FIRE | Financial Independence Retire Early

Jan 19, 2020

The world is a fantastic place. There is so much on offer, so many opportunities and the best part is that it has never been easier to make enough money to live the life you want. You can work anywhere in the world, travel to whatever destination takes your fancy. Everything is at your disposal. This is what makes up the FIRE (financial independence retire early) movement.

Gettingout of the rat race and into whatever life you choose can be achieved in so many ways. Why should you stay in a job you hate for 40 years?

Enter the FIRE movement.

A global community of ordinary people wanting to live an extraordinary life on
their own terms.

It has changed my life and can certainly change yours. When I first started on this journey, FIRE was already getting popular. In the last couple year, it has really started hitting the mainstream with articles in large publications.

People from all over the planet are getting their money to work for them to free themselves from the shackles of society. The higher your savings rate, the faster you can retire.

Since starting down this road, I have successfully left a career that I hated and drained so much of my time and energy, into a far more lifestyle friendly job. Now my main focus going forward it to create side hustles and push my savings rate as high as possible in order to reach financial independence.

What is the FIRE movement?

FI is short for financial independence.

There are plenty of definitions for financial independence. The best description is that you have reached financial independence when you no longer worry about money.

This is different for everyone. Some people will be free from money worries when they get out of debt while for most, it is when they no longer have to work for their income.

RE stands for retire early.

This really sounds clear cut but there is a lot of debate as to the meaning of early retirement. Traditionally, retiring early would be to pack in working altogether and enjoy the rest of your life.

People who make up the FIRE movement tend to be driven and ambitious people. Giving up work isn’t the goal. The retiring early aspect is a point where they no longer have to work but continue because of enjoyment, or switch to a career they are passionate about.

Money is a tool for FIRE, but the main focus is living the life you want. They key to FIRE is finding what makes you happy and pursuing that. You do not need to wait until reaching financial independence before you can start enjoying your life. It is all about creating that life on the journey. FIRE is completely personal and only you can decide what it looks like for yourself.

There is no one size fits all but there are several popular types of FIRE born from people reaching financial independence:

  • Lean FIRE: People who live on less than $25,000 per year.
  • Fat FIRE: People who live more lavishly. This can push into 6 figures in some cases.
  • Barista FIRE: People who retire early but work a part-time job to supplement their income.

Maybe one of these grabs your attention, if not, no matter. There are new types of FIRE coming out of the word works all the time. You make your own path, you decide what works for you.

How did the FIRE start?

Most people agree that it all started with the book, “Your Money or Your Life” by Vicki Robin and Joe Dominguez. Essentially, they set forth the idea that you are exchanging your life and energy for money. Your most valuable resource is time as it is finite so you should value things your spend money in terms of time you cannot earn back.

Ten years ago, hardly anyone was talking about FIRE. Now there are thousands of bloggers focusing on the topic and openly sharing their path to financial independence. There are podcasts, Facebook groups, Twitter chats, Pinterest boards and even a documentary called “Playing with FIRE.”

The Steps to Financial Independence Retire Early

FIRE is simple in theory but can easily be over complicated.

To keep it as simple as possible, here are the steps to reach financial independence
retire early.

Step 1: Decide exactly what FIRE looks like and means to you

When you search for FIRE online, there is a huge amount of information available, but the main problem is that almost all of it is centred around money.

Before you build a house, you need a blueprint and an idea of what it looks like before you even begin to buy the tools and materials. It is the same with FIRE. What life do you want to live? This is the first step in your financial independence journey. Decide what you ideal life is, what will you be doing in an average day, where will you be living, and most importantly, WHY is this the perfect life for you?

A perfect way to figure out what is important to you is start a journal. Spend 20 minutes at the end of each day writing down what you enjoyed and were most grateful for in the last 24 hours, and why it made you happy. Something I realised very quickly was that many things I wrote about were either free or cheap to do. I love playing guitar, going for a walk or cycle, spending time with friends, family and my dogs.

This exercise will change your perspective and priorities. Spending money is not the way to happiness or enjoyment, so it is easier to save that money.

Setting financial goals is straight forward to do, figuring out what you genuinely love in life and how you want to live takes quite a bit more thinking. Don’t worry if it doesn’t come easy. This is worth taking time to figure out.

When you realise you true goal, it will serve to motivate you indefinitely. You can also start building that like from day one while completing the other steps.

Step 1 Action Points:

  • Start a journal. Compile a list of what makes you most happy.
  • Write out the aspects of what your perfect life looks like.
  • Read “The Millionaire Next Door” to help shift your priorities.

Step 2: Back to maths – Calculate how much you need

This step entirely depends on your perfect life. If you want to live in a hut on the beach in Thailand versus a mansion in the Hamptons, it isn’t hard to figure which will require a lot more money to achieve.

The Trinity Study demonstrated that a portfolio made up 100% of stocks has a greater than a 95% chance of lasting for a 30-year retirement and possibly further. This is the basis of the simple math behind early retirement. You need 25 times your annual expenses saved and invested to provide enough for you. If I can live on $40,000 each year, I will need to save $1 million (4% yearly withdrawal from $1 million is $40,000).

