You’ve heard this advice before: if you live within your means, set aside some savings and invest over decades, you may have a good chance of retiring comfortably.
But what if you don’t want to wait until you’re sixty to retire? What if you want to reach financial independence earlier, so that you can enjoy your wealth and free time while you’re still young?
Here's where FIRE comes in.
What is FIRE?
FIRE stands for Financial Independence, Retire Early. It’s a global movement that’s especially popular in the United States, in which people who want to FIRE seek very early retirement – as early as their 30s or 40s – by saving and investing aggressively.
Some are drawn to FIRE because they don’t want to wait until they’re sixty to live a life of leisure. For others, reaching FIRE means having the freedom to pursue interests or passion projects without needing to rely on a full-time job.
FIRE may not be as easy in Malaysia
Trying to FIRE is hard enough, but trying to FIRE in Malaysia? That comes with an extra set of challenges. Here’s why:
High-income jobs are not as common
Some people who achieved FIRE relied on high-income jobs (especially in the tech industry) to invest aggressively early in their careers. But these jobs may not be as common – or pay as well – in Malaysia. According to PayScale, software engineers in San Francisco earn an average of USD121,064 (RM503,626) a year, while software engineers in Malaysia earn an average of RM49,325 (as at 27 October, 2020).
Lower purchasing power
Achieving FIRE is also easier in places like the US because they have higher purchasing power (that is, they can buy more goods and services with their currency). According to World Bank data from 2017, for every USD1,000 spent in the US, you’d have to spend RM1,727 to get the same quality and quantity of goods or services in Malaysia.
Lower currency value
Some people in developed countries achieve FIRE by moving to other countries where their currency would be worth a lot more. As Malaysians, we are limited by how much our currency would be worth in other countries.
How to achieve FIRE
Nevertheless, there are a few things you can do to increase your chances of being able to FIRE. Here’s what you need to focus on:
Find your FIRE number
In the FIRE community, your FIRE number is the savings target you’ll have to hit in order to reach financial independence. Here’s where the Maybank Financial Goal Simulator comes in handy - this tool can help you calculate how much you’ll need to save to reach retirement. Just plug in your current age, your desired retirement age, how long you need your savings to last and how much you can afford to invest right now. It will estimate your retirement savings target, and how much you will need to invest every month to reach it.
Start investing early
When it comes to investing, the earlier you start, the easier it is to achieve your goals. That’s because you’ll be giving more time for compounding returns (when you earn returns on your investment returns) to grow your wealth.
For example, here’s how much you may need to invest every month to reach RM1 million at the age of 45:
How much you need to invest a month to reach RM1 million at 45, at 7% p.a.
Age you start investing
Note: estimations above do not take inflation into account
In the example above, starting at age 22 means that you may have to put away RM1,432 a month at a 7% annual return to reach RM1 million at age 45. But if you wait just a few years later and start at 25, that amount goes up to RM1,857. Of course, this also depends on the performance of your investments – if your investments provide lower returns, you’ll have to invest more every month.
Cut expenses and save aggressively
At this point, you might be wondering: how is it possible to invest such a large amount early in your career? Those trying to FIRE achieve this by saving around 40% to 70% of their income. By keeping their expenses low, they can channel more money into investing.
To minimise expenses, you may have to make certain lifestyle choices, such as:
1. Limiting housing costs by staying with family or renting smaller living spaces
2. Relying on public transportation or buying a cost-effective used car, instead of buying a new car
3. Cooking most of your meals, instead of eating out or ordering takeout
4. Limiting spending on non-essential items, such as clothes, gadgets, gifts, video games, etc.
5. Opting for free or low-cost entertainment
It may seem hard at first to live without these luxuries, but remember that it’s possible to maximise your well-being even without these extras. Doing so will help you improve your chances of reaching financial independence.
Increase your income
Saving a huge portion of your income may not be possible for everyone, especially if it isn’t enough to cover basic living expenses. If this applies to you, it would help if you could increase your income. Earning more makes it easier to invest more. This could mean getting a raise, freelancing during your spare time or starting a side business. As a Malaysian, it could also be advantageous to earn in a more powerful foreign currency, such as the US dollar, by selling products or services to overseas customers.
But the key to increasing your income and savings is to avoid lifestyle creep or lifestyle inflation – that’s a term to describe how people tend to spend more as they increase their income. Try to maintain a specific savings rate, or even increase it over time. For example, if you earn RM5,000 and only spend RM2,500, you’d have a savings rate of 50%. If you increase your income to RM6,000 but don’t increase your spending, your savings rate could go up to 58%.
FIRE is hard, but not impossible
Make no mistake – the journey to FIRE will not be an easy one. You may have to make many lifestyle sacrifices or miss out on experiences in order to keep your savings rate high. But if achieving financial independence early is important to you, it could be a worthwhile struggle.
With some preplanning and a lot of self-discipline, you can make the FIRE dream come true. Start your FIRE journey now with Maybank Financial Goal Simulator.