Become Financially Independent. Then Retire Early.

The FIRE (Financial Independence, Retire Early) movement was founded almost 2 decades ago. It premiered in a book called, “Your Money or Your Life.” The 1992 best seller said that working until age 65 wasn’t an ideal quality of life or even a sound financial strategy. With job insecurity and economic volatility, you could do everything right and still end up screwed.

The Great Recession of 2008 was the perfect proof of concept.

It’s what might have rung the bell for many younger workers. Millennials have embraced FIRE with a passion. It’s a logical choice for people between 25 and 40 years old. The first goal of FIRE is to become financially independent.

Financial independence means you are no longer dependent on working for money. It’s not that you don’t need money…you just don’t need a job.

The second component of FIRE is early retirement. Unless you hit the lotto or someone leaves you a few million bucks, it isn’t going to happen without the first half of the equation. Retiring early is one option but it doesn’t necessarily mean living on the golf course. When you don’t have to earn money at a job, you have a lot of options. You can do things you’ve dreamed of doing – write a book, bike across the country, volunteer, and yes, play golf.

(Read:  What does financial independence look like for me?)

How Much Money Do You Need for FIRE?

Money adds up

It’s not how much money you need, it’s how much money you save. There’s nothing new or glamorous about FIRE. It’s all about saving and investing, instead of spending. If you thought there was some secret formula to FIRE, you’re going to be disappointed. It’s the same financial strategy advisors pushed for years, rebranded, and rolled out as a lifestyle movement.

If the rebranding gets people more interested in saving than spending – we’re the better for it.

Spending is the Problem

Americans like buying stuff…even when we don’t need the stuff. As contributors to the consumer economy, we’re the bomb. We willingly replace working phones. We buy more clothes than we can possibly wear. Sneakers are a $100 status symbol, and 25 pairs of black shoes aren’t enough. We have so much stuff we pay to pay for storage space to stick it in.

We have become insatiable when it comes to stuff. Imagine going a month without buying anything but groceries or medicine. Could you do it? Most people can’t. There’s the problem, you can’t save money you’ve already spent.

Then there’s the willingness to carry credit card debt. That’s spending on steroids. Americans owe approximately $807 billion across almost 506 million card accounts.  The average balance is $5315, whether on one card or multiples.

The rebranding of FIRE as a lifestyle movement has resonated with minimalists. They see consumerism as out of control – spending isn’t just impulsive but compulsive. By paring down your spending, you have more to save and contribute less waste.

Saving To Living Expenses Ratio

The saving rates proposed by FIRE aren’t for the faint of heart. One of the criticisms of FIRE is that lower-income people can’t possibly afford to participate. But this was never intended as a social program – it’s a financial strategy. Almost everyone can save more than they’re doing now. Whether it leads to financial independence or not – it’s extra money for investing.

Without investing any of your savings, here’s what it takes to cover one year of living expenses:

  • Saving 10% of your income, it will take 9 years
  • Saving 25% of your income, it will take 3 years
  • Saving 50% is where you break even, it will take one year for one year.
  • Saving 75% means you save 4 years in one.

If you can save 75% of your income for 5 years, you’d have the equivalent of 20 years of living expenses. And that’s without investing any of it. Here’s the hard part – not too many people can afford to live on 25% of their income. Most of the people who can are already investing and growing their money.

Saving at 50% is more doable but not by much. In 15 years, you’ll have 15 years of living expenses. But we have to ask – if you’re not wealthy, are you still living with your parents rent-free?

How to Get Started With FIRE

This is the hard part. No matter how much money you have, looking to cut your expenses means sacrifice. That’s all well and good for a guy making 6 figures, but for people with lower incomes, it’s not as easy. But remember the two components of financial independence: spend less, save more.

Start with the B word: Budget.

Most people have no clue how much they spend or what they spend it on. There are some necessities like housing, food, healthcare, utilities, and transportation. After that, everything else is a choice.

How much are your choices costing you? The way to build a budget is to pull up your bank statements for three months. That’s how you see where your money is going. Start with your credit cards:

  1. How many do you have?
  2. What are the interest rates on each?
  3. How much of a balance do you carry?
  4. How many authorized users have cards?

If you have been trying to create a budget for a family, number 4 is where it gets ugly. Everyone has to sign on to the budget. Some cards may need to be confiscated. Store-specific are a disaster with high-interest rates – they aren’t needed if you have a major credit card.

What are you buying?

