There’s no denying that FIRE (Financial Independence Retire Early) is a hot topic these days. It has been for a while though. In fact, it’s been a topic of great interest to me for a while. As a result, I wrote a blog post on the subject recently.
After years of saving and investing, you’ve finally earned enough money to retire early. Congratulations! Now comes the hard part: actually retiring early. You see, planning and saving all those years for your financial freedom doesn’t mean you’re financially free. Retiring early means you’ll have to manage your money without day-to-day job distractions like paid vacation, sick days, or even a boss to answer to. It means you’ll have to manage all the things you did before you went to work — like paying your bills and managing your budget.
I’ve been hearing more and more people from my generation talk about retiring early. It’s something I’m curious about myself, so I decided to research the topic and learn what it entails. I was intrigued by what I found, which is why I decided to write this post. (Please note: this post is not an investment advice, so please do your own research before considering investing in something like a FIRE-based retirement plan). Read more about retirement calculator and let us know what you think.
If you’ve gone into the realm of personal finance, you’ve most likely come across the idea of FIRE: Financial Independence, Retire Early. While bloggers like Mr. Money Mustache helped popularize the concept of FIRE, it has been around since 1992’s “Your Money Or Your Life.”
One of the major ideas of FIRE is investment, but we’re not talking about casual investing here. Extreme saving and investment are hallmarks of FIRE. It’s very uncommon for individuals who want to retire early to save 70% or more of their yearly salary. It’s understandable if it seems a little crazy. FIRE is most likely the most severe kind of personal finance, but guess what? It works. You may retire as early as your 30s, depending on your age, income, expenditures, and financial position.
Are you interested in learning how to attain FIRE? Well, it’s easier said than done, so let’s look at the fundamentals of FIRE, the difference between saving and investing, and the five stages most people follow to attain FIRE.
What is FIRE and why is it important?
FIREd people devote years of their lives to paying off debt, saving, and investing up to 70% of their earnings. The aim is to accumulate enough savings and assets to allow them to comfortably live off of them for the remainder of their life. Yes, individuals may retire as early as 30 years old in certain circumstances.
To achieve FIRE, you only take out a tiny portion of your savings and assets each month (typically 4%). If you invest well, you can live comfortably long into your senior years. Isn’t it cool?
FIRE is appealing because it allows you to live your life as you see fit. You have the flexibility to work, volunteer, parent, or travel whenever you choose. It’s not about chasing FIRE just to leave your day job; it’s about living a life free of financial constraints. FIRE is about enjoying life on your own terms, which is why it appeals to so many people.
FIRE, on the other hand, isn’t for everyone because:
- It necessitates severe saving: people must make significant sacrifices in order to save 70% or more of their income. I know individuals who went hungry in order to save a few dollars. The need to save may become obsessive, and not everyone is capable or willing to do so.
- It isn’t foolproof: FIRE depends largely on investments, which are inherently risky. A recession may quickly wipe away a significant portion of your savings, forcing you to unretire.
In my instance, I’m aiming for the “FI” part of the FIRE acronym. Instead of rushing to reach a savings rate of 70% or higher, I’m taking my time. That’s OK with me as long as I’m not reliant on the bank.
Of course, if you make a six-figure income and can keep your expenditures low, there’s a high possibility you can accomplish FIRE in ten to twenty years with the proper inputs. This requires a combination of debt reduction, savings, and investment, as well as a significant degree of strategic discipline.
Investing vs. saving
The problem is, without savings and investments, you won’t be able to attain FIRE. Debt repayment is a no-brainer since it is deducted from your assets. However, after you’ve paid off all of your debts, the real job begins.
When it comes to FIRE, it’s critical to grasp the major distinction between saving and investing:
- Savings: When you put money away in your checking or savings account, you are saving. It’s a kind of currency that you can use anytime you choose, but it doesn’t increase on its own. Savings is useful in an emergency, but it does not generate interest. The main problem is that savings account interest rates will not keep up with inflation. That implies your money will lose purchasing power over time, which may be detrimental to you in your early retirement years.
- Investing: When you invest, you purchase assets such as stocks, bonds, or real estate that will ideally grow in value over time. That’s why FIREd people invest: if you’re fortunate, your assets will outperform inflation, allowing you to live well in your early retirement.
So, which is better for FIRE: saving or investing? I would say that you need both, but investment is unquestionably the key to achieving FIRE.
When it comes to FIRE planning, you must increase your yearly expenditures by 30. If you follow The 4 Percent Rule and take 3–4% of your FIRE fund annually, you should be able to live comfortably for 30 years.
However, it is a broad generalization: it depends on your age, how much you want to spend in retirement, how much you save, how well your assets perform, and a variety of other factors. What matters is that you understand your expenditures and set a FIRE goal that you can strive toward. It will be difficult to determine how much you need to save and invest without that figure, therefore this is a necessity.
