Have you heard of the Financial Independence, Retire Early or FIRE movement? It’s a way of thinking about finances that’s becoming increasingly popular these days, and it’s not difficult to understand why. The “normal” retirement age used to be 65, but that’s no longer true in America. Workers who strive for FIRE retire much earlier, usually in their 40s, 30s, and sometimes even in their 20s. Seem unattainable? Not necessarily. FIRE is not just about retiring early; it’s also about having flexibility to design your life around something other than money, basically allowing you the freedom to choose to work or not.
Step 1: Determine your “why”
The first and most important step to take when crafting your FIRE strategy is to determine why you’re interested in being financially independent and retiring early. Having a job you can’t stand is not reason enough. There must be a positive goal to motivate your actions. With a clear vision, you can stay on track as you work toward your ultimate goal.
Step 2: Track your spending
Find out how much money you truly spend every month. Most people are shocked by how much they spend on certain things. Sit down with a budget and spend time figuring out where your money goes. Once you have a clear picture of where you spend your income, you can see where you can cut back, or possibly even eliminate, spending.
Step 3: Spend More Mindfully
See our previous post on 5 Tips to Master Money Mindfulness for how to get started on the road to becoming a mindful money manager. Here are some areas to consider when seeking to cut costs and begin spending your money more mindfully:
- Lower your housing costs
- Drive used cars
- Cut the cable
- Cancel subscription services you’re not using
- Lowering your tax liability by maxing out your tax-deferred vehicles such as your 401k, 457, 403b, IRA, HSA, etc.
- Use a cheaper cell phone service
- Use credit card rewards and smart financial habits to help fund your travel
- Cut your grocery bills
- Increase your income and consider adding multiple income streams
- Invest in low-cost index funds
Finally, don’t forget to adhere to the 4% rule; the ultimate equation behind achieving financial independence. The 4% rule involves how much you can safely withdraw from your nest egg each year in order to make sure you still have enough money down the road. Being frugal is a big key to reaching financial independence but being intentional with your money is an even bigger key.
FIRE is not something that happens without thinking, planning, sacrifice, and determination. It is not a get rich quick scheme. Achieving financial independence doesn’t necessarily mean that you have to quit your job, either. If you love what you do and it’s fulfilling and satisfying, by all means stick with it while your savings grows and enjoy the knowledge that your job needs you more than you need your job. However, if your future involves pursuing a vision that working a regular job would make impossible, early retirement is a good choice.
In conclusion, the driving force behind reaching financial independence and/or retiring early has to come from your reason for doing so. If your “why” is strong enough, you’ll have the motivation to make a plan and stick to it when tempted to deviate off your path to freedom. The mechanics are simple; spend less than you make and save the rest. That’s the bottom line. Simple to say but not always easy to do, that formula nevertheless remains the key to reaching financial independence.