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Financial Independence, Retire Early
The Financial Independence, Retire Early Movement (FIRE) is a movement where adherents attempt to change their lifestyle to become financially independent, thereby retiring early. Many of the unofficial tenants of the FIRE ideology buck traditional western lifestyles, seeking a simpler and more sustainable way of life. The term itself doesn’t reference a specific methodology, however, its birth can be tied to specific written works.
More broadly, the movement has thrived in internet forums and comment threads across the web. Blogs, such as Mr. Money Mustache, have helped paint specific narratives around what it means to gain Financial Independence (FI) and how Retiring Early may differ from the traditional 401(k) Retirement. Not to get too worked up, after all I am a happily married man with 2 beautiful daughters, but there are even apps dedicated to helping you find would be spouses that also have FIRE in their heart. Living a strict financial lifestyle is probably something that you would need to screen for given money is THE hot topic for divorces.
The principles of the FIRE Movement basically revolve around becoming Financially Independent… becoming ‘FI.’ The retiring early portion is optional. That said here is the general concept in a few easy steps:
- Make a Plan to:
- Reduce Expenses
- Maximize Current Income
- Generate Passive Income
- With Stock Market Investments
- With Real Estate or Property
- Some Other Method
- Execute Above Plan
- Retire Early (Optional)
Cutting expenses is a key strategy for those pursuing a FIRE journey. To become FI, you will need to ensure that your monthly income exceeds your monthly outflows. The lower your outflows then the less income you will need. Lowering your expenses will help you reach FI quicker and give you more freedom when it comes to the amount of income you generate.
When trying to determine how much $1 of cost cuts can translate into income required it may get a little hairy. If you have found a way to generate income passively from real estate, then the net proceeds from your renters will likely be $1 spent equals $ 1 earned. However, if you are intending to pursue an income route where stock and bond market investments make up your passive income there may be a better formula.
The rule of thumb (up for debate) for money you can withdraw from your investment account after you retire that is not too much that it will lower your principal’s future earnings is about 4% per year. That is equivalent to about 0.34% per month. To determine the amount that $1 of spending would require in principal just multiply it by 300. Thus, for every $1 of monthly expenses cut from the budget, you would need to have $300 less in your investment account… and vice versa. Needless to say, reducing your expenses is very powerful in lowering the amount of effort it may take to retire early.
Quality of Life Alert: You should be careful about how much you choose to cut. While you are working, a major segment of your time is consumed with a particular activity (working). If your definition of retiring early implies doing other activities instead of working (e.g., hanging out at the golf course 7 days a week) then make sure you include those line items in your budget. Additionally, if you penny pinch to the point that it may be a struggle to afford the occasional pleasure that you have become accustomed to, then you may find yourself more miserable in your retirement lifestyle than one where you work for an income. Be realistic about the things you remove and be flexible if you find that the trade-off isn’t worth it.
Maximizing Current Income
The next, or concurrent, step in the FIRE journey is to maximize your current income. This is an easy one. Essentially, it’s time to make as much money as possible. Grease the skids and rake in the dough. Money that can be accumulated in the early stages of the process can lead to outsized returns and quicker path to becoming FI. So, what does it mean to Maximize you Current Income?
Ask for a Raise at Work. Keep in mind that if you are on the FIRE journey then you may not be necessarily concerned about the long-term career prospects you may be missing out on. This may be the opportunity to ask for a raise at work. If you are diplomatic and logical about your request, you shouldn’t have to worry about negative consequences. The only thing your employer can say is ‘no.’ But, if you can make a little extra per paycheck it will help you eventually cut the attachment you have to your current job.
Get a Side Gig. Most of us only work 40 or 50 hours a week. That leaves plenty of time during our normal work schedules and off days to pursue additional income. Whether you start driving for a ride-share service or get a part time job as a bartender… the extra flow of cash will get you closer to your goal. If you have a hobby making unique crafts, Etsy is also another great way to make a little bit of extra money. The benefit to getting a side-job is that if you find that you enjoy it you may choose to continue it after you become FI. It may ease the overall savings goal while at the same time allowing you earn money while enjoying a particular activity.
Generating Passive Income
Developing a passive income is the cornerstone of the FIRE Journey. A passive income is an income that ‘makes money in your sleep.’ It doesn’t require any significant effort on your part to generate an ongoing supply of money. Sound too good to be true? For most folks, a passive income is simply the returns (4% annually as mentioned above) made off their investments in stocks or bonds. Another major segment of folks choose to invest in real estate and essentially act as property managers to make steady income from rent payers.
Whether you choose to make investments in the stock market or buy real estate so that you can rent it out, be sure you understand what you are getting into. With stocks and bonds, it is important to diversify your portfolio. There are many ways to do this, but in the FIRE Movement, Vanguard’s Total Stock Market Index Fund is largely considered the gold standard by various FIRE Figureheads.
If you are looking to go the real estate route, make sure you understand what will be required of you as a landlord. It’s not for everybody. My wife and I tried it with a single property and thought we were going to lose our minds. But for some, it definitely makes sense. You will be on the hook for:
- Major repairs
- Evicting tenants that damage your property
- Handling deadbeats
- Having to deal with the emotional toll of either kicking a tenant out or losing necessary income for your lifestyle.
With all the headaches listed above when dealing with real estate there are some benefits. Likely you will be drawing an income from rent payments AND benefit from the appreciation of your property. This appreciation won’t be readily accessible until the property is sold, or financing is obtained from a bank but it could be a major contribution to what your future wealth profile looks like.
Resources for FIRE
- Blogs. Blogs have been probably the single largest way the FIRE movement has caught hold. Here are a few links to some very entertaining and relevant blogs about becoming Financially Independent and Retiring Early:
- Podcasts. Many of the podcasts available are made by some of the same authors of the blogs mentioned above. Additionally, many of the bloggers that do not have their own podcast have been interviewed on major podcasts. (e.g., Mr. Money Moustache).
- Books. These two books are largely credited with starting the entire FIRE movement. Although not critical to understanding the process and end result, they may be interesting as a source of motivation.
Getting started on the FIRE Journey can be quite an exciting and rewarding experience even if you aren’t necessarily looking to retire early. With the appropriate mindsight and a bit of ingenuity, you may be able to retool your financial life in a way that may lead to many decades of extra free time. Use this time wisely! During the process, and after, you will find that there are many other good people on the same journey and that getting involved socially may be just as rewarding as retiring early. If you hit retirement, however, and find yourself bored then this may be a great opportunity to find a hobby or volunteer in your community.