Do you want to learn more about Financial Independence and Retire Early (FIRE)? This guide will teach you EVERYTHING you need to know to dive deep into the topic and retire whenever YOU want.
Today, making sufficient money to live a life you love is easier than ever before.
Imagine 50 years ago, the opportunities and the world looked entirely different.
Nowadays you can work in country A and live in country B, you can fly around the world for cheap, and you can design the life you love.
There is an increasing amount of people that are living life on their terms, forming a community. We’re the FIRE movement.
The FIRE movement changed my life when I first encountered it in 2018.
It really triggered me to learn more, so I dove into the subject radically.
I’ve read dozens of books, including:
In the beginning, it sounded extremely unrealistic to be financially independent by 35 (my current goal, I’m now 25).
However, when I started to educate myself, I realized that I can accomplish it!
As they say, knowledge is power!
What is FIRE (Financial Independence and Retire Early)?
FIRE is an acronym that stands for Financial Independence Retire Early. There is a growing movement of people who are choosing to live the life they want to live by applying the FIRE principles, so they can retire decades earlier than their peers.
The majority of the FIRE movement is applying these basic principles:
- Saving a high percentage of your income (50-70%)
- Save money by living frugally or practice minimalism
- Grow wealth by investing in low-cost index funds
There are two parts of this acronym, FI and RE.
Let’s get into what they mean!
FI stands for Financial Independence. You are financially independent when your income is greater than your expenses. This can be passive income like rent, but also dividend income from your investments.
RE stands for Retire Early. Retiring Early indicates that you never have to work again – if you choose to!
Many people who reach FIRE, start doing something they really love. They start monetizing their hobby, helping others, travel full-time, etc.
So the stereotype of sitting at home doing nothing for retirement is completely thrown out of the window!
Retirement is awesome and gives you all the freedom you want! Think about what you want to do when you retire (early) and create your ideal life!
When you put FI and RE together, you get FIRE.
FIRE is about more than just making as much money as you can and retire as young as you can. It is thinking about what makes you happy, mindful spending, and living a life aligned with your values. FIRE is actually a great way to develop as a person!
There are many different ways to FIRE:
- Coast FIRE: your total amount invested would be enough to retire comfortably at regular retirement age.
- Lean FIRE: you live frugally in a low cost of living area.
- Fat FIRE: you like to spend 6 figures or more per year.
- Barista FIRE: you retire early but still keep a part-time job to supplement your income.
Take from the FIRE movement what fits you and your personal goals & desires!
How Did The FIRE Movement start?
The FIRE movement was started in 1992 when Vicki Robin and Joe Dominguez wrote the book Your Money or Your Life. It popularized the idea of financial independence and not spending your prime years behind a desk.
In the book, there is one thing that really stuck with me. When you’re working, you are trading your life energy for money.
When you’re working, you are trading your life energy for money.
That means that when you buy something, you are exchanging your time for it.
How many hours have you worked for your jeans? For your car?
This way of thinking completely changed the game for me.
6 Steps To Reach Financial Independence and retire early
If you’re still reading, that means that you’re really interested in the FIRE movement. You still want to reach financial independence and retire early.
To make the path to FIRE as straightforward as possible, I’ve summed it up in 6 steps.
I’m referring to a bunch of articles as well, that could provide you with further reading and a deeper understanding of how you can make your path to FIRE a smooth ride.
I mean, if I would have put allll the info in here, we would be soon over 10,000 words. That’s more of a thesis than an article.
Step 1 – Find Your Why
Finding your why in the journey to FIRE is super important!
If you’re setting a goal and you have clear why you want to reach the goal and what will be waiting for you on the other side, you will be much more motivated.
I want you so seriously think about the next few questions:
- What does your perfect day look like?
- What does your perfect week look like?
- Write down the things that make you happy in life
With finding out WHY I wanted to pursue financial independence, I noticed that I want to have options. I want to be able to travel when I want, I want to be able to go run on a Wednesday afternoon, and I want to spend time on my passion projects.
When you think about what matters in your life, you quickly find out what things don’t matter.
That’s great, because that’s where we are going to save the money.
I want you to spend on whatever is important to you and I want you to cut back on the things that are not important to you.
Doing this will speed up your path to financial independence and retire early, enabling you to live your dream life!
Step 2 – How Much Money Do you Really need?
Now we’re start to go into some simple math, in order to calculate your big number.
How much do you need to live your dream life?
That’s the big question.
In calculating your financial independence number, we are going to dive into the safe withdrawal rate (SWR). There is a 4% rule in retirement, meaning that you can withdraw 4% of your portfolio annually to live off.
To transform this to easier math, the rule of thumb is that you need 25 times your annual expenses to retire early. That means when you’re spending $12,000 annually, you need $12,000 * 25 which is $300,000.
These returns and this withdrawal of money also includes inflation.
Step 3 – Find Out Where You’re At
You’ve calculated your FIRE number, yess great!
Now, how do we get there?
You FIRE number is based on your net worth.
Your net worth is basically all your assets and liabilities combined. To calculate your net worth, you add up all the assets and you subtract all the liabilities.
Assets are typically things like cash, investment accounts, peer-to-peer loans, and more. Liabilities are typically things like a student loan, car loan, and the like.
If you want to know how much of your net worth is currently available to you if you need it, calculate your liquid net worth.
