I remember how excited I was when I landed my first job at 17 and the fact that I loved it made it 10 times better. What was it, you ask? I was an English tutor. The day I got my paycheck was probably one of the best. I didn’t know what to do with the money.
I had no bills since I stayed at home and so I decided to splurge. And boy, did I splurge. New clothes, a new hairstyle, and a mani-pedi, I was a changed woman. They say once you taste money there’s no going back, but I became wiser and began saving some of it too.
Flash forward to now, I can proudly call myself financially literate but I’m not quite there yet. This year was a turning point because I began educating myself on money and finance. So I went out and bought my first finance book and I’ve been religiously reading it.
That’s when I came across something interesting. What if I told you that you could retire at 40? Yes, ordinary people like you and me are retiring in their 40’s. Can you imagine that?
They are using a technique called FIRE and I had to know what exactly this is. Now that I have, let me share it with you. Today we will tackle FIRE and how to apply it so that we too can be financially independent and retire early.
What is the F.I.R.E movement?
F.I.R.E stands for Financial Independence Retire Early.
When I was younger, I remember believing that being financially independent means paying my bills on time and without external aid. As much as this is a plausible thing, it’s not financial independence.
Being financially independent means you have enough savings that you don’t have to work anymore. If you woke up one day and decided to turn in your resignation, you’d do it without any financial worries for the rest of your life.
You’ll be making enough money from your passive income, your savings, and investments., such that you can stop working.
In order to achieve this goal, F.I.R.E requires one to save between 50-75% of their income
How F.I.R.E Works (How much Do you need to be financially independent?)
The first step in F.I.R.E is calculating your annual expenses. How much money do you spend in a year?
If you have a spouse and children, collectively calculate how much your household spends every month and then multiply the figure by 12.
The next step is calculating the amount you’ll need in order to be financially independent. This figure is 30 times your annual expenses.
So if your annual expenses are $50,000, you’ll be financially independent once your net worth is roughly $1,500,000.
How To Start With F.I.R.E
F.I.R.E actively follows the high-low principle. The higher your income and the lower your expenses are, the faster you can retire. Sounds like a challenge right? The big question is, how exactly can one achieve this when the cost of living continuously becomes higher? Is this even practical?
The answer is yes, all you need to do is follow these three steps.
Cut back on expenses.
This journey is anything but easy. It requires a lot of sacrifice and for you to actively live below your means in order to save as much as possible. One way to do this is by cutting costs and removing the luxuries that empty out your pockets.
Some of these include regularly eating out, getting really expensive hairdos and buying expensive branded clothes. Adjusting from this lifestyle may take a while but think of it like this, the change is only temporary and for a few years. Once you reach your target, you can live like royalty.
Increase your income
Having multiple income streams catapults you into retiring early. However, working a 9-5 job doesn’t leave much time for a side hustle. The next best option is the weekends. The pinch of sacrificing your weekends may set in but once the income trickles in, you’ll be glad you started.
Save! Invest !Repeat !
As we said earlier F.I.R.E requires you to actively save each month. However, paying off debts such as student loans, credit card debts and mortgages should be the first priority.
Once the debts are fully settled, save, invest then repeat. Putting your money in the bank won’t do much for you. Instead, invest the money and watch it grow. One of the best things about investing is that it continues generating money for you and adding to your net worth even after you have retired.
Downside of F.I.R.E
Honestly speaking, the F.I.R.E ideology is not for everyone. It favours those who make a large income but for those living from hand to mouth, this might seem like a far-fetched dream. There’s no way to save even 50% of the income when each coin is desperately needed.
But instead of throwing the whole thing out without trying, why don’t you take a bite of what you can?
You do this by taking what works for you and leaving out what doesn’t. If you can’t save 50% of your income, how about you start with 20% or even 10%. Cut back on the luxuries in order to get the extra money and over time upgrade to saving 30%.
Even if you won’t be able to retire at 40, you’ll have more savings and will be better off than when you started.
There’s no rush and each one of us has a different journey so don’t compare your progress to another. It’s a journey not a destination, a sequence of small steps taken daily and just like Napoleon Hill said, “If you can’t do great things, do small things in a great way”. Best of luck!