Summary of "The Big Short" by Michael Lewis

Introduction

Living in Southern California, Scott Rieckens seemed to have an ideal life. He had a happy marriage, a two-year-old daughter, and owned a BMW while being a member of a boat club. Despite these outward signs of success, Scott felt something was missing. Upon discovering the FIRE (Financial Independence, Retire Early) movement, he decided to overhaul his lifestyle. Although their family income allowed them to live comfortably, their spending habits were excessive, leaving them with a savings rate of just 8% annually. Realizing this wasn't enough to achieve financial independence, Scott and his family made drastic changes. They relocated to a more affordable area, sold their cars in favor of a used one, and reduced their annual spending to $60,000. The lesson here is that you don’t need a six-figure salary to pursue FIRE—many in the community live on as little as $30,000 a year. Let's explore how you can start your journey toward financial independence.

Chapter 1: Deciding to Pursue FIRE

Most people aim to retire around the age of 65, expecting to collect a full pension and enjoy their later years. But why do we work most of our lives just to enjoy a few years of retirement? Our culture promotes materialism, urging us to spend on luxuries that could instead be saved or invested. The FIRE movement encourages a frugal lifestyle, focusing on what truly matters.

Scott Rieckens, a creative director in Coronado, California, was accustomed to an upper-class lifestyle. He and his wife, Taylor, enjoyed dining out frequently and used high-end products, thanks to their combined income of $142,000 after taxes. Despite contributing to their 401ks, they realized saving only $10,000 a year wasn't enough to achieve their financial goals, like buying a house or saving for their daughter’s college.

In February 2017, Scott's perspective shifted after listening to a podcast by Mr. Money Mustache, a Canadian blogger who retired at thirty. The podcast introduced him to the FIRE movement, a community aiming for early retirement through financial independence. After using an online retirement calculator, Scott realized that by halving their expenses and investing the savings, he and his wife could retire in just ten years. This revelation spurred them to make immediate, significant lifestyle changes.

Chapter 2: FIRE Focuses on Financial Freedom

Retirement doesn't have to mean completely leaving the workforce. For those pursuing FIRE, it's more about gaining financial freedom—having enough wealth to cover your expenses without needing a traditional job. This freedom allows you to choose work that you love or even to explore non-traditional ways of earning.

Take Sylvia, for example. After losing most of her possessions to Hurricane Katrina in 2005, she decided to adopt a frugal lifestyle. Working as a lawyer and picking up extra income as a delivery driver, she managed to pay off her student loans. Now, at 38, Sylvia has achieved financial independence and is free to pursue her entrepreneurial dreams.

Financial independence means something different for everyone. For some, it’s an opportunity to travel, for others, it’s a chance to do charity work or pursue creative passions. According to the FIRE formula, financial independence is achieved by saving and investing twenty-five times your annual expenses. For the Rieckens, this meant cutting their annual spending to $60,000 and saving $1.5 million. By investing these savings, they could expect a 5% return, allowing them to live off $75,000 a year, using the "4% rule" to maintain their wealth.

Chapter 3: Starting Your FIRE Journey

Financial independence begins with reducing expenses and building assets to live off the returns. The first step is to track every dollar you spend and save. Once you recognize your spending habits, you can begin making adjustments. The goal in FIRE is to save and invest 50-70% of your income. To simplify this process, focus on reducing your largest expenses first: housing, transportation, and food.

Scott and Taylor tackled housing by staying with their parents temporarily and later moving to Bend, Oregon, a more affordable city with outdoor activities and good schools. They solved their transportation needs by buying a used AWD Honda CRV for $7,500, suitable for Oregon's terrain.

When it came to investing, they diversified their savings into low-cost index funds, real estate, and entrepreneurial projects. Index funds are particularly attractive because they spread investments across the stock market, usually offering about a 10% return per year. Even Warren Buffet recommends them over managed funds.

Chapter 4: Convincing Your Partner to Join

Convincing a partner to commit to the FIRE lifestyle can be challenging, as it requires significant lifestyle changes. Scott Rieckens developed the "Ten Things Exercise" to approach his wife, Taylor, about FIRE. They each listed ten activities that made them happy, discovering that their true joys were simple and didn’t revolve around their then-luxurious lifestyle.

This exercise opened the door for Scott to discuss the FIRE movement with Taylor, leading to their joint commitment to the lifestyle. It’s important to approach these conversations with care, especially when discussing changes with friends and family who might not share your enthusiasm. The FIRE community can be a valuable support system during this transition.

Chapter 5: Overcoming Challenges in FIRE

The journey to financial independence isn’t always smooth. For the Rieckens, their journey gained attention when Travis Shakespeare, a senior VP at BBC Worldwide, offered to direct a documentary on their FIRE experience. While attending a Camp Mustache retreat, Taylor was initially skeptical but ultimately found a supportive, diverse community.

Adapting to the FIRE lifestyle was challenging for Taylor, who struggled with the transition to working from home while also being the family's primary breadwinner. Despite these difficulties, she adjusted and now appreciates the benefits of financial independence.

Chapter 6: Getting Started on Your Own

You might wonder if FIRE is achievable without a six-figure income. The truth is, FIRE is accessible to everyone, regardless of their salary. Consider Kyle and Kalen, who live in Colorado with a combined income of under $50,000. By adopting the FIRE lifestyle, they reduced their annual expenses to $32,000 and are on track to achieve financial independence in six years.

The key to starting your FIRE journey is flexibility and resilience. The Rieckens, for instance, learned to adjust their budget during their first year, realizing that FIRE isn’t about giving up everything but about aligning spending with values.

Conclusion

Taking control of your finances through the FIRE movement can lead to a life of financial freedom and happiness. Whether you choose to downsize your lifestyle or simply cut back on unnecessary expenses, the principles of FIRE can help you live a more fulfilling life. Start tracking your spending today, make a plan, and begin your journey to financial independence. The time to start is now.