Most of you have probably heard of the Financial Independence Retire Early (FIRE) movement (if not, don’t worry, we’ll explain shortly). Those of you who have heard of FIRE, you likely have a strong opinion on it – one way or the other. Whether you agree with the FIRE movement or not, I think there are important lessons that we can all agree on.
Well, at least I think that… I’m sure some of you will disagree with one or more of my 10 lessons from the FIRE movement below, but let’s find out. If any of these supposed lessons get you fired up (…couldn’t resist), let’s duke it out in the comments! But first, here’s a quick primer on the FIRE movement so that we’re all on the same page.
What is Financial Independence Retire Early (FIRE)?
Financial Independence Retire Early is really two distinct concepts wrapped up in one. Financial Independence, as Wikipedia defines it, “is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others.” Essentially, it means you have enough money to never have to work again.
To Retire Early simply means to retire before the traditional age of 65. Now, the combined “FIRE Movement” is a little harder to pin down, but it encompasses a group of people who are focused on reaching financial independence and early retirement. Some trying to get there quickly. Others slowly. Some through meticulous saving and budgeting. Others through side hustling. Some getting there by 29. Others by 50. The FIRE movement takes many shapes and forms, but it’s centered around the idea of “reaching FIRE.”
The 4% Rule
Normally, at this point in the conversation, someone new to the FIRE movement would scoff, “retired at 29?! Good luck, buddy. I’ll see you back in the workforce in a few years when you run out of money!”
And that would be the cue for the retired 29-year-old to whip out their spreadsheet and calculator to explain the 4% rule. I won’t go deep into the origins and math of this “rule,” but I’ll give you the highlights. The 4% rule at its core is based on:
- The stock market returning 7% each year on average.
- A person withdrawing 4% from their portfolio to live off each year.
- The remaining 3% staying behind to combat typical inflation.
With the above three points holding true, you can keep withdrawing from your portfolio without ever running out of money. So, for example, someone who has yearly expenses of $30,000 needs $750,000 socked away according to the 4% rule ($30,000 / 4%).
To find your “FIRE number” – or amount you need to save to reach FIRE – simply multiply your annual expenses by 25 (or divide by 4%, same thing).
Now that we’re all on the same page, I’ll get on my soapbox and share my thoughts on the FIRE movement. Specifically, 10 things that I think we can all learn from this movement. And to be clear, the 10 lessons listed below usually fit with the FIRE movement mantra, but not always. Some of the lessons are just things that the FIRE movement has made apparent (even if it doesn’t fit with the movement’s goals or path).
1. FI is For Everyone, RE is Not
In the definition of Financial Independence Retire Early, I called out that they are really two distinct concepts. And the first concept, financial independence is by and large the more important one to focus on.
- Do you want to keep working? Fine.
- Want to retire? You’re all set.
- Interested in “semi-retirement,” getting a side hustle and pursuing that in your spare time? Do it risk-free.
- Want to do more charitable work? You now have the time to do it.
- And so on…
Once you reach financial independence, money is no longer an issue. At all. On the other hand, not everyone wants to retire early in the traditional sense. So while everyone should be striving to get to financial independence in some shape or form, not everyone has to retire early if work makes them happy!
2. Create a Plan
According to a survey by GOBankingRates, 64% of Americans Aren’t Prepared For Retirement – and 48% Don’t Care. Yikes. If there is one thing that is true about anyone seeking FIRE, 100% of them have a plan for retirement and all of them care (maybe even a little too much..).
Having a retirement plan is super important. The last thing you want to do is wind up getting to retirement and realizing you can’t because you didn’t create a plan and stick to it early on.
3. Saving Money is Great
In that same GOBankingRates study, they found that 46% of Americans have $0 saved for retirement right now (*nervous sweating*).
I mean, come on people. I don’t want to be insensitive because I know life is hard and everyone’s situation is different, but we all need to prioritize saving. The FIRE movement is all about creating a budget, saving aggressively and taking control of your spending. Which is something I think everyone could benefit from.
4. Investing Money is Even Better
If saving money is great, investing money is even better thanks to the magic of compound growth. A quick example helps bring this to life.