You will need to pay tax when you withdraw the money down the line. In Ireland, tax rate of 33% must be paid on the gains earned in the sale of an asset. We also need to consider inflation over the years, at a conservative rate of 2%, together with tax will reduce the future value of your savings. The final amount of savings required will likely be higher than the 25 times annual expenses, but it is a good starting point. As the journey continues, we can try different money saving techniques to reduce our monetary requirements.

You are better off setting a monetary goal without an exact time frame initially. Once you have the starting point, you can continually trial and error ways of speeding up the process.

Step 2 Action Points:

  • Calculate expected annual expenses
  • Calculate savings retirement (25 times annual expenses)

Step 3: Spend less than you earn, invest the difference

Saving shouldn’t be a chore. You should view it as an investment in your future rather than sacrificing things in your life now. If you see it as giving something up, you will always find saving to be particularly difficult.

Financial independence will only be achieved if you save as much of you money a possible.
But the monetary amount isn’t the important number.

Savings rate is the all-important number. A lot of people in the FIRE movement are savings upwards of 50% of their income and investing it. Outside of FIRE, a savings rate of 50% is a lot rarer.

Your savings rate is the percentage of your income that you are saving. Add up all that you save, divide by your income and multiply by 100.

It is nice and straight forward, the more you save, the faster you reach financial independence. If you start off saving 10% of your salary from the day you start work, you’ll be on track to retire at the traditional age. If you make $40,000 per year, 10% is only $4,000 savings, or $333 per month. That seems like a manageable amount when you are earning more than $3,000 every month.

Push your savings rate above 10% and you’ll be able to retire earlier, potentially 30 years earlier.

Creating a budget is easy enough, actually sticking to it is a lot harder. This is why most people don’t have a budget. A budget isn’t necessary to reach financial independence retire early.

Rather than creating a budget, you should simply be more aware of your expenses and be more deliberate in your spending. You need to reduce the amount you are spending and push up that savings rate.

The biggest costs for most people are housing, food and transport. It makes sense that reducing these expenses will have the greatest impact on your spending. You can walk or cycle to work, downsize your house, and bring your own lunch to work and cook for yourself in the evenings. I cut my transport costs down to zero by making a promise to myself to cycle everywhere. My food bill has cut in half now that I am cooking everything at home by following a meal plan I make on Sunday evenings for the week ahead.

FIRE is your own personal journey. Don’t sacrifice happiness. Forcing yourself into a life of poverty for a higher savings rate might be your thing, but chances are it’s not. Focus on the areas where you spend the most money and try cut back to a point you are comfortable with.

I am happy to cycle to work and want to move to a smaller place in the next year, but perhaps that sounds like hell to you? I am not going to say you must buy this or not spend on that, you make that choice yourself. Start with the largest expenses and aim to optimize them, reduce them, save and invest the difference.

By simply cycling to work, I eliminate $4 per day in transport costs. This works out at $1,000 each year. When invested each year, this small change will leave me with an extra $15,000 in 10 years.

Step 3 Action Points:

  • Calculate your current savings rate
  • Track your spending, find out your largest expenses
  • Aim in increase your savings rate each month, even if only by 1%

Step 4: Sort out your debt

Debt usually comes with negative connotations. But there is bad debt and good debt. Bad debt is the kind that drains money from you while good debt can potentially make you money. Good debt can be a mortgage, you invest the money in real estate that can generate income or possibly student loans to help advance or change career to grow your earning potential.

Bad debts are things like credits cards which usually charge over 20% interest so this should be your priority. Wipe out bad debts as soon as you can, they are costing you money and taking away from your future freedom while they exist.

There are several ways to pay down your bad debt efficiently. The way I went about it, which is what I suggest, is focus on paying off the debt with the highest interest rate which is almost always your credit card.

Furthermore, if it isn’t going to potentially earn you money, you should avoid creating new debts from now on. A loan for a vehicle when you are starting a business that is reliant on that vehicle is a good debt. But a loan for a brand new car purely for personal use, not good.

Step 4 Action Points:

  • Make a list of all your debt and rank in order from highest to lowest interest
  • Pay the minimum on all the debts each month and use any surplus money to pay off each item on the list starting with the highest

Step 5: Improve your job and learn new skills

Most likely, your full-time job in your primary source of income. It makes sense to try push up your salary any way you can.

First off, try asking for a raise. Most people work in jobs year after year without their salary changing, or at least only enough to keep up with inflation. You are probably worth more than what you are getting paid. There is never any harm for asking for a raise, worst thing they could say is “No.”

Even a slight increase in your income, that you subsequently invest, will be potentially worth hundreds of thousands 10 or 20 years down the line.

Perhaps an increase in salary is only possible after more training or going back to school. Before making the decision, do the maths. Calculate the investment cost of further education, the salary potential on the other side and how much it will advance your financial independence journey.

