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How Americans Become Millionaires: FIRE Principles

A couple of years ago on Habré there was already an article about the FIRE (Financial Independence / Retire Early) movement. She described the essence of the phenomenon well, but did not go into much detail, so many readers have the impression that this is not applicable in Russian realities, or leads to a very limited and unhappy life as financial independence is achieved. These arguments are regularly used by Americans, including those who make good money, who are familiar with FIRE only by hearsay. Therefore, it seems to me useful to talk about the principles and methods of achieving financial independence used by the Americans, and then everyone will decide for himself which of these tools is available to them in their situation and their country.

One of the common myths about FIRE followers is that they want to mess around, and so they are in a hurry to "retire." This is usually not the case. The main thing that people in this group seek to avoid is dependence on the employer. One of the first important reference points is “fuck you money”. Such an amount of money that allows you to turn around and slam the door in front of the nose of your employer if he decides to be rude or exploits an employee who is dependent (as he thinks). Most people like to work and create, but would like to be able to choose the work they like, even if they pay little or do not pay at all. Many “quitters” create their podcasts, blogs, start advising, and sometimes it quite unexpectedly turns into a successful business, allowing them to stop using their savings.

For some professions, including programmers, the standard retirement age is also too high given age discrimination in hiring. Many were faced with the fact that after 50 years it was becoming more and more difficult to find work, and solving problems on leetcode in preparation for an interview was becoming more difficult. Therefore, the desire to secure a pension 10-20 years earlier than its official onset is quite understandable.

Books considered pillars of the FIRE movement



The first step to controlling your own money is to keep track of expenses and budget. It is impossible to defeat an invisible enemy, especially when you are the enemy of your wallet. Starting to control spending, many find that they had illusions about their spending. For example, that a big cost item is lunch at work, and you can save some money if you take lunch from home in a disciplined way. Often, asking yourself an honest question, it turns out that the reason people do not do this is a sense of embarrassment in front of colleagues (“everyone goes to the restaurant, and I'm with a boat”) or too lazy to think out what to bring with you tomorrow evening. The same thing happens with prolific subscriptions to services that are almost never used or the cost of a car, where people in their mind only considered the cost of a monthly loan payment, and bringing together the cost of insurance,gasoline and maintenance, suddenly realized that a taxi in their case is cheaper. ATFIRE-communities also successfully share strategies for optimizing travel expenses (how to use bonus miles for opening new credit cards), for teaching children (how not to pay 40,000 a year for their student), optimizing taxes, tips for high-paying professions and tips in economy, but without going into artificial poverty. All for a healthy balance and informed consumption.

After putting things in order in expenses, the second point is the analysis of debts and strategies for closing them. This is hardly the case of Habr, but in the USA there are a lot of people who do not know the interest rates on their credit cards, but they are actively using this loan. People who have accumulated significant debt fall into an endless bondage of constantly accruing interest and lose the ability to close it on condition of a small income. One of the strategies in this case is to find a bank offering to open a card with interest-free services for the first year and free transfer of debt from another credit card. Then all the forces rush to close this debt for a year. If there are several credit cards and debts, the first thing that closes is those with the highest interest rate. Tuition debts tend to have a fairly low percentage,therefore, in the penultimate turn, they are closed, and then a mortgage.

However, not everyone considers it necessary to pay the mortgage ahead of schedule. With a mortgage rate of 3-4% per annum, many people think that this is cheap money, which is better to invest in something that will bring greater profitability. At this point, followers of financial independence are often divided into two categories: real estate investors and investors in index funds. Someone, of course, is diversifying in both directions, but I often observe a pronounced priority. If savings and savings can help a person cease to be dependent on current work, then it is a competent approach to investing that becomes the key in order to be able to stop being dependent on work in principle.

Real estate investment


Step 1. House Hacking : a single specialist or a young family without children can take a house in a mortgage and rent out “extra” rooms, or buy a “duplex” (a house with two apartments), one of which can be rented out. It often turns out that with a down payment on a mortgage of 20% and a low interest rate, the payment is such that the tenants fully cover it from the rent, and the “hacker” lives for free and eventually receives a fully paid housing. If 20% is not, in the USA the first mortgage can be taken with a contribution of only 3.5%, if the owner of the mortgage plans to live in this house.

Step 2. Investment house. A good deal is considered housing in which the “1% rule” is respected: monthly rental income is 1% of its value. In most major US cities, this is simply unrealistic, and that is why often people starting to invest in real estate often lose money. Profitable deals must be sought, bargained, and in some regions there are simply no such deals. An ideal investment home is usually located in a small US town, far from the coast, where there is a university. In this situation, there is a high demand for rent, and a lesser desire to buy housing, because students here are only temporary. As a result, housing can be bought relatively inexpensively (within $ 100,000), and rented out for good money ($ 1,000 per month). You can write off depreciation of housing from rental income, which allows you to save on taxes.

