Knowledge Base

Everything you need to know about Financial Independence, derived from the community-standard roadmap and definitions used in this calculator.

FIRE Fundamentals

The core concepts of Financial Independence, Retire Early.

FIRE (Financial Independence, Retire Early)

"A lifestyle movement with the goal of gaining financial freedom and retiring early."

FIRE is about saving a high percentage of your income (often 50-75%) to accumulate enough wealth to cover your living expenses forever. It's not just about retiring from work, but retiring from the need to work.

FI (Financial Independence): When your assets generate enough income to cover your expenses.
RE (Retire Early): The option to stop working a traditional job once FI is reached.

Savings Rate

"The percentage of your income that you save and invest."

This is the most important metric in FIRE. The higher your savings rate, the faster you reach financial independence, regardless of your actual income.

Formula: (Savings / Gross Income) × 100

A 50% savings rate means for every year you work, you buy a year of freedom.

Safe Withdrawal Rate (4% Rule)

"The percentage of your portfolio you can withdraw annually in retirement without running out of money."

Based on the Trinity Study, withdrawing 4% of your initial portfolio value (adjusted for inflation) has a very high success rate over 30 years.

Example: If you have $1,000,000 invested, you can withdraw $40,000/year.

The FIRE Number

"The total amount of invested assets you need to retire."

Calculated as your annual expenses multiplied by 25 (inverse of the 4% rule).

Formula: Annual Expenses × 25

If you spend $40,000/year, your FIRE number is $1,000,000.

Compound Interest

"Interest calculated on the initial principal and also on the accumulated interest of previous periods."

It's 'interest on interest' and it causes wealth to grow exponentially over time. This is the engine that powers FIRE.

FIRE Variations (Lean, Fat, Coast, Barista)

"Different flavors of FIRE based on lifestyle and spending goals."

LeanFIRE: Retiring on a minimalist budget (e.g., expenses < $40k/year). Requires a smaller portfolio.
FatFIRE: Retiring with a generous budget (e.g., expenses > $100k/year). Requires a large portfolio.
CoastFIRE: Saving enough early so that compound interest will hit your FIRE number by traditional retirement age, allowing you to only work to cover current expenses.
BaristaFIRE: Reaching a portfolio size where you only need a low-stress or part-time job to cover a portion of expenses or health insurance.

Income & Money In

Fueling the fire with earnings.

Gross vs. Net Income

"What you earn vs. what actually hits your bank account."

Gross income is your total pay before taxes and deductions. Net income is your take-home pay. FIRE planning often starts with Gross Income to account for pre-tax savings opportunities.

Side Hustles

"Additional income streams outside your primary job."

Accelerates FIRE by increasing the 'shovel' (income) available to fill the 'hole' (investments). Examples: Freelancing, consulting, gig economy, selling digital products.

Expenses & Money Out

Optimizing spending to maximize savings.

Fixed Expenses (Needs)

"Recurring, mandatory costs that remain relatively constant."

Housing (Rent/Mortgage), Utilities, Insurance, Minimum Debt Payments. These are harder to cut but have the biggest impact if reduced (e.g., house hacking).

Variable Expenses (Wants)

"Discretionary spending that fluctuates month to month."

Dining out, entertainment, travel, shopping. These are the easiest lever to pull for immediate savings improvements.

Lifestyle Creep

"The tendency to spend more as your income increases."

Also known as lifestyle inflation. Avoiding this is key to FIRE. If you get a raise and save it all, you accelerate your path. If you spend it, you stay on the treadmill.

The FIRE Flowchart (Simplified)

The optimal order of operations for your money.

Step 1: Budget & Reduce Expenses

"Know where your money is going."

You cannot manage what you do not measure. Track expenses and cut the fat.

Step 2: Employer Match

"Free money."

Contribute enough to your 401(k) to get the full employer match. It's an immediate 100% (usually) return on investment.

Step 3: High Interest Debt

"Guaranteed negative returns."

Pay off credit cards and loans with interest rates > 7%. It's like earning a guaranteed 20% return by paying off a credit card.

Step 4: Emergency Fund

"Insurance against life."

Build 3-6 months of living expenses in a high-yield savings account (HYSA) or money market fund. Keeps you from selling investments when things break.

Step 5: HSA & IRA

"Tax-advantaged growth."

Max out Health Savings Account (HSA) if eligible (triple tax advantage). Max out IRA (Roth or Traditional depending on income level).

Step 6: Max 401(k)

"Lower your taxes."

Fill up the rest of your 401(k) space ($23,000+ limit) to reduce taxable income.

Step 7: Mega Backdoor & Taxable

"Overflow buckets."

If available, use After-Tax 401(k) contributions (Mega Backdoor Roth). Finally, invest in a standard taxable brokerage account.

Accounts & Vehicles

Where to put your money.

401(k) / 403(b)

"Employer-sponsored retirement savings plans."

Traditional: Pre-tax contributions. Lowers taxes now, pay taxes on withdrawal.
Roth: Post-tax contributions. Pay taxes now, tax-free withdrawals forever.

IRA (Individual Retirement Account)

"Personal retirement account with tax advantages."

Like a 401(k) but you open it yourself. Has lower contribution limits ($7,000 in 2024).

HSA (Health Savings Account)

"The 'unicorn' of accounts."

1. Tax deduction on contribution. 2. Tax-free growth. 3. Tax-free withdrawal for medical expenses. After age 65, acts like a Traditional IRA for non-medical expenses.

529 Plan

"Education savings plan."

Tax-free growth and withdrawals for qualified education expenses. Some states offer tax deductions for contributions.

Taxable Brokerage

"Standard investment account."

No tax advantages, but no restrictions. Money is accessible anytime without penalty. Essential for retiring *before* 59.5.

The FIRE Flowchart

The community-standard flowchart from r/financialindependence that outlines the optimal order of operations for your money.

View Flowchart on Reddit