The index fund is a smart approach

Financial Independence Retire Early (FIRE) - How you too can retire early with a sustainable lifestyle and smart financial planning

FIRE - that stands for "Financial Independence, Retire Early". The members of the FIRE scene therefore aim to no longer be dependent on gainful employment at a young age. A particularly above-average salary or a thick inheritance is by no means necessary for this - with FIRE, financial independence should be realizable for every “ordinary citizen”.

But how is that supposed to work? In short: if you want to be financially independent early on, you have to two adjusting screws rotate. One is through a long-term financial strategy to build up sufficient reserves and the other in the radical Lower your own cost of living. The best measures to implement both strategies are discussed in detail within the FIRE community.

From a purely mathematical point of view, it is possible to make the right investment decisions with a very high savings rate after less than 10 years of working life to say goodbye to the same. Some well-known pioneers of the FIRE scene became financially independent in their thirties.

But let's take a closer look at the two strategies.

Strategy I: Lower expenses, higher quality of life

The most obvious way to build up financial reserves is of course to cut your expenses and save the rest. Of central importance in the FIRE concept is the relationship between the amount spent and the amount saved, the so-called. Savings rate. If you earn 1,500 euros a month and put a third of that, i.e. 500 euros, aside, your savings rate is around 33%. The higher the savings rate, the faster you can achieve financial independence. The average saving rate of German households was around 10% in 2018 - many supporters of the FIRE movement can only smile tiredly about that. Because in the community the so-called. Frugalism widespread. This denotes a lifestyle that allows you to be your own Radically cut spending and thus drastically increase the savings rate. There are frugalists who save a significantly higher percentage of their income than they spend and achieve savings rates of a proud 70%.

Retire at 40? Is this really possible?

In principle, a pension at 40 is possible. As already mentioned, how many years you have to work to achieve financial independence depends largely on the individual savings rate.

In the blog of »Mr. Money Mustache ”, a very well-known“ guru ”of the FIRE scene, the relationship is shown very clearly in a table.

With a very high savings rate of 70% (i.e. you only spend 30% of your income and invest the rest) you can achieve financial independence after only 8.5 years. However, this is rather difficult to achieve with an average income (at least without additional sources of income such as rental income). But you don't have to set the bar that high and have it in the area of ​​lower savings rates even smaller increases have a huge impact. For example, if you increase your savings rate from 15% to 20%, you can retire 6 years earlier! To achieve this, from an average German salary of EUR 2,000 per month, one would have to set aside EUR 100 in addition to the previously saved, which is usually quite feasible - for example, one could take home-cooked meals to work instead of lunch several times a week to get them abroad (and by the way, you are also doing something good for your health). It should be noted that these calculations assume that savings will be invested to produce an annual (adjusted for inflation) return of 5%. We'll get to that in more detail later.

A new definition of wealth

However, a frugalist lifestyle does not automatically mean that you forego any quality of life until you retire or that you turn into a curmudgeonly curmudgeon. It is much more about becoming aware of what really contributes to your own happiness and about one broader definition of "wealth". Because for frugalists are »Time prosperity«, self-determination and independence more important than the accumulation of material possessions. So you could say that a frugalist lives below his own financial means, but still enjoys (or perhaps because of it) a higher perceived quality of life. The concept of frugalism is strongly related to the much better known term of »Minimalism«Related. Even minimalists strive for a frugal lifestyle and focus on the essentials, but frugalists also have a tangible, overarching objective before your eyes. This can be very specific, e.g. "retiring at 40" or at least having to work less at some foreseeable point in life. For frugalists, financial wealth is never an end in itself, but merely a tool for the »purchase« of more freely plannable and self-determined lifetimes. Frugalism can therefore be considered a targeted variety of minimalism are designated.

So frugalists use one Consumption reduction for one long-term wealth accumulationin order to be able to afford (more) financial independence in the working age. People often tend to make their lifestyles more expensive and resource-intensive as their income rises: the large apartment when starting a job, the big car after a raise, etc. Expenses keep inflating, a kind of "lifestyle inflation". Because of the sheer consumption euphoria, you quickly forget that you are becoming dependent - because the higher the material standard of living, the more work is required to maintain it. By stopping this upward spiral of the accumulation of consumer goods through conscious and reduced consumption, one gains freedom. Last but not least, such a lifestyle also drastically reduces one's own negative ones Effects on the environment and the climate.

