Tag Archives: FIRE

The Basics of FIRE (Financial Independence and Early Retirement)

FIRE is becoming popular. And there is a very good reason for that. Everyone wants to attain financial independence and retire early. So, get ready to learn everything about this movement.

What Is FIRE?

When someone mentions retirement, you automatically think of people aged 50 0r 60. This is what you are used to. 

People striving for FIRE, however, retire earlier; in their 40s, 30s, or even 20s. 

It is easy to dismiss FIRE, especially if you don’t make much money. Take the example of someone making about 35k a year. Also, assume that they have a huge student loan debt. How can someone like this retire early? Well, be patient. You will know shortly. 

The FIRE movement is mainly about retirement. But there is more. When you look deeper into its principles, you will realize that it is about flexibility. 

Once you attain financial independence, you can make life choices without considering money. Most people have to take finances into account every time they plan something. But with financial independence comes freedom. 

FIRE is also not about quitting your job. It is a movement that supports being free to go after your ambitions and dreams. You can decide to continue working or not. 

Who Is Eligible for FIRE?

Did you become interested in FIRE because your job pays well but makes you miserable? This may actually not be a good idea.

An expert says that you should not retire early just because you hate your job. When you finally retire, you will be aimless and bored. FIRE takes determination and focus. It is not for you if you just hate your job or want a get-rich-quick scheme. 

If you job sucks the life out of you, get into a different path or position. 

That said, a good number of people believe that any person can achieve FIRE. They argue that, if you can’t it is your fault—you need to cut back more expenses or save more. 

But wage stagnation is a problem for many people. To be honest, a decent income is necessary for FIRE.

FIRE Rules

The math is simple: earn more than you spend then save the difference. You can invest the savings in index funds and other low-fee investments. 

Frugality is also important. With time, you can get into other investments such as rental properties. 

The rules seem simple, but carrying them out can be challenging. You have to train yourself. 

Steps to Attain FIRE

The first step to reaching FIRE is asking yourself why you want to do it. This will be your motivation. Next, track your spending. Make sure you spend mindfully. 

To help you, here are 10 financial independence pillars:

  • Reduce your housing cost.
  • Buy used cars.
  • Eliminate cable.
  • Reduce your tax liability (max out tax deferred vehicles).
  • Find a cheap cell phone service.
  • Utilize credit card rewards.
  • Lower grocery bills.
  • Raise your income.
  • Invest in low-fee index funds.
  • Adhere to the 4% rule. 

How Anyone Can Retire Early in 10 Years

Early retirement for many people is just a fantasy. But it doesn’t have to be. There are strategies that work, and not just for brilliant investors. Some of them are nothing but predictable and repeatable science. 

So, this post highlights the theory, why it works and why only a few people make it. There are also tips to help you attain success with the strategy.

The Early Retirement Math

For quick math, assume you earn $48,000 a year. Also, assume this is your income after tax. Every month you will have a spendable $4,000. 

If you decide to save $2800 every month (70% of your earnings), at a return of 8%, after 10 years you’ll have $515,000. 

You will be forced to live on $14,400 a year. But after 10 years, you will have financial independence. 

You can also decide to retire earlier and save 80% of your income. This will mean extreme frugality. But again, in 7 years or less you will be enjoying financial freedom. 

Silencing the Naysayers

Someone reading this may laugh the idea off. Especially if you can’t even cover basic expenses with 100% of your earnings. But in many cases, this is not the “truth”. It is about your lifestyle choices.

People choose a lifestyle of extreme frugality because they’d rather not slave most of their lives for money. They opt for the cheaper options everyday just so they can realize their dreams. 

The point is that it works and it has worked for many people. 

Why Few People Retire Early

Many people want to, but most of them fail. Why? Because you need to have impeccable self-discipline to save 70% to 80% of your income. It is even harder for people with spouses and kids. 

This is just one path. You can choose to start a business or get into real estate for the same results. 

Understand these key principles:

  • The more you save, the earlier you can retire.
  • Inflation and investment return don’t have a huge effect in the short term.
  • Financial independence is not enough motivation to live frugally. That is why few people achieve it. 

Questioning the Goal

What is your goal: financial independence or financial freedom? They are different. 

A super frugal lifestyle is anything but freedom. To achieve financial freedom, know your values and then create sufficient wealth to actually live them. 

Your Plan and Your Values

For some people, extreme frugality is not something they see themselves doing. So, incorporate your plan into your values. You want to attain both financial independence and financial freedom. Your plan should reflect your reality. There is nothing like a one size fits all when it comes to a wealth plan. 

One of Four Paths

This post is aimed at showing you how saving and frugality can help you achieve early retirement. But there are other paths.

  • Getting lucky (inheritance, the lottery, etc.)
  • Traditional saving strategies
  • Hiring financial advisors 
  • Using tried and tested methods

Wealth planning is a personal choice. 

10 Steps To Save Your Retirement

Many of the brightest and hardest-working marketing and advertising people in the country are obsessed with getting you to spend money and, if necessary, to go into debt to do so. Absolutely all the media that reach you every day are designed to get you to spend money. In order to save money in this environment, you will need determination to withstand the constant pressures to spend now.

What is it that separates those who are successful from those who are not?

Successful individuals have a strong personal vision of what they want and why they want it. That vision gives them the strength to stick to their strategies even when doing so is uncomfortable. It gives them the determination to persist when they are discouraged. This is the same characteristic of women entrepreneurs and is the reason their new, small businesses are successful.

The 401k Plan

Today, the 401(k) plan has become the main investment vehicle for working women to save for retirement. But many don’t take full advantage of their plan, and this could leave them with a lot less at retirement. Here are some steps we believe you can take to improve and eliminate any retirement worries about whether or not your retirement will be pleasurable or public charity; or whether you will have all the free time to spend with your family or friends.

