Building Financial Freedom: Combining the 50/30/20 Budget Rule and FIRE

19 May 2023
Kimie Rasmussen
Head of Reserve

As Wealth Advisors, we help many of our clients with financial planning and budgeting. These essential tools are the cornerstones of building and maintaining wealth, regardless of your current financial situation. By developing and adhering to a well-thought-out financial plan and budget, you can optimise your spending, saving, and investment habits to achieve your financial goals.

And if there is one goal most of us have in common it’s to achieve financial freedom and retire comfortably. When and what that looks like and how to get there is however a personal matter. But to achieve it, you first need to be specific about what your goal is and then apply the right approach to get you there.

You would have heard of a few different strategies being practised, but what they all boil down to is reviewing and adapting your spending versus saving habits.

The 50/30/20 Budget Rule is a low-effort, yet effective method for managing personal finances. The rule divides your after-tax income into three categories:

  1. Needs: 50% for essential expenses such as housing, utilities, groceries, and other necessary expenses.
  2. Wants: 30% for discretionary spending such as dining out, entertainment, hobbies, and other non-essential expenses.
  3. Savings: 20% for savings and debt repayment such as emergency fund, retirement savings, and paying off debt.

By adhering to this simple rule, you can maintain a balance keeping lifestyle inflation in check, while prioritising savings and long-term financial goals.

The FIRE movement is another approach that has gained significant attention in recent years. The primary goal of FIRE is to achieve financial independence as fast as possible, so you can spend your time however you prefer.

The FIRE strategy emphasises saving and investing much more aggressively than the 50/30/20 rule, by allocating at least 50% of your after-tax income towards gaining financial independence. The proponents of FIRE focus on diligently tracking expenses, drastically reducing spending (which comes from lifestyle choices) and investing in assets that will grow beyond inflation over time. There are, however, variations to the FIRE strategy which caters to different financial goals and lifestyle choices. 

LeanFIRE vs FatFIRE vs BaristaFIRE vs CoastFIRE

Adherents of LeanFIRE prioritise cutting costs, often living well below their means, in order to retire early with a relatively smaller nest egg. Whereas followers of FatFIRE take the opposite approach. They aim for a more luxurious lifestyle during retirement by saving and investing aggressively to build a larger nest egg. This is to support a higher standard of living and accommodate more discretionary spending during retirement.

There’s the hybrid approach that goes by the name of BaristaFIRE which seeks to achieve partial financial independence while continuing to work part-time in a low-stress, enjoyable job. And lastly (for now) the CoastFIRE method, which focuses on achieving a level of financial independence where existing investments are expected to grow enough over time to support your retirement needs without having to contribute additional savings. You are then free to allocate a larger portion of your income towards current lifestyle and discretionary expenses. With CoastFIRE, you invest aggressively early, and enjoy compound interest for longer.

Combining the 50/30/20 rule and the FIRE strategy

While the 50/30/20 split is a great rule of thumb for budgeting that doesn’t require too much discipline, the FIRE strategy will get you to your goal faster. FIRE however demands choices that for some may be unsuitable. But the two concepts can be combined to create a solid foundation for building long-term financial success.

Rather than sticking to a basic 50/30/20, review and adjust your budget depending on both your personal financial situation, as well as the economic environment.

In a high inflationary environment your living expenses will increase. You need to ensure your budget is accurately accounting for these increased costs. Be mindful of your spending habits and prioritise needs over wants. You may need to cut back on some non-essential expenses or search for lower-cost alternatives to your essential expenses. This ensures you prioritise savings at all times. You may also want to increase your emergency fund to create a greater financial cushion during uncertain times - just don’t leave it in the savings account earning nothing.

In good times, when inflation is low or your income has increased, you may be inclined to spend more rather than save more. While lifestyle inflation is not inherently bad, you could allocate a larger share of the income increase to your savings and investments to reach your financial goal sooner. The key is not to let something slide into your expenses unnoticed. Here are some steps to put it all into practice:

  1. Set a clear financial goal including timeline.
  2. Work your way backwards to ensure a saving rate of 20% will get you there. If not, you will need to adjust either your goal or your monthly savings rate.
  3. Create a budget based on the 50/30/20 rule, ensuring that essential expenses, discretionary spending, and savings are appropriately allocated.
  4. Look for opportunities to reduce expenses to boost your savings portion of the budget, with a focus on achieving a more aggressive saving rate.
  5. Pay your future self first. Set up a Direct Debit or Standing Instruction to your savings/investment accounts soon after pay day, and leave it on auto-pilot. This will help you tackle unwanted lifestyle inflation.
  6. Ensure you have an emergency fund in a readily accessible account, which can cover 6 months worth of expenses. Invest the rest.
  7. Invest consistently in a diversified portfolio, prioritising long-term growth and harnessing the power of compounding.
  8. Don’t touch your investments - market movements are proven to be short-term.
  9. Track your net worth, review your budget when needed, and reassess your financial goals and investment strategy to ensure they stay aligned to your long-term objectives.
  10. Enjoy your financial freedom and retirement.

By combining the practicality of the 50/30/20 Budget Rule with the ambition of the FIRE movement, you can create a tailored approach that balances both immediate financial needs and long-term aspirations.

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