial advisors are expensive and usually take a % cut of your pot per year. This is usually around 2%. We don’t want that as we want to get to FIRE quickly. To get around it, people in the FIRE community will invest in low-cost Exchange Traded Funds (ETF). They generally are run by computers and consist of the correct proportion of shares in the stock market. You are buying the whole market rather than a stock. It makes things rather more simple and the risk of you losing everything very low. Only 20% of funds outperform the market, so why pay someone 2% to do worse than an ETF charging 0.05%? 

Vanguard is one of the front runners of these kinds of funds and provides all kinds of trackers for the FTSE100, S&P500, Emerging markets and Entire world markets. There are other ETF providers, of course, and you should do your research before investing.

In the UK, we have several options open to us, which protect your investments from the taxman. You should start with these.

ISAs – Stocks and shares. There are others, but I’m going to look at S&S ISAs. You can contribute up to £20,000 per year and never pay tax on the growth, income or dividend, which result.

Pensions – Your employer is required to set you up with a pension. It’s like getting a 3% pay rise for nothing. You save 5% of your salary; you get an extra 3%. Plus you get all the tax you would have paid on your earnings back. If you put in £10k per year, the government will give you £2k back (£4k if you are in the higher tax bracket).

How do you do this?

Firstly, you should select a broker of your choice. You can go with Vanguard and sign up for an account. There are others like Interactive Investor who I use.

Second, open Stocks and Shares ISA account and a SIPP (self-invested personal pension) account with them.

Third, pay in on a direct debit monthly. That way you won’t skip your payment and buy another pair of shoes!

That’s it. Keep doing investing until you have 25 times your expenses.

Alternative route

I should add that there is no set route for FIRE in the UK. Each person will have their own quirks and you must do something that works for you. Going all for nothing on paying off the debt is a risky process. I did this, and with hindsight, I would recommend having a few thousand in a savings account at the same time. Although doing this may mean you take a bit longer to pay off the debt, and pay more interest, you will probably feel better.

Employer Pension

In the UK you should be auto-enrolled into your employer’s pension scheme. This is a good thing and if you haven’t already, pay into you employers pension the whole way through this process. Doing this will mean you get a step up when you get to the investment stage. Plus, If you never had the money, you will never miss it. Plus you want that extra money from your employer contribution. It all adds up.

Conclusion – Ready to FIRE in the UK?

The premise to FIRE is simple. Reduce expenses, increase income and increase savings rate. Invest your money until you can live off the returns from that investment.

The key steps you need to take to achieve FIRE:

  • Make a budget and track expenses;
  • Pay off consumer and student debts;
  • Build an emergency fund;
  • Invest in low cost index trackers.

Oh yea, and be very patient.

Thanks for reading and please look at my other articles to get some more detailed ideas and see what I have done to get this far.

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