How You Can Be Financially Independent And Retire Early (FIRE)

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Do you ever think about not working? Like really, purposefully and with intention, not working. And, not worrying about money. What if you could retire while still in the most active part of your life, and be financially secure. Sounds like a dream!

Welcome to FIRE – a movement that teaches you to retire early, with financial independence. And, it won’t cost you anything but time to learn the techniques.

What is FIRE Retirement? 

The FIRE acronym means Financial Independence Retire Early. The emphasis is on living a full life, simply and with happiness, while being financially secure. ‘Retiring early’ may not mean never working again, what it does mean is that you don’t have to rely on the income from working – and you can choose to do the work you love – regardless of the paycheck.

FIRE also means enjoying more time with family and friends, time pursuing activities and learning opportunities because you want to. Getting to financial independence – FI is not easy; it takes focus, sacrifices are made and it takes time to learn the principles.

Who Started the FIRE Movement?

The idea of financial independence for life – FIRE was first discussed in the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez. Vicki Robin was also involved in the Sustainable Living movement and had “questioned our dependency on money and on buying stuff.”

Her partner, Joe Dominguez, was interested in “saving like a demon” so that he would have the time to enjoy his life in later years. Together they popularized the idea of financial independence and the concept of retiring using their own financial support.

And importantly, doing this before the traditional retirement age of 65.

Related: Choosing The Best Place to Retire (and it’s not Florida)

How do you FIRE – Retire Early?

FIRE isn’t easy. “Saving like a demon,” as Dominguez said, is what you aim for. Reducing your expenses and increasing your income with absolute focus – for multiple years – takes effort.

By working obsessively hard for a number of years, side hustles, working weekends, putting in sweat equity, investing in the stock market and most importantly, severely reducing expenditures, many others have retired early – some at 50, 40 and even 30 years old. Depending on where you are starting from FIRE generally takes around 10 years to achieve.

The end goal of FIRE is a dollar amount, your calculated “FI” number. (We talk about how to calculate this further on.) There are apps, calculators, Facebook groups and YouTube videos to get you started and encourage you along the way. But, the basic concept is to spend as little as possible with your goal number in mind. How long that takes is up to you – some people fully embrace living frugally – move into an RV and eat rice and beans.

For others cutting unnecessary expenses but still keeping the things that are important to them will still get them to FIRE despite their monthly student loan payments.

Earn While you Can – Side Hustles

You may not have the capacity to increase your income in your full-time role, but you can take on additional jobs to increase your income. Side hustles are a big thing in the FIRE community! An extra $100 each week is $5,200 per year closer to your financial independence.

Check out these 51 Side Hustles to Bring in Extra Money. You will have to make sacrifices with your time, but stay focused on the end goal when you will have all the leisure time you want.

Living Frugally. Avoid Lifestyle Creep.

As you do increase your earnings, FIRE advocates say that it is super important not to allow lifestyle creep to happen. Lifestyle creep is when you make life upgrades because now you can ‘afford to.’ These can quickly erode the extra money you bring in! It is always safe to have an emergency fund set aside before you begin your financial planning.

If you drive a 2010 Nissan and get a pay increase of $10k, lifestyle creep could see you blow it all on a new car lease, a fast road bike, a nicer apartment. Stick with your current, lower-income living expenses and invest the extra money. Don’t switch from 2-minute noodles to filet mignon just because you got a pay raise and have “enough money” to splurge!

Smart Investments

Investments that make use of sweat equity or knowledge that is unique to you will offer you the best return on investment. My favorite FIRE family Amon and Christina from Our Rich Journey give great investing advice on their YouTube channel and website.

They retired at 40 years old, and have two kids!

It took them eight years on average salaries while saving 70% of their income. Many of their side hustles use their sweat equity and creativity rather than paying contractors and relying on wages to finance their FIRE. Finding the best investment account for your money can help you save on investment fees and enjoy the beauty of compound interest early on.

Related: The 5 Best Credit Cards for People with Bad Credit

How Much Money Do You Need for FIRE?

In order to reach FIRE, it is suggested that you invest in income-generating assets that give you a return of about 7% each year.

Considering inflation of 3%, you will use about 4% of your invested funds as cash to live on. These numbers are based on stock market average returns over time – taking into account fluctuations in the market.

What is your FI number?

In order to know when to retire, you want to have an endpoint in mind. A number.

When your savings reach that number you can officially ‘retire.’ Most FIRE advocates suggest using your expected annual expenses in retirement and multiply that number by 25 to build your retirement plan.

If you expect to spend $40,000 each year x 25, your FIRE number is 1 million dollars. This is money invested that can generate income. Note that this does not include the value of the home you live in – that is not included in this calculation.

From this investment, you can safely withdraw 4% of the savings each year and not run out of money. You can read more about how these numbers are calculated here and find a FIRE calculator.

How do you Increase your Income When you Already Work Long Hours?

Working a 40 hour week, plus a side hustle may not increase your income as much as you want to. This is where your creativity comes in!

Passive income sources

Passive income is where you let your money do the work. And in the words of Financial Advisor Niki Canotas How to Manage your Finances [Now and Later in Life] – if you’re money isn’t working for you – you’re working for it. Putting cash in a bank account earns you on average less than 1%, take out inflation and your nest egg will start to disappear.

Most successful FIRE’ees suggest investing in the stock market – carefully. Look for low-risk investments that pay a dividend, which makes up a part of the cash you use for living. High-risk investments will give greater growth if you are buying and selling but you are looking for income, stability and low risk.

If you are unfamiliar with dividends – a dividend is money paid out of a company’s profits to shareholders. A portfolio of dividend producing shares can give you an ‘income’ that could be buying your groceries in retirement. For example, NHI – National Health Insurers shares cost around $60 per share and paid out $1.102 each quarter of 2020.

Obviously quantity matters, if you have $1,000,000 in NHI shares, you would receive approx $16,000 per quarter. These are numerical examples, please do your own due diligence!

Rachel Richards, Finance Author and Financial Advisor adds, “If you have more time than money, consider creating royalty income. Can you write and launch a book? A course? Can you create and sell digital products online (items that are created once and can be downloaded and sold over and over again)?”

There are plenty of passive income streams out there, you just have to find the right one for you.

Earning money from your property

The main way to have income from real estate in retirement is to rent out a property that you own. A property that you have paid the mortgage on. It may be the first apartment you owned, you kept it and now rent it out. It could be a house you specifically buy to rent to tenants.

The rent the tenants pay becomes your income. Similarly, you can rent extra bedrooms or even a parking space if you live in a city or near an airport. This could give you a regular income with minimal work while increasing your overall net worth.

How Can I learn More About FIRE?

The FIRE community is a sharing community where people openly talk about their own money – something we really tend to not talk about enough!

Alex Tuckman, Financial Advisor at Wealth Management Partners of Los Angeles, also adds a few tips to get you started:

a. Have a plan

b. Know how much you’ll need in retirement

c. Prepare for the what ifs

d. Adjust for your new lifestyle

e. Know what kind of a retirement you want to have

f. Prepare for the three phases of retirement

These are a few resources to help you join in and learn about this movement of how to become financially independent. You can learn more, gather information and join discussions as you make your journey towards Financial Independence and Retire Early!

You might also be interested in: When To Use A Personal Loan To Consolidate Credit Card Debt [With Expert Advice]

Meagan Mujushi

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