Compare your net worth to people in the Netherlands and see where you are compared to others!
Make sure that your net worth is going up over time!
Want to have an easy way to calculate your net worth? Without the math? Start Today Tracking Your Net Worth For FREE and see where you’re at!
Step 4 – Save Money Without Feeling like you’re cutting back
Now you know where you’re at in terms of net worth, it’s important to start saving money.
Personally I LOVE saving.
Do you know why?
Because saving money enables me to spend on what I find valuable when I don’t spend on the things I don’t find valuable.
It’s all about your spending being aligned with your values.
I can save over 50% of my income, while I still lead the life I love. For example, in 2019, I traveled around the world for 4 months and still saved 65% of my income.
Yup, you read that correctly.
The best way to see how much money you’re currently saving is by tracking your savings rate.
Your savings rate is your savings as a percentage of your income, so simply divide your savings by your income.
If you make $50,000 per year and are saving $20,000, that means you’re saving 40% of your income.
How much money are you currently saving?
What is your current savings rate?
Let’s Get To Budgeting
There are many different approaches to budgeting and it may not work for anyone.
The problem with the budget is that people often feel limited in the amount that they can spend. The thing is, your budget should enable you to spend where you most want it.
The easiest way to do this is to cut back on the Big Three:
When you can cut back on these three expenses, you’re golden.
On average, Americans spend 70% of their income on the Big Three. Meaning that if you can lower that, you can bank the difference.
How can you do that?
A couple of suggestions:
- Move to a smaller apartment
- Move to a lower cost of living area
- Live with roommates
- Walk or bike to work
- Prepare your lunches at home
- Meal plan & cook at home
By keeping my rent low, only eating out occasionally, and not having a car, I managed to save 65% of my income in 2019. My goal for 2020 is to save 75% of my income and I’m on track to reaching that this year.
This is really speeding up my way to financial independence, a lot!
Where The Heck Do I Start?
So where do you start saving? I would say check where you’re spending the most each month and see how you can save on that.
Make the big and hard decisions so that you can make a quantum leap and speed up your way to financial independence.
Think about what we discussed before, your money is actually made from your time. So if I’m trading my future freedom for this product, would I still want to spend my money on it?
It’s up to you to make the decision on about where would you want to spend your money on.
These decisions are very personal.
I was happy to cut back my eating out, to live with roommates until 25, to bike to work, and to spend aligned with what I value. I banked the difference, which leads me to save over $17,000 in 2019.
This $17,000 will be worth double, or $34,000, in 10 years when I want to be financially independent.
Don’t you want that for yourself?
It was totally worth it cutting on these things and getting back this amount of savings and investments for it.
Try it for yourself and see how far you can come!
Step 5 – Hack Your Earnings At Your Job
Since I’ve started working, I’ve been reminded time and time again that your career is your most valuable asset.
Why is that?
Your career is probably the place where you will make the most money. That means that it’s very important to get paid as much salary as possible.
If you’re getting a 4% raise every year instead of a 3% raise, after 45 years of career you reach the traditional retirement age, and you will earn $850,000 extra. Just from that 1% extra salary increase.
I hope this illustrates why maximizing your salary is so important.
I am big on asking for things.
That’s how I got promoted. That is how I got my raise.
Keep learning new things, be good at what you do, and never be afraid to ask!
Step 6 – Start A Side hustle
Starting a side hustle to make some money outside of your day job.
The great thing about side hustles is that you can make money doing ANYTHING you want. I swear!
You can try out one on the list:
- Become a virtual assistant
- Make money blogging
- Run Facebook ads
- Sell your stuff online
- Make money typing
- Fill out surveys for rewards
- Get cashback on your purchases
If you want to read more, see this list of best side hustles to try this year!
When you would rather build up passive income rather than side hustle income, check out these articles:
- 15 Best Passive Income Sources To Try This Year
- How To Start Peer-to-Peer Lending (12%+ annual return)
- Dividend Investing 101
Step 7 – Investing is key
We’re at the last step, investing!
Investing is a key step.
What we’ve done until now is realizing what our current situation is. Than we have assessed the gap.
The gap between your earnings and your savings should be as big as possible. That is the amount that you can invest.
Investing is a game changer, believe me. Over the past two weeks I’ve made over $3500 from investing, mostly in my sleep.
Why is investing so important?
When you invest your money, you can let your money grow over time. That is what they mention in Rich Dad Poor Dad as let your money work for you.
Important: before you start investing, make sure you have 3-6 months of savings in your emergency fund.
For investing, I recommend looking into low-cost index funds. These are funds that track entire indexes, like the S&P 500 and have an expense rate of around 0.2% annually.
To maximize your returns, you have to minimize the costs of maintaining your investments.
If you don’t have any investing experience, check out this article about how you can invest your first dollar!
Implement This Slowly in your life
These steps need constant attention in your life and constant improvement is necessary. You will learn more and more about what you think is important in terms of spending, you will earn more in your job, and you can grow your net worth over time.
Let Me Help You!
This can all be very overwhelming, that’s why I want to take you by the hand.
I want you to know, that YOU can achieve financial independence and retire early!
You can accomplish it, and I want to be the person to educate and motivate you to get started.
Technology enables us all to read the journeys of those who already accomplished financial independence and retire early, walk in their footsteps and achieve FIRE ourselves.
Are you pursuing Financial Independence or Early Retirement?
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