You did everything you were told. You have a job you worked hard to get and now you work hard at that job, but you’re staring down a long road to retirement at age 67. Is this what we hoped for? To work for someone else for 40 years until our healthier days are behind us.
Enter FIRE, Financial Independence Retire Early. The FIRE Movement is a new way (circa the 1990s) to approach your life and career.
What is the FIRE Movement?
At its core, the FIRE Movement is a lifestyle that has gained momentum among millennials and the younger Gen Z online in places like r/financialindependence. The premise is simple. Maximize your savings today so you can do what you want in the future. To do that, you will have to take action.
Determine your living expenses
Do you know how much you spend each year? To get started with the FIRE Movement you need to understand where your money is going. There are a plethora of apps that can help.
Track your net worth
Net worth is the total of all your assets (checking, savings, investments) and liabilities (mortgage, credit card debit, student loans).
Look for opportunities to cut expenses
Now that you can see where your money is going, are all of those purchasing serving you?
Start Investing. Already Investing? Increase it!
The FI of the FIRE means not having to work for money. Your savings need to be working for you through investments. One day you will live off them.
Set a goal
Put a timeline for when you want to be Financially Independent. Having a goal to work towards will help you make decisions that serve you.
Increase your income
In the FIRE Movement, a lot of attention is given to cutting expenses, but saving income from a side hustle or a promotion is probably going to get you to FI even faster.
If I Retire Early will I be drinking a Mai Tai on a beach every day?
Not necessarily. It means leaving your day job and having the freedom to not work. It does not mean you have to quit working entirely. RE is different for each person. You could decide you want to spend your time traveling in an RV or living abroad.
For others, it means a career change to a profession that is more fulfilling. Say you were pushing legal papers for 20 years, but you always wanted to teach art. Unfortunately, the teaching profession does not pay what your current job does. With a good FIRE plan, you could switch careers after you have saved enough. Since you will have income outside of your investments from teaching and hopefully a benefits package, your FI goal will be lower than someone who wants to not work at all.
Other people will take a hobby to the next level, work part time, get involved in groups or dedicate more time to family.
How much do I need to save to be Financially Independent?
The FIRE Movement follows a simple formula. When your net worth is 25 times your annual expenses, you are considered Financially Independent. This is not a hard rule, as the multiple depends significantly on your personal FIRE plan. There are a few factors to consider when setting a goal.
- Your plans once you are FI
- Cost of healthcare
- Cost of living
If your FIRE plan is to actually retire early – meaning not working part time, changing careers, or running a profitable business. Then you will probably need to save more, have a minimalist lifestyle, or both. That is because true early retirement means your investments will need to cover your living expenses and healthcare costs during the gap period until your age qualifies you for full retirement benefits. This is a challenge you will have to plan for if your current employer provides your healthcare and a majority of your net worth is locked up in a 401(k) or IRA. You will not have access to Medicare, Social Security, or traditional 401(k)s and IRAs without significant penalties. That means you’ll need a brokerage account for investments that you can access before full retirement age.
What expenses should stay, and which ones should go?
Cut expenses that are not serving you. Spending a lot each week on take out or drinks? Try reducing it for a month. You will be surprised what you can live without and may even enjoy going without. Take the extra savings in your account and invest them into an index fund.
Learning to live on less can be rewarding. This does not mean you have to cut every little expense. If something you do brings you joy, then keep it. Say you have a personal trainer, great! But if you get a promotion, do not buy a bigger car or a bigger house. Put the extra income in an investment. Raising your income but keeping your living expenses fixed is a great way to accelerate your time to FIRE!
Want a new car? Skip it and buy a used one. Thinking about taking an expensive vacation to Europe? Look for alternatives closer to home.
Are you and your partner both gainfully employed? Learning to live off one salary is a life hack that can help anyone. Deciding what expenses to cut is going to be unique to each person. If you want to be FI by the time you are 40, then that could mean more significant cuts, large increases to your income, or both depending on your situation. Your FIRE plan will determine how much you need to save each year.
Start today
Putting your money to work for you is the key to FIRE. The more you save now the more your investments will make later. What seems like small gains over the first few years will grow to significant gains down the road. The sooner you start, the more time you have for your investments to grow.
Each person’s FIRE is different. Whatever you choose, the point is you are deciding that you will not drift casually along. The FIRE Movement is about taking action in your life, cutting unnecessary expenses and saving for the future. Of course, you can double down by going for that next promotion too!