Is shopping for stuff your major expense or is it entertainment? Do you eat out a lot, tailgate, or go to the movies? It’s hard to live without some discretionary spending, but you can pare it down. If you’re renting a storage unit or your garage is too full for your car – might be time to slow down the shopping.

Back in the day, a budget meant a family meeting to go over a spreadsheet, but now you can go with an app. This is particularly helpful for families with kids.

Financial guru Dave Ramsey has an app called EveryDollar. It creates your budget spreadsheet. We like that it syncs across all devices. No one can claim they didn’t see it.  We also like Digit. The app lets you customize what you’re saving for and chips away at debt. They will help you invest your money too. It’s free for 34 days, then it’s $5.00 a month.

If you’re digging yourself out of debt, these apps will guide you to that goal. They also show you how to cut back and save money instead of spending it.

Make New Deals

When was the last time you checked around for car insurance prices? Can you refinance to reduce spending on car loans or the mortgage, even student loans? Shop for better deals on phone services. Mint Mobile is a new vendor with all-inclusive talk, text, and data plans starting at $15 a month. They run their services through the same lines that your current plan use.

Look at the credit limits on your cards. Call the company and get them lowered – having too much credit is almost as dangerous as having none. While you’re there, see if they will negotiate on interest rates. Look for options to consolidate debt with a low-interest loan. Just make sure the terms are favorable.

(Read: Are You Building Wealth or Just Making Money?)

Investing Your Money

Once you start saving, the next step is to start making money on your money. There are all kinds of investment opportunities. Search for with low fees, no commissions, and a manageable minimum investment. If you’re just starting you can begin funneling your savings every month.

Index Funds

The place to start is an index fund. An index fund covers a pre-determined group of assets with one investment. The best example is the S&P 500 index but there are hundreds of them.

Index funds are built on mutual funds or Exchange-Traded-Funds (EFTs.) Index funds are passive investments – there is no human advisor. The funds are managed by algorithms, so means they have lower fees. For example, Fidelity has four index mutual funds with no administrative costs.

EFT index funds may have some different fees. EFTs are traded on the stock market, so you can expect fees for making trades. There is some administration costs on the accounts, called an expense ratio. For example, Vanguard’s S&P 500 ETF – named by Warren Buffet as a low-cost EFT fund – has a .03% expense ratio.

The SPDR S&P 500® ETF Trust is known as SPY. This is a highly popular fund for active traders. The expense ratio is high at 0.0945% because it’s not a passive account. Investors have some control over the fund’s portfolio.

Real Estate Investment Trusts (Reits)

REITs are investment funds that buy, manage or finance income-producing properties. Shareholders pool their money to invest in commercial and residential real estate. These are passive investment opportunities that will diversify your portfolio.

REITs make money by leasing space and collecting rents. They act as the banker in these transactions, making their services more affordable. REITs are required by law to pay 90% of their taxable income as dividends to shareholders. The investors are responsible for paying taxes on their dividends. REITs hold properties all across the country, minimizing market downtowns in a particular area. They offer a competitive return, and you can reinvest your dividends.

Retire Early

The Retire Early part of FIRE is the opportunity to live your life on your own terms. The retirement age of 65 was set up almost a century ago when FDR created Social Security. FIRE enthusiasts point out we spend our best years working in jobs to make money for old age.

Retire early is a two-pronged concept: 1) freedom from working for a living and 2) an opportunity to enjoy a work-free life while you’re younger. More time to spend with family, your children and participate in the things you like to do.

It might be time to stop considering retirement in terms of age. Some people love what they do and continue long past 65. Others want the chance to spend their time pursuing dreams they couldn’t fit in while working. Financial independence is the key. Once you achieve it, you decide when to retire.

Retirement can be a vibrant time of life – at any age – if you don’t have to worry about money.

Summary: The FIRE Movement

Financial independence is a worthy goal but very few people can afford to save 50 to 75% of what they earn. FIRE is appealing to young professionals who are also high earners. If you can manage to live on 25% of your income, it’s an excellent opportunity to escape from working for money.

At the highest saving rate, you can save 20 years of living expenses in 5 years, 40 years of living expenses in 10. If you started at 35 you could retire very comfortably by age 45. Not a bad deal if you can do it.

If you can’t, you can still benefit from the idea. Follow the same steps toward curbing spending and increasing savings. Make sure you have an emergency fund in a high yield savings account. Then start investing in a low-cost index fund of your choice. Make the most of whatever money you have.

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