Life hacks for budding frugalists

How can you make your own lifestyle a little more frugal or reduce your own expenses?

A very important tip for the beginning: The good old one Budget book. Sounds stuffy? Maybe, but around Savings potential to discover it is unbeatable! It is advisable to meticulously document all expenses for at least a few months. Based on this list, it is easy to reflect where your own money is really going, what is really necessary, what you don't want to do without and, above all, in which areas you can relax with a good feeling. Above all, it is worth Consumption habits (i.e. regular expenses), since these - no matter how small they may be viewed individually - can add up tremendously over several years.

Here are some ideas and thought experiments:

  • Can't I prefer a defective item myself repairinstead of buying it new?
  • If a repair is not possible, how often do I need this item? Is it enough to give me this from time to time from friends or neighbors lend?
  • If I need this item often: I can do it too Second hand buy, e.g. on ebay classifieds?
  • It has to be an expensive one every year Long-distance travel or can I imagine discovering closer goals?
  • If I live in the city - I really need one of my own automobile? Which routes and errands could I manage, for example, with a (cargo) bike?
  • I can imagine using long-lasting, classic, timeless pieces in my wardrobe instead of new ones every season clothes to buy that are in line with the latest fashion trend?
  • Are there subscriptions or other contractsthat I can actually do without, e.g. unnecessary insurance? Often cheaper alternatives can be found, e.g. outdoor sports instead of the gym, public library instead of magazine subscription or prepaid card instead of mobile phone contract
  • One every day on the way to work Coffee to go? Extrapolate that to 10 years…. How about some self-brewed coffee in a stylish thermo mug?
  • One every week Restaurant visit? Could I imagine reducing this to once a month so that it stays special?
  • Do I really need that much Living room?

When I do, manufacture or repair things myself instead of running to the nearest store and buying something new, I am learning on the side new skills to do this and demand mine creativity out. Sharing objects with other people promotes the social exchange and intensifies the contact with each other: These are factors that can increase your happiness in life in the long term than mere consumption.

You can find more specific tips and tricks for starting a more frugal lifestyle in our article "Minimalism: Less is more - How to get rid of unnecessary baggage".

Strategy II: Just send your savings to work for you

Even if increasing your own savings rate is a central factor on the way to financial independence, it will not be enough for most people with an average income to simply use the savings as fodder for their piggy bank. Because here comes the second important adjustment screw into play: The increase of one's own fortune through clever and effective Investment strategies.

Of course, month after month, year after year, you can deduct a certain amount of money from your income and transfer it to one Savings account or call money account lay. The big catch: Because interest rates have been extremely low for years, it is hardly possible to increase wealth through interest rate effects. On the contrary: Since the interest rate level is below the inflation rate (approx. 2% per year), your own assets suffer a loss of value over time - you basically pay more for your savings.

Ask another possibility property With these you can either generate a constant flow of rental income or, if necessary, use the income from the sale of the property for your livelihood. But not everyone has the opportunity to buy or inherit real estate.

One option that is theoretically possible for everyone is Investments in the financial market, e.g. in the form of stocks or funds. These are nothing more than shares in companies that are traded on the stock exchange. In contrast to the savings account, the money here is not only passively on the high edge, but "goes to work for you". This means that the companies whose shares are acquired with the shares generate profits and distribute these proportionally to the shareholders. When choosing the companies to invest in, ethical and ecological criteria should ideally also be taken into account. But more on that later.

Conquer the "magic triangle"

Due to the strong, short-term fluctuations Stocks are best suited for a long-term investment - such as for retirement provision. Does that sound like a paradox at first? But it is not: Because even if the stock exchange prices collapse in phases (such as during the financial crisis of 2008), the listed companies - globally and over several decades - generate one average return of 6-7% (see figure below). So you should avoid using stocks or funds to finance the purchase of your next car, for example - because in the worst case, the price will plummet in the next 2-3 years or exactly when you want to make the purchase. Of course you can also be lucky and the opposite is the case, so that with your returns you could also afford the latest Tesla with the best special equipment, but that cannot be foreseen.

