More and more young adults are realizing that they don’t have to work until they are 65 and then retire. There is an alternative to working the same job for decades and then retiring at the end of their life.
With the right planning and strategy, there is a better way to reach financial independence earlier in life. The FIRE movement is the key to retiring early and freeing yourself from the traditional myth of retirement.
Stop thinking about retirement as a way to stop working at age 65. Start thinking about reaching financial independence early so you can retire as early as your 30s or 40s.
What is the FIRE Movement?
FIRE is an acronym that stands for Financial Independence, Retire Early. The FIRE movement is really a method of aggressively making money, saving it, and investing to build wealth to be able to retire early.
In many cases, this has let people retire in their 30s and 40s instead of the traditional age 65.
One of the key pieces of FIRE is to be able to save a large chunk of your income. Usually, this is well over 50% of their income, sometimes up to 70%. That money is then invested strategically to allow it to continue to rapidly grow.
Now, retiring early doesn’t have to mean that you stop working altogether. It simply gives you the freedom to be able to do more of what you love.
If that means working part time and traveling 6 months out of the year, FIRE helps people do this. This method really just gives you more options for determining how you want to spend your life.
Finding Financial Independence
Retiring early is a byproduct of becoming financially independent. Financial independence is the ability to be self sustaining through savings, investments, and passive income.
Financial independence allows you to have enough income to cover all your expenses for the rest of your life. The key, though, is that the income is passive so that you don’t have to work to make money.
The first step to financial independence is to determine how much money you need to live on for the rest of your life. Then, build enough income-producing assets to generate that amount.
This is done by increasing your income, reducing expenses, and saving as much as possible. The savings can be invested in stocks, real estate, and businesses to generate passive income.
Once you have gotten to a level of financial independence, you’ll be able to do more with your life, like retiring early. If you don’t want to work a 9 to 5 job, you don’t have to.
FIRE for Couples
Financial independence and retiring early is perfect for couples who want to do more together. Newlyweds and young couples may decide that they want to be able to spend more time together doing what they love. By committing to a FIRE strategy, it is possible for couples to retire early.
For couples, you can pool your income to tackle your FIRE goals faster. Yes, you may have more debt and two mouths to feed, but there is a benefit of working together. If you are both working, you’ll have at least two income streams that can be used to save more.
To reach FIRE, you’ll need to save as much as possible on regular basis. Try to reduce your expenses so that one of you can cover them. Your partner can then put their entire paycheck towards saving and investing.
Once you reach financial independence, use your newfound freedom to travel, pursue hobbies, spend time with your partner, or anything else that brings you happiness.
Calculate Your FIRE Income Number
If retiring early sounds good, you’ll have to start planning and changing your financial habits. The first step is to calculate how much money you need to become financially independent.
To do that, determine your base monthly expenses to be able to live comfortably. This should include your housing, food, utilities, transportation, childcare, and pet expenses. Also include a basic budget for entertainment and vacations.
When you add up all these expenses, this will be the minimum amount of income that you need to be able to live comfortably. This will be your target FIRE income number that you will need to be able to retire early.
For example, you may determine that you your expenses come out to $5,000 per month. In order to retire, you will need to have a passive income of at least $5,000 per month to be able to support you for the rest of your life. Preferably, you should not have to sell your investments or dip into savings to support your basic expenses.
One thing to keep in mind is inflation. A dollar today is worth more than a dollar in 10 years due to inflation. If the cost of living goes up around 2% every year, be sure to factor that into your FIRE retirement number.
Creating Passive Income
There are two ways to fund your retirement. The first is drawing down on your investments and the second is to generate passive income so that you don’t have to touch your base investment. Having passive income helps to preserve your wealth and requires a lower amount invested to reach FIRE.
Once you have your target income number to be able to retire early, you need to start building income streams that equal that number.
Passive income is the ultimate goal for hands-off income for the rest of your life. It is really anything that allows you to make money without trading your time and effort to get paid.
Working a 9-5 job or side hustle is not passive income. In these cases, you are essentially trading your time, skills, and effort to get paid.
Passive income allows you to set up a system once that will continue to pay you with minimal effort going forward. This can be dividend stock or real estate investing, writing a book, or building a website that sells something. Once those systems are launched, they should continue to make money for years to come.
Here is a full list of passive income ideas to start building your income streams.
How to Become Financially Independent and Retire Early
Retiring early requires planning and commitment to reach your goal as quickly as possible. You may have to give up certain things in the short term to be able to save and invest more money. Be prepared to work hard and make compromises with your partner.
Ready to start your FIRE journey? Here are some ways to get started towards your financial independence.
