What is Lean FIRE? The term has been growing in popularity over the past few years, and for a good reason. Lean FIRE is when you have just enough investments to cover your basic living expenses.
But what exactly is Lean FIRE? And more importantly, can it help you achieve your own goals? In this post, we’ll explore what Lean FIRE is and how you can use it to improve your life.
Related: How to Live a Simple Life
The first step to achieving Lean FIRE is understanding how much money you need to live on. This is called your “Lean FIRE number.”
To calculate your Lean FIRE number, you’ll need to know two things: what you spend and your essential expenses. You will also need to know your desired withdrawal rate.
Your annual living expenses are all of the costs you incur in a year, including housing, food, transportation, utilities, insurance, healthcare, and debt payments.
Your desired withdrawal rate is the percentage of your investments you plan to withdraw each year. A typical “safe” target is 4%, but some people aim for a lower rate just to be extra conservative.
Once you have these numbers, you can calculate your Lean Fire number by dividing your estimated Lean FIRE annual budget by your withdrawal rate.
For example, let’s say you want a Lean FIRE budget of $25,000 per year. This means you would need investments of $625,000 if you wanted to withdraw 4% each year ($25,000/.04 = $625,000).
But what if you only want to withdraw 3% each year? In that case, you would need investments of $833,333 ($25,000/.03 = $833,333).
As you can see, your desired withdrawal rate significantly impacts how much money you need to achieve Lean FIRE.
Some budget items that you may want to include when figuring out your essential living expenses:
- Housing (mortgage/rent, property taxes, insurance) – Learn How to Live Mortgage Free
- Food – Cheap Food to Buy When You’re Broke
- Transportation (car payments, gas, public transportation)
- Utilities (electricity, water, trash) – How to Save Money on Utilities
- Insurance (health, life, disability)
- Debt payments (student loans, credit cards) – 10 Tips to Become Debt Free
- Clothing – Thredup review
- Gym membership – DIY Home Gym on a Budget
- Subscriptions (Netflix, Hulu, Amazon Prime) – Get Netflix for Free
As you can see, there are many items you may want to include in your Lean FIRE budget. And, of course, everyone’s budget will be different.
But the important thing is to figure out what your essential expenses are so that you can create a realistic Lean FIRE budget.
For Lean FIRE, you will want to reduce this list of expenses as much as you possibly can without making your life ultra miserable. Consider these options:
- Downsize your home, payoff your house (if you have the means), or move to a cheaper area of the country/world to reduce your housing expense;
- Pay off your debt before retiring;
- Eliminate your gym membership – you can work out for free outside or at home!
- Try these dirt cheap meals and save money on groceries;
- Eliminate childcare since you will no longer be working;
- If you have multiple vehicles, consider selling one, or possibly even selling al vehicles and using a bike to get around if you live in a bikeable area – we live in the country where that isn’t possible.
- Try these 25+ frugal living tips as well as learning how to live well on less.
Now that you know what Lean FIRE is and how to calculate your Lean FIRE number let’s take a look at some of the pros and cons of this lifestyle.
There are a few key advantages to Lean FIRE that make it appealing to many people.
First, it can help you save money. If you’re able to live on a lot less than you earn, you’ll have more money to invest. This can help you reach your financial goals faster.
Second, it can give you more flexibility in retirement. With a smaller nest egg, you’ll have more options for how you spend your time and where you live. You won’t be tied down by the need to maintain a particular lifestyle.
Third, it can reduce stress. If you’re not worried about running out of money in retirement, you’ll be able to enjoy your golden years more.
One of the biggest pros of Lean FIRE is that it can help you keep your investment portfolio small – which means you have to save less because you won’t need as much money to cover your expenses.
Another benefit of having a small portfolio is that it’s easier to manage. You won’t have to worry about keeping track of a bunch of different investments.
Another pro of Lean FIRE is that it’s a simple lifestyle. So this could be the perfect solution if you’re trying to downsize and declutter your life.
With fewer belongings and less money, you’ll have more time and energy to focus on the things that are important to you.