By Jashuah - Own work by uploader, data from MSCI Inc., CC BY-SA 3.0,
Development of the global stock market index from 1969 to 2012. (Source: Wikipedia Commons by Jashuah, data from MSCI Inc., CC BY-SA 3.0)

But aren't equity investments only for financial professionals or risk-savvy gamblers? Numerous members of the FIRE community prove the opposite: many of them are completely normal »Otto normal investors«who are neither professionally active in the financial sector nor have an above-average income. It is also not necessary to follow the current share prices every day.

But before you break up your piggy bank full of optimism and invest your savings in stocks, you should first deal with a fundamental dilemma of investment, which is also "Magic triangle" is called. This dilemma always arises when you want to generate a constant stream of income from fluctuating investments (as naturally occur in the financial market due to fluctuating prices).

After all, ideally you want one during your retirement as well fixed or plannable amount take from your assets, the additional as high as possible should be and cover your living expenses. On the other hand, your stock portfolio should as safe as possible from bankruptcy i.e. the risk of running out of money during your lifetime as low as possible.

However, these three requirements are in conflict with one another: If two of the requirements are met, this is automatically at the expense of the third. If you take too much money out of your investment or take it out at an inopportune time, the risk of bankruptcy increases. If you play it safe and withdraw less money, your risk will decrease, but it may no longer be enough to cover your expenses or you will stay below your possibilities with the withdrawals.

The "magic triangle" (source: own illustration)

The infamous "4% rule"

So it is important to find a suitable one Withdrawal strategy one that takes all three factors into account. The best possible extraction strategy is the subject of lively and sometimes very controversial discussions within the FIRE community as well as among financial experts and scientists. Unfortunately, there is no general recommendation.

A very well-known clue in the community is the so-called. »4% rule«. This was derived from a study that was published in the 1990s by three American economics professors and which gained great popularity as the so-called "Trinity Study". In essence, this rule defines a safe removal rate ("Safe Withdrawal Rate"). 

In concrete terms: you can use a mixed portfolio of stocks and bonds 4% of the total saved starting value can be withdrawn annuallywithout going bankrupt within 30 years. The amount withdrawn must be adjusted to the respective inflation. Example: With assets of € 500,000 invested in cheap securities and an average return of 6-7%, I can spend € 20,000 per year for 30 years from the start of my retirement.

If you are interested in the background and details of this rule, you will find a very easy to understand explanation here in the blog »Frugalists«.

Even if this study historically set an important milestone for financial and pension planning, it should only be used today as a rough guide and rule of thumb. Because meanwhile the scientific methods have developed further. There are, for example, tools that target individual factors as well as on actual and expectedMarket situations instead of stubbornly clinging to a fixed withdrawal rate (here 4%). So can on varying framework conditions reacts dynamically and the withdrawn amounts can be readjusted if necessary. One of these tools is the open source software cFIREsim, with which everyone can simulate the development of their own financial flows under various assumptions. Bloody beginners can also start with the Vanguard Nestegg Calculator. This tool is easier to use, but also offers fewer setting options. Don't worry: there are detailed instructions and video tutorials for both tools.

A good first overview of various dynamic extraction models can be found in this »frugalist« blog article.

Investing for beginners: ETF

So far so good. But which stock portfolio is best suited? That basically depends on two factors: Your Investment objective (e.g. complete financial independence or just building up an additional cushion for retirement, etc.) and yours individual willingness to take risks. Basically, the higher the risk, the higher the possible return.In any case, you should sleep soundly with your investment and be comfortable with the idea that your assets will be subject to fluctuations: How high these will be, however, can be easily influenced by the choice of investments. It is also possible to get a mix of different stocks or funds different risk classes put together: Safe investments can guarantee a solid basic return, which is then supplemented by somewhat riskier components in order to additionally boost the return in the best case.

Of course, you have the option of putting together a stock portfolio of selected companies yourself by doing your own research (or having it put together by a consultant). However, this takes a tremendous amount of time (or money). Many supporters of the FIRE movement therefore rely on exchange-traded index funds, so-called. Exchange Traded Funds (ETF). These are equity funds, i.e. share packages that can be used to invest in many different companies at the same time. As a result, you automatically have a high degree of risk diversification: If one of the companies goes bankrupt, the loss can be absorbed much more easily by the others. A characteristic of ETFs is that they are not managed by expensive fund managers, but rather copy the stock indices, such as the MSCI World Index. This means that the administration costs are very low.