Saving Sally saves $100 every year for 18 years. She ends up with $1,961 thanks to a modest 1% interest she earned every year in a savings account.
Investing Isabel invests $100 every year for 18 years. She ends up with $3,399 thanks to an average 7% return from the S&P 500 every year.
Investing provided an additional 73% more cash! It’s one of the best ways to build wealth, and those in the FIRE movement know this – it’s why they invest their money aggressively in low-cost index funds and ETFs.
5. Take Advantage of Personal Finance “Hacks”
People going after the Financial Independence Retire Early goal are aggressive by nature. And they’re not afraid to exploit the system to their benefit. Two common hacks employed by the FIRE movement are:
Bank Switching: Banks often offer sign-up bonuses when opening an account. Many folks in the FIRE community will switch banks once a year (or more often) to take advantage of that free money (usually a couple hundred bucks).
Credit Card Optimization: Not only do FIRE seekers have the right credit card for them to maximize their rewards, but similar to banks, many also switch cards frequently to take advantage of the sign-up bonuses. You should be careful with this “hack” though, because it does have a negative impact on your credit score, and should be done smartly and rarely.
On top of those, there are countless “hacks” to help increase your income or decrease your monthly bills. Below are some of the best resources out there.
Earn Money:
- Mistplay: Make money playing games on your phone! Yes, literally get paid to play games.
- S’more: Earn cash in exchange for placing ads and content on your lockscreen. If you don’t mind ads, this is a no-brainer way to make a few bucks.
Cut Costs:
- BillShark: Let BillShark negotiate lower prices on your monthly bills – saving you time, money and hassle. The best part is there is no upfront cost to you, as they only get paid if you save money.
- Gabi: Find the best (and lowest cost) car insurance in order two minutes. Gabi does the comparison shopping for you, saving you time and money.
- Geoarbitrage: Save money by moving to a lower cost-of-living area (LCOL Area).
6. Spend on Things that Matter
Those in the FIRE movement are adamant about avoiding lifestyle creep – or spending more on things just because you have the money to do it. And while I shared my thoughts here on why lifestyle creep is not always a bad thing, I do agree that we should be conscious about our spending. Conscious spending will help ensure that we buy things that add value to our lives and free up money for lesson #3 – to save.
7. Cut Out Expenses that Don’t Matter
Similar to Lesson 6, those seeking FIRE cut out any expense that is not currently adding value to their life. It’s why many of them are cable cutters, apartment down-sizers and bikers (not drivers). Do you have to go to an extreme cost-cutting mindset for everything? Of course not. But it doesn’t hurt to take stock of your current expenses and see if there is anything you could save on.
8. Get a DIY Mindset
I’ll be the first to admit that I’m not super handy. But having some DIY (do-it-yourself) skills can be a great way to save some cash. And, it’s a good confidence booster too. So consider if you could fix something yourself before immediately grabbing the phone for help. Just don’t hurt yourself.
9. Try to Increase Your Income
I know, obviously, we all want a bigger income. What a dumb thing to suggest! But hold on one second… When was the last time you actually asked for a raise? Or pursued a second source of income? Or hustled to make a few extra dollars one day?
Sometimes, you just need a gentle reminder to actually take action. Here are some potential ideas:
- Ask for a raise.
- Seek out a promotion.
- Look for a higher-paying job.
- Start a side hustle.
- Check out Mistplay or S’more.
10. Retired Doesn’t Have to Mean Retired
Bringing it all the way back to lesson #1, being retired doesn’t always mean you’re retired. I actually think that most people in pursuit of the Financial Independence Retire Early status don’t actually want to just sit on a beach somewhere and waste away their remaining days. Maybe some do, but I doubt many.
Most people want to reach FIRE status so that they can spend their time how they want to. Not how some employer wants them to. Whether it means spending more time with family, traveling, or doing whatever they want to do, FIRE seekers are really seeking freedom. And that’s what retirement can provide – freedom.
Summary: Financial Independence Retire Early
I’ve learned a lot from the FIRE movement, and I hope that now you have as well. Have any lessons that you think I missed (or ones you agree or disagree with)? Let me know in the comments!
Related:
This article originally appeared on JustStartInvesting.com and was syndicated by MediaFeed.org.