1. Know Your Retirement Number
The first step is to know the target that you are shooting for. This means understanding your expenses in retirement and how much income you would need. Factor in inflation, lifestyle creep, and any experiences you would like to have. Traveling around the world in first class will probably increase your current expenses.
This stage of planning for your retirement is very important to make sure you don’t run out of money early. While you can always go back to work later in your life, true financial independence should set you up for for the rest of your life.
By doing this calculation, you may think you need $1.5 million in the bank plus a monthly income stream for $3,000 to live comfortably for the rest of your life. This is your target for reaching financial independence. Now it’s time to figure out how to make it happen in 5 or 10 years instead of the traditional 45 years.
2. Invest Early
Investing in income-producing assets is one of the easiest ways to generate consistent passive income. This can be stocks and funds that pay out dividends on a regular basis. Real estate is another good option since you can collect rent payments or dividends from REITs.
To get a head start on your FIRE journey, start investing as early as you can. Even if you only have a few dollars, save it and put your money into investments that will grow over time.
Due to the power of compound interest, investing even a few years earlier can produce large gains later.
3. Keep Your Expenses Low
Gaining financial freedom quickly means being able to save and invest as much as possible. The more that you can save, the faster that you’ll build your retirement nest egg.
People who reach FIRE in their 30s and 40s have been able to reduce their expenses so that they can save more money. In many cases, they are saving 40% to 70% of their income and investing it. They often get creative when saving money by living alternative lifestyles, such as living in a tiny home.
Take a hard look at your current expenses and see what you can cut out. Keep only the things that you absolutely need and cut out everything else. It’s not easy being this frugal all the time, but keep in mind your ultimate goal to retire early.
4. Increase Your Income
The flip side of saving more money is to increase the amount of income you make every month. By keeping your expenses the same and increasing your income, you will naturally be able to save more.
Start with your job to see if there is a way to get a raise or promotion. This might mean getting certified in your field or taking extra classes to learn new skills. Talk with your boss to see what it takes to get to the next level in your career and then invest effort to make it happen.
To really increase your income and be able to retire early, look for side hustles to make a few extra dollars. This can be anything you can do in your spare time to earn extra money, like walking dogs, painting houses, or making deliveries.
5. Create Passive Income
Besides adding active income, start building passive income streams that will earn money while you sleep. The easiest way to start doing this is to put your saved money into dividend stocks and funds. These will pay out dividends on a regular basis that can either be reinvested or cashed out for your living expenses.
Real estate investment trusts (REITs) are an easy way to invest in real estate and benefit from dividends. There are REITs traded on the stock market or use a platform like Fundrise or Diversyfund that make it simple to get started.
If you have enough money saved up for a down payment, another option is to buy real estate directly and rent it out. By doing so, you can collect monthly rental checks while also benefiting from the property appreciating over time.
Besides investing your money, you can also create an asset that will generate passive income. This can be a blog, book, software, course, or website that sells products. When a system is used to drive traffic to these digital assets, it is possible to generate a steady stream of money.
6. Stay Focused
In the beginning, it can be a little intimidating trying to reach your goal. It’s no easy task saving to reach $1 million or more, especially if you only have a few dollars to start with.
Once you have your FIRE retirement target number, stay focused on your plan to reach it. Consistency over many years is what will let you build your wealth faster than others. Don’t be scared to live your life, but always keep your goals of saving and investing in mind.
The other thing is to try to set realistic goals based on where you are now and your life journey. Some people may take a little longer to reach FIRE but that’s ok. Being a little less strict with your budget and retiring early when you are 50 can be just as rewarding as a 40 year old retiree who cut everything out of their budget to get there.
7. Couples Work as a Team
If you are married or in a serious relationship, make sure that you are both onboard with your early retirement goals. Since FIRE can require serious sacrifices in the first few years, you’ll want to make sure you both are on the same page.
Once you are, work together as a team to go full steam ahead. Pool your resources, skills, and time to maximize your savings and income. Look for ways to cut costs by buying in bulk and doing things together instead of separately. Working together, you will be able to better juggle your jobs, side hustles, childcare, and other obligations.
FIRE Summary
Reaching financial independence and retiring early may not be for everyone. It takes a commitment to saving as much money as possible, increasing your income, and investing every penny. For some people, this may be too drastic for their lifestyle or retiring early just may not sound that attractive.
No matter if you want to retire decades early or just build more wealth, there are lessons to learn from the FIRE movement.
- Determine your FIRE number and make a plan to reach it in the timeframe you want.
- Aim to save 50% of your income by cutting expenses and leaving well below your means.
- Increase your income through side hustles and passive income streams. Build assets that will generate payments so that you don’t have to work a normal job.
It’s never to late to start working towards reaching financial independence and retiring early. FIRE principles can work for anyone to help build a better future for you and your family, so get started today.