All you need is one Securities account. This is a special account that is opened with certain banks and with which you can manage your securities and fund shares. With a so-called. Savings plan you can slowly start building up your wealth from as little as 25 euros per month.

Detailed information on the subject of ETFs can be found in the corresponding article on »Finanztip«.

Classic guidebooks usually recommend investing in index funds such as the "MSCI World", which consists of the 1,600 largest stocks from the most important industrialized countries and maps the global index trend fairly well. However, it must be accepted that one automatically invests in companies that are involved in arms deals, oil production, environmental destruction and human rights violations. Can an investment in ETF be reconciled with a clear conscience?

Invest sustainably

Yes, it is possible, but it does require a little research. Those who want to be sure that they can do something good with their wealth and only in sustainable companies wants to invest can fall back on funds that have been put together according to special criteria. But here, too, caution is advised, because every provider defines "sustainability" differently. One should pay particular attention to funds that pursue the "best-of-class" approach. Here, the index provider selects the most "sustainable" from all companies. But this can also be an oil company that does a little less damage to the environment compared to the others. This applies, for example, to the "MSCI World Socially Responsible Investment", the "green" version of the MSCI World Fund, so to speak: Although companies involved in armaments, alcohol, tobacco, gambling and pornography are excluded, this fund still includes many controversial corporations.

Screenshot from
Sustainable ETFs can be easily found on Sustainable (screenshot from Sustainable

Help with your research can be found on the portal If you tick sustainability / ethical funds in the fund database for fund types and then select the ETF option for fund types, 30 products are currently displayed. If certain exclusion criteria (e.g. genetic engineering, exploitation of animals, etc.) are particularly important to you personally, these search results can also be narrowed down under negative criteria. In this way you can gradually approach the fund that is right for you.

Pension = doing nothing?

When it comes to the term "pension," some may associate it with sitting on a park bench all day feeding pigeons. Isn't that terribly boring? Don't you want to push something forwards at the age of 30 or 40, change the world a little, get professional recognition?

It is precisely this that in no way excludes the achievement of financial independence. On the contrary: the freedom gained can be used to self-determined Spend time doing something that you really enjoy and that makes sense to you. And who says you can't keep making money? Whether freelance jobs, part-time employment or project work - you can determine the conditions under which you work, as you are already financially secure. Your heart beats for a voluntary project or would you just like to backpack through Europe for a year? Everything possible.

As soon as you are no longer dependent on paid work, other things can come to the fore, e.g. the working conditions, the cohesion in the team, opportunities for development and, above all, the Meaningfulness the activity. This means that after you »retire« your life will not necessarily be more comfortable, but it will be richer.

Tips to read on

If you now want to delve deeper into the subject matter and the FIRE concept, we recommend the following sources of information for further reading:

Mr. Money Mustache
This blog is a "Classic" within the FIRE community and is written by an American who actually managed to achieve financial independence in his thirties and is therefore celebrated by the community as a kind of »guru«. Very extensive, entertainingly written and definitely recommended as an introduction to the subject. Even if "MMM" gives very good ideas, the German reader should be careful with all calculations - because the American tax system differs significantly from the German system! Therefore, always use additional sources with a German reference!

Frugalists - Living Richer 
Oliver Noelting, the author of this blog, has contributed significantly to the establishment of the term »frugalism« in the German-speaking area and is definitely one "Must-Read" for everyone who is interested in the topic of FIRE. Oliver has the talent to explain even the most complicated financial mathematical relationships with ease. So if you want to better understand the concepts behind FIRE, you've come to the right place.

Financial happiness
Another popular blog from the German FIRE scene. Nico’s blog also consists of personal experience reports, helpful tips and recommendations as well as background information on the topic of financial independence. Also exciting for the more advanced are the »Friday questions«, where reader questions are posted and openly discussed with the community

The finance vizier - Albert Warnecke
This book is considered by many FIRE professionals Standard work and successful introductory reading recommended in the subject of asset accumulation and index funds / ETF. It explains all the building blocks from the ground up, starting with the selection of the perfect investment mix, through the implementation strategy, to buying and selling.
Do you want the full overview? The FIREhub is a platform for the FIRE movement in Europe and offers, in addition to its own wiki, a forum, an event calendar and, above all, a comprehensive one Directory of FIRE blogs and podcasts in the European area. In addition, all registered blogs can be searched for relevant articles using a keyword selection.