Have you ever heard of the Financial Independence, Retire Early movement, also known as the FIRE movement? If not, you may currently be living under a rock! Or you’re not obsessed with personal finance podcasts like me. “FIRE” has been a trendy buzzword in the personal finance community for the last few years. In this article, I’m sharing my 10 tips on how to achieve FIRE!
Before we get started, I want to share my favorite thing about FIRE: you can make your own plan. You don’t have to follow anyone else’s roadmap; you can shape your journey and mold it to fit your lifestyle and goals.
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What is Financial Independence Retire Early?
According to Investopedia, Financial Independence, Retire Early (FIRE) is a movement dedicated to a lifestyle of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow. By dedicating up to 70% of income to savings, followers of the FIRE movement may eventually be able to quit their jobs and live entirely off withdrawals from their portfolios decades before the conventional retirement age of 65.
#1: Figure Out Your Why
Before you start fleshing out your financial independence plan, figure out your ‘why’. Why do you want to pursue financial independence? Why do you want to retire early? Is it because you really and genuinely want to, or are you just attracted to it because it’s trending? Could it be that you simply hate your job right now? Do you feel like your only recourse is to retire early and tell your boss to “take this job and shove it”? If that’s the case, you may just want to consider getting a new job that doesn’t suck!
As someone who has achieved big financial goals, like paying off almost six figures of student debt, I can tell you that it won’t always be easy. There will be days when you want to quit. Your “why” needs to stand strong behind your goals. A compelling why will help you stay the course when things get hard, and you want to quit.
You may want to consider starting a FIRE journal and write out “W H Y” at the top of the first page with your list of reasons and goals.
#2: Have a Discussion about FIRE with Your Spouse
If you have a spouse, a discussion is needed before jumping in because embarking on this journey will affect them too. Some of the steps to achieving FIRE will not be easy, and you may have to make some drastic changes to your lifestyle together.
You don’t have to convince your spouse during that first discussion, but it is important to start with an introductory conversation to see if they are even open to the idea and get the wheels turning. I DON’T recommend sharing articles with them that talk about the extreme methods of achieving FIRE, like living off rice and beans for ten years, because you’ll likely scare them off. Instead, introduce it in an easy-to-understand, appealing manner.
Personally, when I introduced the idea of FIRE to my husband Eric, he just didn’t get it.
Him: “You’re going to retire early and do what?”
Me: “I’m going to do whatever I want to do!”
It didn’t click. To give some context, my husband has been a full-time pastor for the past 15 years. Along with that comes a degree of professional independence that most of us 9 to 5ers never experience. He didn’t have to deal with bureaucracy, being micromanaged, or commuting for hours every day. When God is your boss, how can you not enjoy your work? He would be happy to work forever.
While that’s great for him, that’s not going to work for me! It wasn’t until a couple of years ago when he took a side job as a hospital chaplain that he experienced typical corporate bureaucracy. One day, after a particularly long day, he came home and said, “You know what? I get it. I understand where you are coming from. What can we do to get closer to retiring early?” That was the best moment ever because he finally got a glimpse into what I’d been dealing with in the workforce for decades! Since then, we’ve had an easier time discussing FIRE.
#3: Calculate Your FIRE Number
Traditional advice would tell you to take your annual spending and multiple it by 25 to give you the amount of money you would need to retire. For example, if you spend $40,000 per year you would multiple that dollar amount by the number 25 which gives you an approximate retirement goal of $1,000,000. This loose calculation works perfectly well if you want to retire at 65 or 70 years old. However, if you want to retire in your 30s, 40s, or 50s, you will need to run your numbers differently. Instead, you should multiple your annual spending by 30 or 35 to get a more accurate picture of how much money you will need to retire comfortably.
The last thing that you want to do is rush your FIRE date using an unrealistic number and end up running out of money in your older years. Nobody wants to be forced to go back to work, so be sure that you calculate your FIRE number carefully.
#4: Get a Handle on Your Debt
If you don’t have a handle on your debt, then it’s likely handling you. One of the worst feelings in the world is to feel trapped or handcuffed to a job that you despise. All because you have to pay off debt or a stack of bills. You go into that job every day knowing that you hate it but have to be there to pay the bills.
Guess what? Once you can get rid of your debt, you will have more flexibility and options in your life. Plus, your attitude changes when you can walk into your job knowing you do not HAVE to be there.
#5: Optimize the Big Three
I highly recommend that you optimize your budget by scaling back on the big three: housing, transportation, and food. That is the area where you want to start slimming down first. While penny-pinching in others is helpful, these three categories will make the most significant difference right off the bat.
The main principle here is that you want to live below your means. While you might be able to technically afford that new Range Rover or a mini-mansion out in the suburbs, is that really supporting your goal of achieving FIRE or your “why”? To reach your FIRE goals, you’ll have to spend more conservatively than you have in the past so that you can save and invest at a faster rate.
#6: Get Multiple Streams of Income
While cutting back expenses is excellent, adding another income stream can significantly increase your earning potential. Maybe you take on overtime hours, work some part-time jobs, or start a side hustle. Once you have more income coming in, you can pay off debt faster and invest at a faster rate.
#7: Increase Your Savings Rate
It’s not about how much money you earn; it’s about how much money you get to keep. If you don’t mind retiring in your 60s or 70s, you can follow the traditional savings metric of 10%. However, if you have big goals and want to retire early, 10% will not cut it! In order to calculate your current savings rate, follow the equation below.
Savings Rate = Annual Savings / Gross Income
You can then times that number by 100 to calculate the dollar amount.
#8: Max Out Your Workplace Retirement Accounts
Whether you have a 401(k), a 403(b), a 457, or whatever your account is, you should try to max it out if you’re in pursuit of FIRE. By contributing to your workplace accounts, you will get an upfront tax break to save on your federal taxes and hopefully a match from your employer as well. All of that equals more money and more compound interest to get you closer to your FIRE number.
#9: Open a Roth IRA and Max It Out
Once you open a Roth IRA, you should do your best to max it out every single year! Plus, with a Roth IRA, if you want to retire early, you can tap into those funds sooner than you can tap into your workplace accounts. If you were to tap into traditional workplace accounts early, you would pay taxes right then and there, plus a penalty! No thanks! Just remember to consult with an accountant or your financial advisor before removing money from a Roth IRA.
#10: Start Investing Outside Your Tax-Advantaged Accounts
Now that we have contributed to our workplace retirement accounts and Roth IRA, we will want to start investing our money in the general stock market on our own. For me, that is Index Fund and ETFs, which I do through my Vanguard account. You can then use that money to subsidize living in between retiring and getting to tap into those retirement accounts.
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What is Your FIRE Goal?
I hope this article has inspired you to think about FIRE and ponder whether or not it’s feasible for you. If you’ve already started your FIRE journey, please comment below and share your ideal retirement age and how much money you think you need to retire comfortably!