We all know that we should never play with real FIRE and that is not what this post is about. It’s about you playing with the concept of Financial Independence Retire Early (FIRE)!
If you have not yet started to play with the thought of being able to retire early, now is the time to start!
Financial Independence Retire Early is when you focus on how you can reach your “retirement” as fast as possible. Instead of working all your life until you are 65-70 (or whatever age might be the official “retirement age” in the future) and then finally having the time to do what you want whenever you want to!
According to true FIRE aspirants there a couple of key things to focus on which I will touch upon in this post.
The key characteristics of the FIRE-movement is to lower your costs as much as you can and invest as much of your salary as you possibly can to reach the 4% withdrawal rule which will allow you to retire early.
The 4% rule
The 4% withdrawal rule or just the 4% rule or the Safety Withdrawal Rule (SWR) is often used as a benchmark for how much money you need to be able to retire early. There have been numerous studies done on the financial markets over very long periods of time in order to determine a viable withdrawal rate. The idea was to find out how much one can withdraw from ones investments over any 30 year period (retirement period) without the risk of running out of money. The conclusion they came to based on historical numbers (no guarantee for the future) was 4% per year and then you should also be covered for inflation. Check out my full post on the 4% rule to learn more about the details.
This means that if you need 25,000 USD per year to cover all your expenses, you would need a total investment portfolio of 625,000 USD (25,000/0.04). When you have accumulated that amount you should, based on history, be able to withdraw 4% every year and the money should last you for at least 30 years. As thirty years is a very long period, some in the FIRE community mean that 30 years or 60 years will have a small impact so you could actually say that the money would last you forever. As long as your investments grow with 4% (after any fees and inflation) and you can withdraw the 4% tax-free, you would be able to withdraw and live of those 4% in eternity.
Living frugally or just on your terms?
Some are very determined when they decide to start their FIRE journey and make loads of changes whilst others might be a bit more conservative. The biggest obstacle normally is the thought of “what are others going to think?”, basically Fear of Other People’s Opinions (FOPO) and/or Fear Of Missing Out (FOMO)…
Some feel they will have to sacrifice “everything” if they are going to start saving +50% of their income… That is the initial feeling but once you start playing and looking at some numbers, to most it is actually not that hard. Especially not when you know that you can retire early (perhaps 10-20 years earlier) by just making some changes to the way you use your money!
Often the best things in life giving us lasting happiness are not buying stuff, it is the experiences we do together with people we love. If you were to have 4 hours more per day with your kids, how much would that be worth?
Some changes can be made with absolutely no difference in what we get/consume, the only thing we need to do is to become more aware of what we are paying for those products and services. Check out this post on how to save +1,000 USD in a few hours! We have also written before about The Language of Money and the sooner you learn this language, the more money you will have in your pocket!
FIRE lets me use my time as I please which means I:
- Don’t have to transport myself to and from work (estimated saving of 100-300 USD per month).
- Don’t “have to” eat out everyday which I used to do (estimated saving of 200 USD per month).
- Don’t have to wear a suit & shirt every day (estimated saving of 200 USD per month).
- Can live anywhere – geographical arbitrage (estimated saving of 500-1000 USD per month).
- Don’t care about what car I drive – cheaper and lower depreciation (estimated saving of 200 USD per month).
- I don’t drink but if you do, your after work drinks twice per week are now gone (estimated saving of 240 USD per month).
- Can live in a cheaper location, not only affecting housing but groceries and everything (estimated saving of 250 USD per month).
- Don’t have to do take-aways as we are so “busy” working so hard twice per week (estimated saving of 200 USD per month).
- Can travel when we want to, not when we have to so no peak travelling often means half price or less on flights, hotels etc. This means a minimum estimated saving of 500 USD per month (travel expenses around +10k per year used to be the norm).
- Have time to check my subscriptions and costs and make sure I only pay for what I use and need (estimated saving of around 200 USD per month).
- Am never late so never have to take a taxi… (estimated saving of 100 USD per month).
- Don’t have to call a handyman every time something needs fixing, I have the time to learn and do it myself. This can be a huge amount but let’s just estimate it at 200 USD per month.
I could go on and on but the above is pretty close to our “old life” which shows a monthly 3,500 USD which we now don’t have to spend! If our monthly expenses used to be around 6,000 USD per month (pretty close), we can now live of 2,500 USD and have all our time at our disposal! Try doing your numbers like this yourself and see where you end up. Additionally, if you have kids and then could take care of them yourself, there is another x hundreds of dollars which you now don’t have to pay (unless you want to). If you tend to buy a coffee on your way to work, don’t forget to include that. Now you can brew your own coffee at home and properly enjoy it!
So how much money does one “need” then to live a great life and be able to retire early? Well, only you can answer this as it is something completely individual. The above and below are just food for thought.
Food for thought before you start playing with FIRE
- Do you want to work for the rest of your life or be able to retire early and choose what, how, when and how much you work?
- Can you tell the difference between a brand new car and one that is five years old? If not, then save yourself the x hundreds of thousands of dollars (in alternative cost) by never ever buying a new car!
- The “stuff” you have bought over the last 6 months, are those actually worth you working an additional 5-10 years of your life (assuming they are of value and you instead could have invested that money and gotten a decent return over time)?
- How would your quality of life change upon you starting to take control over your finances, meaning you would never have to worry about money ever again?
- What would your friends think if you decided to retire early, like in ten years?
- What would your friends think when you tell them you will be living abroad for 6 months per year (maybe letting your own home whilst away to pay for your full stay abroad)?
- What would your ideal day, week, month look like? Create a vision board right now and start focusing on the right things so that you can start living your life on your terms!
I would love for you to start playing with FIRE so that you too can start your journey towards a life on your terms. The more you immerse yourself and focus on what you want to do, how you will spend your time, the more smart ways you will find to get more value out of your money and increase your income. These things together will literally transform your life and you will become a true FIRE member. How fast is completely up to you. You either play with FIRE for a while or you go through everything we have on our Wealth Sessions and apply it to your life, including all the ideas on saving money and how to automate your finances and you will be way on your way!
See you on the other side of FIRE!
Actions to take:
Check out these posts:
- The Language of Money – a language for life
- The Bucket System – Automating your Finances
- Are you making money whilst sleeping?
- The “easy” way of becoming a dollar millionaire
- Low Costs – the effortless way to creating wealth!
- Eat healthy stuff but be smart about it and pocket the difference!
- Buying a new car – Wake the fck up!
- Make use of all the ideas in our Section for Savings Ideas
- Not sure what you want, start with setting your Visions & Goals