F.I.R.E. stands for Financial Independence, Retire Early. The F.I.R.E. movement is a lifestyle movement with the goal of gaining financial independence and retiring early. F.I.R.E. became very popular with millennials starting around 2010. With F.I.R.E., you need to invest 50% – 75% of your income by increasing your Savings Rate. Your savings rate is your monthly expenses divided by your monthly income. Sounds impossible? The F.I.R.E. movement is more feasible for the middle-upper class and people who live in areas offering an acceptable cost of living. If you live in the state of California or the city of New York, F.I.R.E. will be very difficult for you to achieve and Dave Ramsey’s 7 Baby Steps may be better suited for you. I’m not saying your should give up. Instead I would encourage you to move up the income ladder by furthering your education, earning certificates, and applying for new opportunities.
The 4% Rule
According to F.I.R.E., you need to save/invest 25 times your annual expenses. That is where the 4% rule comes in. When you retire with 25 times your annual expenses, you can live off 4% of your retirement and never run out of money. That is because your retirement investment accounts (401k, IRA’s, HSA’s) typically grow 5 to 10% each year. With 5% to 10% growth year over year, you can afford to withdraw 4% each year.
For example, if your monthly expenses are $3000, you need to save $900,000 ($3000*12 = $36,000 per year x 25 years = $900,000). $900,000 x 04% = $36,000 per year. Note: You will need to consider inflation and save more!
How do I get started?
- Calculate your Savings Rate – To get started with F.I.R.E., you need to calculate your current Savings Rate (monthly expenses/monthly income). For most people, this falls around 25%. If your savings rate is above 35%, you are doing better than most.
- Track your Expenses – Use a budgeting template designed for F.I.R.E. I created a template specifically for F.I.R.E. Click here to request my spreadsheet template. My template helps you calculate and increase your savings rate to attain financial freedom and retire early. When you categorize your expenses, you can determine what you want to cut and what you want to keep.
- Change your Lifestyle – F.I.R.E. depends on your determination to retire early. You need to live frugally as you save, and in retirement. You are not saving for the ability to live lavishly. You are saving so that you can live the same way and spend the same way as you always did. Use the 72 hour wait rule when deciding to make large monthly purchases. Consider cancelling your subscriptions and memberships. You may find that you won’t miss them. If you drive, only buy used efficient and reliable cars and drive them up to $200,000 miles before selling. Checkout my posts on ways to save.
- Increase your income – Try to get a promotion, move to a new company, get a side hustle, or make passive income. You can continually try to do this as you are reaching financial independence.
- Open Investment Accounts – If you are employed full time, you may already have a 401k. Make sure you contribute what your employer matches. For example, many employers will match around 4% of your 401k contributions. If you do not have a 401k, then open up a Traditional IRA or Roth IRA and contribute to the maximum $6000 ($7000 if over 50). If you are curious on the differences between a 401k, Traditional IRA, and Roth IRA, check out my post comparing these accounts. Next, open up an HSA, or Health Savings Account. This is a retirement account meant to pay for medical and healthcare expenses, tax-free. Finally, open a 529 account if you or your children may go to college one day.
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