The FIRE movement is growing and for good reason. More and more people are realizing that their careers do not have to define their lives. In fact, they are looking for ways to achieve financial freedom and possibly leave the workforce altogether years or even decades before the traditional retirement age. That is a stark comparison to 48% of Americans who are 55 or older who have no money saved for traditional retirement.
If this financial freedom sounds interesting to you, here are the basics of the FIRE movement and the first steps you can take to get started.
What does financial independence mean?
The first thing to remember about FIRE is that it is part of personal finance. That means that by definition, it is personal. Of course, this means that there are different definitions about FIRE even within the FIRE community itself. Most people define financial independence as some variation of having enough income to support yourself. That generally means that your living expenses are covered through investments or passive income. You don't have to punch a time clock to support yourself anymore at this level of financial freedom.
What does early retirement mean?
The financial independence, or FI, part of FIRE is fairly straightforward. If you spend any amount of time in Facebook FIRE groups or on FIRE-focused Reddit threads, you will see that the RE part of FIRE is hotly debated.
A handful of people argue that the strictest definition should hold. Early retirement, or RE, means that there is an absence of work. The early retiree leaves his or her career and never works again.
However, the vast majority of early retirees aren't striving to spend the rest of their lives in a hammock beachside. They develop their passions, pursue new hobbies, and perhaps even earn an income. This could be in the form of a part-time job, book royalties, income properties, or myriad other ways to earn money. The point is that the work is non-essential and happens on their own terms.
How do I know if FIRE is right for me?
If you found yourself bristling at the notion of retiring early, that's OK. Early retirement may not be for everyone. However, there is good reason for everyone to strive for financial independence.
The sooner you reach financial independence, the more secure your money situation is. Even if you currently love your job, that can change. Coworkers get reassigned, bosses leave, companies go under. When you reach financial independence, you invite a new level of freedom into your life.
What are the first steps I can take toward FIRE?
You're ready to start working toward financial independence. That's fantastic. This first post won't cover every single aspect of FIRE; instead, think of it as a launch pad.
Here are the first few steps you can take to get started on your FIRE journey:
1. Calculate your net worth
The first step toward FIRE is to determine your net worth. To start, you will want to determine what assets you currently have. This can be both financial assets and physical assets.
Financial assets may include:
· Pension plans
· Taxable investment accounts
· Other retirement accounts (401K, 457)
Physical assets may include:
· Real estate
· Precious metals
· Personal property (collectibles, cars, etc.)
Financial assets are more liquid than physical assets. It is worth noting, though, that there are often many stipulations that come with accessing retirement accounts ahead of traditional retirement age. Additionally, because it is often difficult to get money from a physical asset quickly, some people choose not to include them in their net worth calculations. If you do choose to include the value of your primary residence and your car, make sure you use a reasonable figure. Working with a real estate agent or consulting Kelley Blue Book can help.
After you have totaled up your assets, you need to determine your liabilities. That means you take an inventory of all of your debts.
Liabilities may include:
· Car loans
· Student loans
· Credit card debt
This is also a good time to consider any loans that you may have co-signed. Even if you are not currently making payments on them, you can be held responsible for those loans if the other party stops paying.
Now that you have calculated your assets and your liabilities, you can calculate your net worth. The math is simple:
Assets - liabilities = net worth
Subtracting your liabilities from your assets reveals your current net worth. Remember that this number is a starting point. If the number isn't as large as you had hoped or you're currently looking at a negative number, fear not. Everyone starts the path to financial independence in a different place. If your FIRE timeline is slightly longer than someone else's, that is OK.
2. Track your spending
You will want to gather a month's worth of spending data. You can do that using a notebook, a spreadsheet, an app on your phone, or software like Personal Capital. The most vital part is to make sure the data is as complete as possible.
After you've calculated your spending for the month, ask yourself these questions:
· Does this spending feel typical or were there unusual expenses?
· Was I holding back because I was tracking my numbers so closely?
· Did I feel deprived or uncomfortable? Is this how I imagine living in the future?
The point is to determine if these are truly reflective of your current spending habits and how you'd like to live. If they are, you can multiply your number by 12 to get an estimate of what your yearly expenses will be. Make sure to also add in any one-time or semi-annual expenses you incur, such as homeowner's insurance or property tax payments. This gives you a ballpark estimate of your annual expenses.
3. Calculate your FIRE number
Now that you have a handle on your net worth and your spending habits, you are ready to calculate your FIRE number. Whether or not you intend to stop working, this number will show you at what level you become financially independent. This series will explore how the math behind FIRE works in future posts, so consider this to be a primer.
To determine your basic FIRE number, you will want to multiply your annual expenses by 25.
If you spend $50,000 a year, that means your FIRE number is $50,000 x 25, or $1.25 million. With $1.25 million invested, you should be able to support your $50,000 a year lifestyle for the rest of your life.
Depending on your annual spending level, you might find yourself reaching financial independence with less than a million dollars invested. On the opposite end of the spectrum, you might not feel FI until you have $2 or $3 million dollars invested.
4. Focus on growing the gap
Steps 1-3 help you understand your FIRE journey starting point. Whether you're pleasantly surprised, anxious, or somewhere in between, there's a good chance you're ready to get started moving the needle toward FIRE. Growing the gap will help you do exactly that.
Some people argue that increasing your income is the best strategy, while other people say it is important to reduce unnecessary expenses. The truth is that both are important. In fact, you want to focus on growing the gap to reach FIRE faster.
The difference between your income and your expenses is considered "the gap". That is money that can be invested. This allows compounding to do some of the heavy lifting, especially if you are starting while you are young. Depending on your current career and lifestyle, these are some strategies that you can use to start growing the gap:
- Negotiate a raise
- Invest (don't spend!) your next bonus
- Start a side hustle
- Cut back on discretionary expenses
You may find yourself using a combination of strategies all at once, or you might find yourself leveraging different techniques at various stages of your career.
Final Thoughts on Getting Going with the FIRE Basics
The inspiration behind FIRE is simple: Life is too short to have your waking hours revolve around work forever. People want more freedom, more flexibility, and more control. And they want it before the age of 65 or 70.
However, the road to FIRE can be complicated. Understanding the numbers behind FIRE is one thing; embracing the psychology that supports living your life in a way that is very different from the status quo is also hard.
Because the topic of FIRE is so complex, this series will include an exploration of the math behind FIRE, the different types of FIRE, and a deeper dive into some of the investing options that might help you reach FIRE faster.
With a basic understanding of the concept of FIRE, you can start to determine if this is the lifestyle for you. If it is, calculate the data to determine your current financial picture and start growing the gap. These four steps of the FIRE basics will have you starting your financial journey before you know it.