3. BRRR: Buy, Rehab, Rent, Refinance. After the first investment house turned out to be a successful investment and the investor begins to think about the next, or even several, the question arises of how to build up your portfolio as quickly as possible. The BRRR strategy works as follows: an investor finds (for example) $ 20,000 for a down payment on new investment housing in a “killed" state. He buys a house for 100,000, then invests another 50,000 in repairs and rents it out for $ 1200 per month. Then she comes to the bank and says: “Thanks to the repair, I increased the cost of housing, and now such a house on the market costs at least 200,000, let's refinance.” The bank sends the appraiser, he confirms that the houses are in a similar condition and the truth is that much (people are ready to overpay for the house in the state of “move in and live”) andthat an investor debt of 80,000 now represents not 80% of the cost of housing, but much less. “Let's bring the debt up to 80%”, the investor offers, and the bank increases its loan amount and monthly payment, but at the same time returns “extra” 80,000 in cash to it. Total, the debt to the bank is $ 160,000, with a mortgage rate of 4.5% (investment rates are more expensive) - this is $ 811 dollars per month. With an income of $ 1,200 per month, this allows you to cover the costs of a mortgage, property tax, and there remains a margin of safety for simple real estate between tenants, repairs or unforeseen situations. And while in the hands of the investor 80,000 for the next BRRR. 30 years after the end of the mortgage cash flow is converted into net income. However, many 30 years are not waiting, and bringing the portfolio to a comfortable number of “doors”,begin to gradually close the mortgage, directing all the "extra" income from all real estate to one housing, then another, and with each house paid, the rate of debt closure increases.

However, not everyone, however, has the time or desire to engage in repairs, finding tenants, and raking up related problems. There are management companies that for 10% per month will take on relationships with residents, but not all investors have the opportunity to find deals that will allow them to win even with 10% commission. Those who have a permanent job and young children prefer passive income.
Syndicates are passive real estate investments. For example: 50 investors are dumped at $ 100,000 each, the management company takes a loan of another 20 million, and buys an apartment building. After which it is renewed, rent is gradually increased, and then resold to another investor. After 5 years, the invested money is returned and after deducting the share of the management company, investors remain incomes at the rate of 8-15% per annum.

A more diversified and passive income from real estate is investing in REIT real estate indices .

Investments in Index Funds


For a long time, the mecca of passive investors was Vanguard. Before its founding in 1975, there were mainly mutual funds in the market: these are funds that “actively” managed your investments, but also took a significant percentage for this. For example, a mutual fund’s yield in a good year is 14% per annum, but they will take 8% for management and you will get 6%.

In Wangard, all of its customers became co-founders of the company. This means that maximizing profits and minimizing customer costs are interrelated and mutually beneficial tasks. Vangard created his own indexes, which are often wider than well-known indexes like S & P500 or NASDAQ. Their profitability can be either lower or higher than some mutual funds, but at the expense of very low% for service they win as a result. In 2008, Warren Buffett Predictedthat the S & P500 will bypass 10 years of active management of any fund, and he turned out to be right.

One of the most popular passive investor indexes, VTSAX, is a fairly broad portfolio, although 22% is occupied by fairly large companies like Apple, Microsoft, Visa and Procter & Gamble.

Mantra of lovers index of funds: “At the interval of 10 years, the market can go anywhere, but at the interval of 30 years it goes up.” It is clear that the past does not guarantee the same in the future, and Japan has already demonstrated how the market can stagnate for many decades. But this is “the best we have.”

In the past few years, start-ups have appeared that provide a slightly more convenient interface, although in essence they offer exactly the same index funds - Betterment, RobinHood, which as a result began to change the market’s old-timers, Fidelity now also offers its index funds as a way to attract new customers.

Index funds are not intended for short-term investment, but for people with a long planning horizon. Therefore, these investors are not afraid when the market goes down: when stock prices fall, dividends often continue to be paid, and these incomes are reinvested in the purchase of new shares at a lower price. So long-term investors call the periodic drawdown of the market a sell-off period and many try to invest more in this period, rather than pulling out their money. Others do not change their strategy and simply regularly invest the same amount, no matter what happens to the market “time in the market> market timing”.

In FIRE communities, it is generally accepted that the average market grows by 8% per year (after the financial crisis since 2012 it has grown very rapidly, sometimes by 20% per year, so many people expect from 2013 that it is about to begin to fall, but even the coronavirus did not break it for a long time).

Therefore, after a person stops investing and starts spending savings on pensions, spending 4% per year is considered safe so that the savings are enough for 30 years, and 3% is so safe that the savings never end. Here's what one of the early retirement calculators looks like .

As the pension approaches and the risk appetite decreases, investors add less profitable, but generally considered more stable bonds to their portfolio. Separate books have been written about them and related strategies. With a healthy balance of stocks, bonds and cash, a person has the opportunity to choose which of the savings to spend depending on the economic situation.

Yes, IT specialists and other highly paid specialists will become faster millionaires. But almost anyone can become financially independent. A family with small savings can move to a place with a lower cost of living, and accordingly start spending less, which will help their savings last longer. Some Americans consciously choose to live outside the United States, so their (by American standards) modest savings allow them to live comfortably abroad. For those who want to travel and earn extra money, they often recommend working at vipkid.com - native English speakers are in demand all over the world. With the growth of Russian-speaking expats abroad, the demand for Russian-speaking teachers leading online lessons is also increasing, so this could also be a growing niche besides programmers already working for outsourcing,translators and designers.

If you describe the average representative of the movement for financial independence, then offhand you get something like this portrait:

  • He uses credit cards only for bonuses, but always closes the balance on time
  • Saves 30-50% of his income.
  • She does not shun “handwork” or part-time work for the sake of additional income.
  • He does not envy the neighbors who bought a new car, but wonders why they did not save, and did not buy an economical three-year period.
  • Chooses clothes and equipment for their quality and convenience, rather than brand.
  • If he likes an iPhone, then the previous generation will still buy and use it for 4 years.
  • He understands that the children put off his financial independence for ten years, but decides that he can afford this luxury.

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