How do you strike a balance between saving and investing for FIRE?
Investing is an important part of achieving FIRE, but there are a few things that must happen before. Everyone’s path is unique, but most FIREd people follow these five stages before retiring early.
Establish an emergency fund.
Have you set up money for a rainy day? If you don’t have one yet, now is the time to start! You need a $500 emergency fund before you accomplish anything, which may seem contradictory. This will provide you with a much-needed buffer for life’s “oops” situations (vehicle problems, job loss, medical expenses, and so on) that may put you in a financial bind.
An emergency fund is also a good place to start since it allows you to see where you can reduce costs and save more money. We’ll come back to your emergency fund later, but once you’ve reached the $500 mark, it’s time to move on.
Open a retirement account that is sponsored by your company (if you can)
Yes, even if you’re in debt, you should open a retirement account right now. This is only true if you have access to a company-sponsored retirement plan that matches your contributions.
I always made just enough contributions to my employer’s retirement plans to qualify for matching contributions. Put in the bare minimum to be eligible for matching right now; the most important thing is that you have time on your side. It may be as little as $20 right now. What counts is that you’ve established the account and that you’re depositing money into it on a monthly basis.
You may go to the next stage if your company does not provide a retirement plan or match.
Pay off your debts
You probably don’t need me to tell you that debt is terrible. The monthly fees are oppressive, making it difficult to save anything. Even if your payments are affordable, debt reduces your net worth and makes it more difficult to attain FIRE.
The majority of individuals will advise you to focus on high-interest debt initially. That typically makes more sense mathematically. But I wanted a fast victory, so we started by paying off a $200 low-interest credit card. Make sure you start paying off your bills, whatever you choose to do it.
Certain individuals like to leap straight into investing at this point, which is feasible in some cases, but I recommend that you first address your debt.
Make the most of your retirement funds.
After you’ve paid off your obligations, you’ll need to take one more step before going all-in on your investments: maxing out your retirement account.
Tax-advantaged retirement accounts, such as IRAs and HSAs, let you save more money than a savings account. Because IRAs have contribution limitations (typically $5,500 per year), most FIREd people put their money into retirement accounts before investing. Some of my friends like to make their IRA contributions early in the year, when the maximum is reached, and then concentrate on their investments for the remainder of the year.
The last stage is to invest the money you’ve saved. But I’m not referring to any investment. The majority of individuals who are seeking FIRE put their money into particular, low-cost assets that provide steady long-term returns with no volatility. These investments aren’t going to make you wealthy overnight, but they’ve shown to be successful in the FIRE community:
- Index funds are a group of assets with a reduced risk and better diversification profile. For most FIRE investors, Vanguard is the index fund of choice.
- ETFs: Exchange-traded funds (ETFs) are less expensive and have a lower investment minimum than index funds.
- Real estate: Some of my FIREd friends have put their money into multifamily housing, trailer parks, and home flipping. Real estate investment is a whole other world, yet it can provide passive income throughout retirement, which is why it’s so popular.
But how much money should you put in? It depends, just like everything else in the world of FIRE. Because I’ve previously paid off my debt and maxed out my savings, I put all of the money I have left into investments. If you can save 70% or more of your salary each year, you might have as much as 70% of your income available to invest—it all depends on your circumstances.
Last but not least
It’s easy to get caught up in the complexities of fire. It’s a good idea to combine saving with investing so you may hedge your risks and be as prepared as possible for the future. Both saving and investing have drawbacks, yet investing is necessary to increase your money over time and fight inflation.
These five stages may help you go on the road to financial independence in your quest of FIRE:
- Putting together an emergency fund.
- Employer matching is being used to its full potential.
- Getting out of debt.
- Saving to the hilt.
Do you have to do each step in the correct sequence now? Obviously not. You may save, pay off debt, and invest all at the same time. Some individuals set aside a portion of their monthly earnings to check all the boxes at once (20 percent to debt, 10 percent to savings, and 10 percent to investing). In my situation, I mainly split all of the stages to make things simple, but if a unified approach works for you, go ahead and try it.
Everyone’s experience with fire is unique. At the end of the day, it’s up to you to create a FIRE strategy that fits your lifestyle. FIRE is always a worthy goal that offers you greater control over your life, even if it takes a few decades.
It’s a frightening truth that most people don’t have enough money saved up for a comfortable retirement. By 2030, the number of retirees will double, and by the middle of the century, more than half of Americans will be over the age of 65. As the population ages, there will be widespread demand for financial advice and assistance, and if you don’t think you need or want it, then you’ll be a prime target for these pitchmen.. Read more about fire movement uk 2020 and let us know what you think.
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