In addition to pushing up your salary, building new skills should be a priority. This can improve your performance at work, prepare you for a changing world in a few years, or even get you ready for financial independence retire early. The majority of people from the FIRE movement who have reached early retirement are pretty clear that you shouldn’t retire from work but retire to something. This is where building skills along the way can help. Always wanted to be a photographer? Learn how, enjoy it, maybe turn it into a income producing past time, or even become a part time photographer when you reach FIRE. You apply this to anything that catches your fancy.

Step 5 Action Points:

  • Check the salary range for your job
  • Ask for the higher end of the range at your performance review in work
  • Make a list of skills you think you need for work and your future and start learning

Step 6: Side Hustles

Side hustles are any ventures that bring in an income supplementary to your fulltime job.

The best part is that it can be anything. Side hustles have the benefit of being something you are already good at, or really enjoy. You are in total control of the hours and ideally what you get paid.

Part-time jobs are not side hustles as you don’t control you pay or hours, you likely report to a boss, and part-time jobs won’t necessarily be enjoyable as you don’t create the job description.

There are endless side hustle ideas. You can find an expert on each of them with a simple google search. Find what you would enjoy doing, and better yet, something that is scalable. Driving a taxi is not scalable. There are 24 hours in a day, only so much money can be made due to a limit in the time you can spend in the car each day. A blog is potentially scalable. It can start with very little traffic but grow exponentially with hard work and eventually be monetized so that it even earns money when you are not online.

Step 6 Action Points:

Step 7: Invest! Invest! Invest!

Financial independence retire early is based around making your money work for you. Unfortunately, saving alone isn’t enough. It is essential to your success that
you invest what you save.

In the first few years, the amount you save will make up most of your portfolio. Suddenly, compounding interest really kicks into gear and soon, the greatest additions to your portfolio will be the interest your investment is earning.

Investing really is the key to fast tracking your financial independence. You can invest however you like but one of the most limited risk way is to stick to stocks and bonds. Some people even go down the real estate route.

Firstly, you need to create an emergency fund. This is readily accessible money that can cover 6 to 12 months of expenses. Savings an emergency fund will allow you a safety net should any unexpected expenses occur.

After the emergency fund, long term investing is the net step. Aim for low cost index funds that track the total stock market or indices such as the S&P 500. These are offer a stake in a diverse range of companies across the world.

When closer to financial independence retire early, it’s time to build up that short term stash which will be the money that you will eventually be using to fund your lifestyle, while replenishing it from time to time from your long term portfolio. These sort term investments will serve you best in a high interest online savings account. Shop around for a high rate, after all, short term doesn’t mean the money cannot still be working for you.

Investing can be scary to the inexperienced, but it is quite straight forward and can be fun. I stay away from individual stocks as these carry a lot more risk than the index funds. Spend time learning about investing when you first start out, it will serve you well.

Step 7 Action Points

Step 8: Track your Net Worth

It is paramount that you keep tabs on your hard work. After all, you put in the effort to follow all the previous steps, so you should know exactly what your portfolio is doing.

Your net worth is your total assets less your total liabilities.

There are net worth trackers available online but honestly, I do it on an excel sheet, it is quick and easy to do on a monthly or yearly basis. Tracking your net worth is the best way to follow your progress to financial independence.

Step 8 Action Points

  • Set up a net worth tracker on excel or use an online one
  • Update it at a set interval that works for you such as monthly

Step 9: Take it step by step

A major mistake people make when aiming for financial independence retire early is that they are too focused on the end goal. Tunnel vision set in. It is so important to remember the end goal without letting today pass you by. Even the smallest changes now can have a large effect down the line, but it can be hard to see the potential benefits. This is why consistency is key. Develop the good habits early and continue them for years. A few good months simply won’t do it.

When you are focused on your final goal, it can be very exciting at first, but then the negatively creeps in. Saving a large amount of money is very difficult to comprehend, a concept that seems too farfetched because how could you make so much money.

Treat financial independence like you would going on a diet. You don’t think about losing 30kg all in one chunk because that seems like a very daunting task. However, 1kg each week seems much more doable and better yet, it is very achievable. Break it down even further, that is 143 grams per day. That doesn’t even seem hard, right?

Let’s say I want to reach a goal of $1 million in 30 years, with investing and a 7% return. I would need to save $855 per month or $28.50 every day. This sounds far more achievable than saving a seven-figure sum.

You can start at whatever pace you prefer as long as you remain consistent. Start creating good money habits that are sustainable and ramp them up from there. Set your overall goal then break it down into bite size chunks that you can complete and keep yourself on track and motivated. Before you know it, you’ll reach financial independence.

Financial Independence can be for anyone

There are hundreds if not thousands of FIRE bloggers out there, each with a unique story and take on financial independence retire early. Here are some of the originals that I started out reading:

FIRE is an exciting journey. Create the one the is best for you. A little inspiration from those who have reached financial independence never hurt anyone.

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