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5 ways to invest without hurting your budget
I’ve heard countless people say they can’t find the money to spare after they have covered their monthly expenses. Sure, everyone has their own sets of budgetary constraints. Whether you’re just getting on your feet after leaving home, after getting married, or after having a child, finding money to invest is always a challenge.
As of April 2018, 59 percent of Americans report that they enjoy saving over spending, and 26 percent say that spending less overall is something they plan to continue as they move forward in life, according to a survey conducted by Gallup, the global analytics company.
So this might explain how more Americans are saving more even though wage growth isn’t keeping up with the rising cost of living. There are many different ways you can begin saving with future investments in mind. If you’ve already reviewed your budget and cut corners where you can, consider the following:
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If you are a full-time employee, contributing to your employer’s retirement plan is often one of the easiest ways to invest money without feeling the pinch. You can set up automatic deductions from your paycheck that are withdrawn before taxes are taken out.
What’s even better is that many employers match your contributions up to a certain point. This means that every dollar of your own money that you invest turns into more than one dollar instantly. Some employers match dollar-for-dollar up to a certain percentage of your salary, while others contribute only 25 cents or 50 cents per dollar.
Either way, it’s free money that you can’t pass up if you’re looking to find more to invest. My wife and I always invest in our employer retirement accounts at least as much as is needed to get the full retirement match.
Even if you’re lucky enough to have tons of room to save, you can’t contribute more than $19,000 of your own money to your 401(k) in 2019. However, if you’re over 50, you’re allowed an extra $6,000 a year as a “catch-up” contribution for a total of $24,500 annually. Make your earnings work for you.
There are also 401(k) management tools that can help you stay on top of your retirement savings game. For instance, you can connect Blooom to your retirement account and see how you’re doing in minutes.
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Another awesome feature that many employer-sponsored retirement plans have these days is automatic increases in contributions. All you have to do is select an amount, and your employer will automatically increase your contributions by that number for each requested period. Most plans offer increases in terms of percentages on an annual basis. However, some plans offer even more choices.
If you start out investing five percent of your salary and increase that by two percent every year, you’ll eventually invest 15 percent of your salary in just five years. If my wife and I weren’t already at our ideal percentage, this is exactly how we’d start increasing the amount we invest.
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Investing half of your raise is a genius way to find more money to invest. In order for this trick to work, you must increase your investment amount as soon as you receive your raise. Otherwise, you might incorporate your extra raise money into your budget and avoid investing it after a paycheck or two.
You’ll still be able to access the other half of your raise for whatever you wish, though. Personally, my wife and I love this idea because it not only helps us prevent lifestyle inflation, but will also help us retire sooner. It’s a win-win situation in our eyes.
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If you don’t have an employer-sponsored retirement account, you can still find ways to invest money. The easiest way to do so is paying yourself first. Essentially, you decide how much you want to invest. Then you go to your investment provider and set up automatic transfers that will come out of your checking account the day after your paycheck is deposited.
This way, you won’t simply invest whatever is left over at the end of the month. Instead, you’ll invest the same amount each paycheck. My wife and I use this method to fund our Roth IRAs.
You can also implement the automatic increases that some employers offer with just a bit of work. Pick your go-to calendar application and set future reminders to increase your contributions as often as you want. When the reminder goes off, increase your automatic transfer amount.
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This method has the greatest upside when it comes to finding money to invest. All you need to do is take a look at your monthly spending. Make a list of your expenditures and put a mark next to categories that you feel don’t give you enough value for the money you lay out. These could be dining out, car payments, memberships, subscriptions, or any number of other expenses. Then cut back your spending in those categories and use the money you save to start investing.
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Finding ways to invest money doesn’t have to be difficult. You simply have to be decisive in your mindset, knowing that you don’t have to start with a large nest egg. That is built over time with good habits and the magic of compound interest. Once you see how much it benefits you, you’ll be investing on a regular basis in no time.
Even if you don’t have much money, you might want to set yourself up with an automated app like Stash, where you can invest as little as $5 at a time. Build an investment strategy that suits your goals, risk levels, and budget. Plus, get updates, tips, and articles that allow you to continue to learn as you invest.
This article originally appeared on CentSai.com and was syndicated by MediaFeed.org.
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