Related: 50+ Simple Joys of Life
One of the best things about Lean FIRE is that it can help you take advantage of compound interest. This is when you earn interest on your investments, and then you reinvest that money and earn interest on it as well.
Over time, compound interest can help your money grow exponentially. So, if you start investing early, you could retire with a much larger nest egg than if you waited until later in life.
You should be aware of a few potential drawbacks to Lean FIRE before you decide if it’s right for you.
First, it can be challenging to achieve. If your expenses are high or your income is low, reaching your Lean FIRE number may be tough.
Second, it may not be sustainable in the long term. If you have a health emergency or another unexpected expense, you may need to dip into your savings. This could put your retirement at risk.
Third, it can be boring. If you’re used to an exciting lifestyle, Lean FIRE may not be for you.
You may find yourself bored and restless if you’re not used to living on a tight budget. Read on for some more cons to Lean FIRE.
However, I think boredom is self-made. There are plenty of fun and exciting things you can do on a budget. have you ever heard the phrase “if you’re bored, you’re boring” by Barbara Cooper?
One of the biggest dangers of Lean FIRE is lifestyle inflation. This is when your costs go up as your income increases.
For example, let’s say you start out with a Lean FIRE budget of $25,000 per year. But then, you get a raise at work, and your budget goes up to $30,000 per year.
If you’re not careful, you may find yourself spending all of that extra money and never reaching your financial goals.
This is why it’s essential to be mindful of your spending and ensure that your lifestyle doesn’t inflate along with your income.
Another potential downside of Lean FIRE is sequence risk. This is the risk that you’ll retire too early and experience a market downturn.
For example, let’s say you retire with a nest egg of $1 million. But then, the stock market crashes, and your portfolio loses 30% of its value.
You could find yourself in a difficult financial situation if you’re not careful. So, it’s important to make sure that you have a plan in place in case the stock market takes a turn for the worse.
Always know you can go back to work – I heard someone say once that the worst that can happen is you have to go back and get a job like 95% of the people on the planet.
If you want to achieve Lean FIRE, you may need to relocate to a place with a lower cost of living. This could mean moving to a smaller town or even another country.
Of course, this is a big decision, and it’s not suitable for everyone. But if you’re willing to make the move, it could be a great way to save money and reach your financial goals.
Now that you know what Lean FIRE is, you may be wondering how it differs from Fat FIRE.
Fat FIRE is similar to Lean FIRE in that it’s a lifestyle that enables you to retire early. But there are a few key differences.
First, you don’t necessarily have to downsize your lifestyle with Fat FIRE. You can still live a comfortable life and enjoy your hobbies and possessions.
Second, Fat FIRE often requires a higher income. This is because you’ll need to have enough money saved up to cover your costs for the rest of your life.
Third, Fat FIRE is more flexible than Lean FIRE. For example, if the market declines and you lose 30% of your nest egg, you can just reduce your expenses without having to return to work.
With lean FIRE, you’re already living at the bare minimum so there is not a lot to reduce.
Now that you know what Lean FIRE is and some of the pros and cons, you can decide if it’s right for you.
For example, if you’re looking for a simple lifestyle with fewer expenses, Lean FIRE could be a good fit. But if you want more money in retirement, you may want to consider another option.
No matter what your decision is, make sure to do your research and plan carefully before you commit to any retirement strategy.
So what exactly is Lean FIRE? And more importantly, can it help you achieve your own goals?
As you can gather from this article, there are a few potential drawbacks to Lean FIRE that you should be aware of before you decide if it’s right for you.
First, it can be difficult to achieve. If your expenses are high or your income is low, reaching your Lean FIRE number may be tough. You may need to make sacrifices to chive your goals.
Second, it may not be sustainable in the long term. If you have a health emergency or another unexpected expense, you may need to dip into your savings.
However, there are some really excellent pros to living the Lean FIRE life as well. For example, it can help you save a ton of money and reach your financial goals much faster.
And, if you’re careful with your spending, it can be a sustainable way to live in retirement.
So, what do you think? Is Lean FIRE right for you? Comment below and let us know your thoughts!