  1. Increase your contributions to the maximum that you can manage. Many women contribute just enough to take advantage of their employer’s matching contributions, and then they stop. By adding more to your account, beyond the matching contributions, you’ll end up with more in retirement.
  2. Invest at the start of each year instead of taking a little bit out of each paycheck. Nothing in the law says you have to invest in a 401(k) plan a little at a time, from each paycheck. By investing early, you’ll put your money to work sooner for your benefit.
  3. A few years ago it was reported that more than 30 percent of the money in 401(k) plans was invested in money-market funds or similar accounts. For investors nearing retirement, that may be appropriate. But most workers in their 40’s and 50’s need growth in their retirement investments. Put more of your investment fund in equities and less in money-market funds.
  4. Research indicates that over long periods of time, small-company stocks outperform large-company stocks. Since 1926, In the equity part of your portfolio, shift some of your money into funds that invest in small companies. Don’t put your entire equity portfolio in small-company stocks. But consider investing at least 25 percent of your U.S. equity investments in that fund.
  5. Numerous studies have shown that value stocks outperform growth stocks. According to data going back to 1964, large U.S. value companies had a compound rate of return of 15.1 percent vs. only 11.4 percent for large U.S. growth companies. Among small U.S. companies, the difference was even more striking: a compound return of 17.4 percent for the value stocks vs. 12.1 percent for the growth stocks. Don’t put your entire equity portfolio into value stocks. But if there’s a value fund available to you, consider investing at least 25 percent of your U.S. equity investments in that fund.

6. Re-balance your portfolio once a year. Your asset allocation plan calls for a certain percentage to be invested in each of several kinds of assets. Re-balancing restores your asset balance and allows for the possibility that last year’s losers may be this year’s gainers. Diluting your diversification actually increases risk in your portfolio over time, which is a result that’s just the opposite of what most investors want.

7.Without compromising proper asset allocation use the funds in your plan that have the lowest operating expenses. Choose funds with low turnover in their portfolios.

  1. Don’t borrow or make early withdrawals from your 401(k) unless that is the only way to respond to a life-threatening emergency. Furthermore, if you take an early withdrawal before you are 59.5 years old, your withdrawals will be subject to a 10 percent tax penalty (in addition to regular taxes) unless you are disabled. Just don’t do it.
  2. If you leave your job, you’ll get a chance to roll over your 401(k) into an IRA. Take that chance. In an IRA, you have the same tax deferral as a 401(k), and you’ll have the flexibility to invest in virtually everything you can get in a 401(k), plus much more.
  3. Here’s the most important thing you can do to maximize your 401(k): Keep your contributions automatically payroll deducted, and make them no matter what. It’s simple, but it’s not easy. Half of the households in the United States have net worth of $25,000 or less. In a typical year, about two-thirds of U.S. households do not save money.

Remember, to be successful, first, imagine your early retirement; the Caribbean condo, the yacht, the new Lexus. Luxury and pleasure as far as your eyes can see. Create a strong vision, and then don’t let go. The power of a clear, strong vision applies to more than just your retirement savings. Let your vision shape your life, instead of the other way around, and all of the time in the world can be yours. You won’t be spending your Golden Years working at the Golden Arches.

12 Tips to Build Wealth for Early Retirement

In theory, building retirement wealth is quite easy. 

There are three things involved:

  • How much you invest
  • How fast your money grows
  • The time you give it to grow

The reason why many people fail in wealth building is because it is not about understanding the principles. You need to act effectively. Have that in mind as you read the tips below. 

Have a Plan

Never underestimate the power of a written plan. Without it, how will you execute the financial success formula? 

A written plan is the first step and it acts as a roadmap to where you want to go. 

Lifestyle Lags Income

Many people are more concerned with looking wealthy instead of actually being wealthy. Lifestyle is preferred by the current generation over financial freedom. Rather than accumulate assets, they spend. Spending money will never make you rich. 

Financial Education

Your financial intelligence will determine how much your money grows. Before you invest, learn. Any market condition can offer you an opportunity to make a profit if you are an expert. Research, read and take courses. That will be money well spent. 

Don’t Procrastinate

Another thing that affects your accumulated wealth is the amount of time your capital has to compound and grow. The longer you wait to start investing, the less you will have when you retire. A little procrastination will cost you. 

Wealth Building on Auto-Pilot

Automatic actions are easy and less painful. Automate some actions to increase your assets. You don’t have to put in extra work or make an additional decision. It is a good way to ensure that you stay on track. 

Take Responsibility

Taking full responsibility for everything that concerns your wealth. It helps you take the necessary action. You decide when to start investing and what you spend money on. Make these decisions and own the results. 

Commit What You Have To

Under-commitment is a recipe for failure. If you want to attain your wealth goal you have to get all the resources required for that. 

Make Your Cash Hard to Access

If you can easily access your savings whenever you want, you are setting yourself up for failure. This is what makes government-sponsored plans great. Don’t go to your savings every time you need something. 

Risk Management

In investing, choose a smart strategy that reduces the risk of volatility and loss by use of different tools. Some of these tools include a sell discipline, valuation, careful asset selection and diversification. Note that defensive investing does not mean avoiding risk completely. 

Use Common Sense

Speculative frauds and manias will destroy your retirement plan if you are not keen. Whatever you choose to invest in must make business sense. 

Basic Estate Planning

Death is certain. It is important to leave things in order for your loved ones. This is not something that people love to think about it—but that’s just how it is. Plan who will get what. 

Live

Retirement planning is not just about money. Think about interesting activities, your health and relationships. You will be happier as a retiree if your life is fulfilling.