“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

– Albert Einstein

What is F.I.R.E.?

FIRE is a lifestyle movement that grew out of the GFC (the recession of 2007-2009 called the Global Financial Crisis).  Its goal, as the name suggests, is for people to gain their financial independence and retire early.  You can see more about it on Wikipedia.

Some great people who give advice about it and that we follow are:

We know we have missed a lot of quality people and if you would like to be added to the list or have a recommendation, drop Nicole an email.

What is interesting about the movement is how down-to-Earth and full of common sense it is.  It is not a “get rich quick” scam but rather uses time-tested methods for living a good life.  Charlie Munger, Warren Buffett’s longtime partner at Berkshire Hathaway, has said, again and again, that the best way to live a long and happy life is to live beneath your means when young so you don’t have to when you are old.  Ben Franklin broke up a person’s life into three parts; getting an education, being productive, giving back.  Albert Einstein is reputed to have said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.”

FIRE boils down to:

  • Save a lot
  • Start early
  • Be nice to others ( I added this last one)

Financial Independence Through Saving Money

One of the best ways to save money is to make sure you never see it.  Apps and savings accounts that automatically round up a credit or debit card purchase to the nearest dollar and put the extra money into a saving or investing account are an example of this.  Another good way is to pay a bit extra in money you owe for credit cards or mortgages.  Never pay only the minimum if you can.  Also, make sure to pay off your credit cards before other debts as they usually have the highest interest rates.

Once you have saved some money, invest it, and then don’t look at the balance every day.  If your money is in the stock market and the market takes a 20%+ tumble which it does every few years, you might panic and take your money out at exactly the wrong time.  As the advertising slogan for the lottery says- “You have to be in it to win it”.

Financial Independence Through Investing

Being in the stock market has historically shown to be a winner.  Since 1926, there have only been two periods when keeping your money in the S&P500 with dividends reinvested over ten years would have resulted in a loss and then, it would have only been for about 10% of your money.  Those two periods were during the Great Depression and the GFC.

If your time horizon for the use of money was 20 years, you would have never had a loss of principal.  Of course, past experience is not an indication of future returns which is why professional advice is helpful as is diversification.  But time is your friend when it comes to investing so don’t look at your account statements too often.

A long, long time ago, in a far off place called New England, there was once a traveler who came upon a small village.  He noticed someone locked in the stockade.  “What have they done?” inquired the traveler.

“He dipped into principal.”


money pools mobile

Want to know a secret? I know where the stock market will be in 10 years.

– Nicholas Gerber, Founder

The stock market, as measured by a broad index like the S&P500, will be about 55% higher in ten years or about 5,280 up from today’s approximate 3,200. This is down from historical projections of the stock market doubling every ten years or so.

There are two strong proven formulas behind this forecast:

  1. The Bogle Model
  2. The Demographic Model

The Bogle Model

John Bogle (1929-2019) was the founder of The Vanguard Group, one of the first people to create an index fund for retail investors, author, and generally smart & nice guy. In 1991 he wrote an article in the Journal of Portfolio Management called “Investing in the 1990s: Remembrance of things past, and yet to come”. In it, he wrote that only three things mattered in the aggregate when it came to figuring out the long-run returns of the stock market. The stock market’s current yield, the growth of earnings, and the level of price to earnings (PE ratio) at the end compared to the beginning. The S&P500 is currently yielding about 2% a year, earnings are projected to grow slowly at 3% a year and the PE ratio is projected to stay the same at about 22. Historically the PE ratio has averaged about 15 but with interest rates so low, it makes sense to keep PE high or maybe even move it up a bit. So total average long-run growth from today’s levels should be 2% (dividend yield) plus (3% growth of earnings) + 0% (PE ratio change) or 5% a year which comes to about 55% after ten years.

The Demographic Model

Another simple-but-effective model is the Demographic Model. It simply states that stocks are reflections of business and business can only grow if population increases, if productivity increases or if inflation increases. The US Census Bureau estimates that the population will grow by about 1% a year over the next ten years. Productivity has been slow this century and while expected to pick up with the advent of technology being taken advantage of more, a stable conservative number of only 2% a year is warranted. Inflation is low today at about 2% and expected not to grow until the economy can get to full employment again which might take a few years. Once it does, watch out but that is a story for another article. If we add up the components of business growth; 1% population, 2% productivity, and 2% inflation we get 5% a year which again comes to about 55% after ten years.

What to Do?

The best way to take advantage of this knowledge is to invest and forget. Create Money Pools for your savings and investing dollars. Attached goals and end values to the Money Pools like Christmas in 3 years $500, College in 10 years $35,000, or Retirement in 35 years $3,000,000. Once you know how much money you want and when it then becomes simple math to use the formulas above to figure out how much you will need to save today to reach them.